Legislature(2017 - 2018)Anch LIO Lg Conf Rm

07/11/2018 09:00 AM RESOURCES

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Audio Topic
09:00:11 AM Start
09:02:41 AM Aklng Quarterly Update
12:02:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Joint with the Senate Resources Committee
+ Update on the Alaska LNG Project: TELECONFERENCED
Alaska Gasline Development Corporation
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         July 11, 2018                                                                                          
                           9:00 a.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Cathy Giessel, Chair                                                                                                   
 Senator Natasha von Imhof                                                                                                      
 Senator Kevin Meyer                                                                                                            
 Senator Bert Stedman                                                                                                           
 Senator Bill Wielechowski                                                                                                      
 Senator Click Bishop                                                                                                           
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Andy Josephson, Co-Chair                                                                                        
 Representative Geran Tarr, Co-Chair                                                                                            
 Representative Harriet Drummond                                                                                                
 Representative Justin Parish, online                                                                                           
 Representative Chris Birch                                                                                                     
 Representative DeLena Johnson                                                                                                  
 Representative George Rauscher                                                                                                 
 Representative David Talerico                                                                                                  
 Representative Mike Chenault                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator John Coghill, Vice Chair                                                                                               
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative John Lincoln, Vice-Chair                                                                                        
 Representative Chris Tuck                                                                                                      
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Peter Micciche                                                                                                          
Senator Shelley Hughes                                                                                                          
                                                                                                                                
Representative Bryce Edgmon, online                                                                                             
Representative Jason Grenn                                                                                                      
Representative Jennifer Johnston                                                                                                
Representative Charisse Millet, online                                                                                          
Representative Dan Ortiz, online                                                                                                
Representative David Guttenberg, online                                                                                         
Representative Paul Seaton, online                                                                                              
                                                                                                                                
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
OVERVIEW: AKLNG QUARTERLY UPDATE                                                                                                
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
DAVE CRUZ, Chair                                                                                                                
Alaska Gasline Development Corporation (AGDC)                                                                                   
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
FRANK RICHARDS, Vice President                                                                                                  
Project Management                                                                                                              
Alaska Gasline Development Corporation (AGDC)                                                                                   
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
LEIZA WILCOX, Vice President                                                                                                    
Economics and Communication                                                                                                     
Alaska Gasline Development Corporation (AGDC)                                                                                   
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
MIKE BARNHILL, Deputy Commissioner                                                                                              
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
MARIA TSU, Alaska Gasline Project Financing Specialist                                                                          
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
ANDY MACK, Commissioner                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
MARK WIGGIN, Deputy Commissioner                                                                                                
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
STEVE WRIGHT, Consultant and Advisor                                                                                            
Department of Natural Resources (DNR)                                                                                           
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Participated in AKLNG quarterly update.                                                                   
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
9:00:11 AM                                                                                                                    
CHAIR CATHY  GIESSEL called the  joint meeting of the  Senate and                                                             
House Resources Standing Committee to  order at 9:00 a.m. Present                                                               
at  the  call   to  order  were  Senators   Stedman,  von  Imhof,                                                               
Wielechowski,  Bishop, and  Chair  Giessel;  Senator Coghill  was                                                               
excused.                                                                                                                        
                                                                                                                                
CO-CHAIR   TARR  said   that   Representatives  Birch,   Johnson,                                                               
Talerico, Co-chair  Josephson, and Co-chair Tarr  were present at                                                               
the call to order. Representative Johnston was in the audience.                                                                 
                                                                                                                                
CHAIR  GIESSEL said  that Senators  Micciche and  Hughes were  in                                                               
attendance.                                                                                                                     
                                                                                                                                
^AKLNG Quarterly Update                                                                                                         
                     AKLNG Quarterly Update                                                                                 
                                                                                                                              
9:02:41 AM                                                                                                                    
CHAIR GIESSEL said  the purpose of today's meeting was  to hold a                                                               
quarterly  update on  the Alaska  LNG (AKLNG)  project, which  is                                                               
required by Senate  Bill 138 that was passed in  2014. They would                                                               
hear from the Alaska Gasline  Development Corporation (AGDC), the                                                               
Department  of Natural  Resources  (DNR), and  the Department  of                                                               
Revenue  (DOR), and  the agencies  and  instrumentalities of  the                                                               
state charged with carrying out this project.                                                                                   
                                                                                                                                
SENATOR MEYER joined the meeting.                                                                                               
                                                                                                                                
CO-CHAIR  TARR said  that she  appreciates AGDC    willingness to                                                               
share  information   such  as  semi-monthly   reports,  financial                                                               
reports,  responses to  individual legislators,  and meetings  as                                                               
required  by Senate  Bill  138.  Confidentiality agreements  have                                                               
been signed  in some instances.  She had put together  a notebook                                                               
of  all  the  communications  with AGDC  that  was  available  to                                                               
members.                                                                                                                        
                                                                                                                                
REPRESENTATIVE DRUMMOND joined the committee.                                                                                   
                                                                                                                                
CO-CHAIR  TARR  said  that Representative  Chenault  was  in  the                                                               
audience and Representative Parish was online.                                                                                  
                                                                                                                                
9:05:18 AM                                                                                                                    
CHAIR GIESSEL said  she had chaired this committee  for six years                                                               
and  it has  been  suggested to  her many  times  that the  folks                                                               
testifying be placed under oath  and that AS 24.25.060 allows her                                                               
and  other committee  chairs,  the president  of  the Senate  and                                                               
Speaker of  the House to do  so, and that a  person who willfully                                                               
swears or affirms  falsely concerning any matter  material to the                                                               
subject under investigation  or inquiry is guilty  of perjury and                                                               
upon conviction is  punishable by imprisonment for  not less than                                                               
one year  nor more than  five years.  She would not  place anyone                                                               
under  oath  today,  but  she  wanted  to  emphasize  that  these                                                               
meetings are recorded,  and minutes are prepared. This  is a very                                                               
serious subject with significant  implications for the state. She                                                               
noted that  Alaska legislative energy consultants  were listening                                                               
online, but  their purpose  today is to  listen, not  to testify.                                                               
She  reminded them  that hard  questions would  be asked  and the                                                               
folks sitting at  this table were placed here by  the citizens of                                                               
Alaska who  represent them. Most  private citizens  wouldn't know                                                               
what AGDC  stands for  and have entrusted  the people  sitting at                                                               
this table to do the due diligence for them.                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON  also invited a  discussion of what  they have                                                               
delegated to AGDC under Title 31, because it is important, too.                                                                 
                                                                                                                                
CHAIR GIESSEL said the committee  had submitted questions to AGDC                                                               
and the answers were in the committees' packets.                                                                                
                                                                                                                                
CO-CHAIR  TARR recognized  Representatives  David Guttenberg  and                                                               
Paul Seaton who were online.                                                                                                    
                                                                                                                                
9:09:36 AM                                                                                                                    
DAVE CRUZ, Chair, Alaska  Gasline Development Corporation (AGDC),                                                               
Anchorage,  Alaska,   said  this   project  operates   under  the                                                               
guidelines mandated  in SB 138.  He said staff will  present more                                                               
details  about  progress  over  the   last  five  months  in  the                                                               
technical and  regulatory world as  well as their efforts  in the                                                               
commercial and  financial arena. In the  technical and regulatory                                                               
process,  they would  hear  about the  completion  of the  Alaska                                                               
Stand  Alone Pipeline  (ASAP)  Supplemental Environmental  Impact                                                               
Statement (SEIS),  one of the  project's largest  milestones they                                                               
have been  able to get  done, and about  how it will  benefit the                                                               
AKLNG  project. He  explained that  most Alaska  projects he  has                                                               
been involved  in go through  a process of conception,  getting a                                                               
customer and  a contractor, and  getting a supply, but  then find                                                               
out  getting the  federal permit  is a  problem. It  has happened                                                               
repeatedly. It should  take six months in his  opinion instead of                                                               
the  4.5  years  coupled  with the  continual  efforts  of  their                                                               
technical committee and U.S. Senators  interfacing with the Corps                                                               
of Engineers.  The project went  through three  different project                                                               
managers, which  means they  had to start  over three  times. But                                                               
today they have  the permit. It gives the  project a right-of-way                                                               
from Prudhoe  Bay to Point  MacKenzie as  well as a  404 wetlands                                                               
permit, another huge milestone.                                                                                                 
                                                                                                                                
9:12:06 AM                                                                                                                    
MR. CRUZ  said he would  also address  the answers to  the nearly                                                               
1,400 Federal Energy Regulatory  Commission (FERC) questions, the                                                               
publication  of  the  first  national  Environmental  Policy  Act                                                               
(NEPA)   schedule,  air   quality  permitting,   U.S.-based  pipe                                                               
manufacturing, and outreach  to Alaskans on impacts  to the Kenai                                                               
Spur  relocation.  For  commercial and  financial  progress,  the                                                               
committee  will  also hear  about  completion  of 15  letters  of                                                               
intent and the MOUs for the sale of LNG.                                                                                        
                                                                                                                                
He has been amazed at the  reception they have had from the Asian                                                               
countries.   Progress  with   their  Chinese   joint  development                                                               
agreement (JDA)  counterparts and  the first gas  sales agreement                                                               
with BP will be addressed along  with work with Goldman Sachs for                                                               
financing,  cooperation  with  Department  of  Natural  Resources                                                               
(DNR) and Department of Revenue  (DOR), and modeling efforts with                                                               
DOR and with Legislative Budget and Audit Committee (LB&A).                                                                     
                                                                                                                                
MR. CRUZ  said he is  personally excited about the  progress AGDC                                                               
has made  toward the goals and  directions set by their  board of                                                               
directors. The  board is not  a once-a-month,  rubber-stamp board                                                               
and is  extremely engaged  in this project.  Many of  the members                                                               
are actively  on committees and  are working daily with  staff to                                                               
help the  corporation achieve its  goals. Their attitude  is that                                                               
they are not here to study this project but to build it.                                                                        
                                                                                                                                
9:15:42 AM                                                                                                                    
FRANK  RICHARDS,  Vice   President,  Project  Management,  Alaska                                                               
Gasline Development  Corporation (AGDC), Anchorage,  Alaska, said                                                               
he  would  provide an  update  on  the technical  and  regulatory                                                               
aspects  of  the  project  and  then  Ms.  Wilcox  would  provide                                                               
commercial and financial updates. He  said AGDC has completed the                                                               
pre-FEED  activities with  their former  project partners  and on                                                               
January  2017, AGDC  took over  that  responsibility. Their  main                                                               
focus in  2017 was to  advance the project through  three primary                                                               
goals: to de-risk  the regulatory process, market  the project to                                                               
Asian markets,  and seek financing  opportunities to  execute the                                                               
project.                                                                                                                        
                                                                                                                                
In 2018,  they provided the Federal  Energy Regulatory Commission                                                               
(FERC)  with  over  120,000  pages  of  documents,  went  through                                                               
numerous rounds  of marketing to  potential buyers,  and obtained                                                               
letters  of intent  from potential  partners as  well as  a joint                                                               
development  agreement (JDA)  with Chinese  counterparts, efforts                                                               
that are still under way.                                                                                                       
                                                                                                                                
On  the  technical side,  folks  are  focused on  de-risking  the                                                               
project  through   the  regulatory  process  so   that  potential                                                               
customers  and  suppliers  can  be assured  that  the  budget  is                                                               
executable  and   that  the  project  has   the  federal  permits                                                               
necessary to be constructed.                                                                                                    
                                                                                                                                
In the  regulatory arena,  both state  and federal  entities must                                                               
interface  with  FERC, primarily,  as  the  lead federal  agency,                                                               
which has  the responsibility under  the Natural Gas Act  for the                                                               
siting and authorization of LNG  projects. This project is called                                                               
the Integrated Project, because it  incorporates not only the LNG                                                               
plant, but  the pipeline,  and the gas  treatment plant  (GTP) on                                                               
the North Slope.                                                                                                                
                                                                                                                                
MR.  RICHARDS said  the U.S.  Department of  Interior (DOI)  is a                                                               
very large landowner in the State  of Alaska and the project must                                                               
also work with them to  acquire the right-of-way (ROW) to federal                                                               
lands. A right-of-way grant will be  the outcome of the EIS. They                                                               
are  also  working  with the  Trump  Administration  through  DOI                                                               
Secretary  Ryan  Zienke  and  Assistant  Interior  Secretary  Joe                                                               
Balash on  some "federal overreach"  by agencies of  the National                                                               
Park Service  and the  U.S. Fish  and Wild  Service that  want to                                                               
extend their purview of Clean Air Act requirements in Alaska.                                                                   
                                                                                                                                
                                                                                                                                
9:19:04 AM                                                                                                                    
He   explained  that   within  Alaska   there  are   two  primary                                                               
distinctions of wetlands: Class 1,  which are the Denali National                                                               
Park and Sydney  National Wildlife Refuge, and Class  2, which is                                                               
the rest  of Alaska. Unfortunately,  some Department  of Interior                                                               
folks are asking that Class  1 protections be extended into Class                                                               
2 areas.  So, they  are bringing  that to the  notice of  the DOI                                                               
Secretary's Office and they are  now working to bring that policy                                                               
back  in line  with the  Trump  Administration, so  they are  not                                                               
having  that federal  overreach. That's  working in  consultation                                                               
with the Department of Environmental  Conservation (DEC) that has                                                               
the  responsibility for  clean air  monitoring and  permitting in                                                               
the  State  of  Alaska,  so   they  are  in  alignment  with  the                                                               
Department of Interior.                                                                                                         
                                                                                                                                
The Army  Corps of Engineers  is a  key player, because  they are                                                               
the ones who  are going to be providing the  Section 404 wetlands                                                               
permit  authorizing fill  to be  placed in  waters of  the United                                                               
States. To  get a  permit, they  must provide  FERC with  list of                                                               
what  wetlands will  likely be  impacted  and get  from them  the                                                               
jurisdictional determination on those wetlands.                                                                                 
                                                                                                                                
MR. RICHARDS said  the ASAP project already  has a jurisdictional                                                               
determination on  the project,  which essentially  encompasses 80                                                               
percent  of  the land  that  will  also  be  used for  the  AKLNG                                                               
Project. This is  key to the completion of  a wetlands mitigation                                                               
plan for  the final record  of decision for  the ASAP that  was a                                                               
precursor that is  available to the AKLNG project.  So, they feel                                                               
they are making great progress and  an MOA was signed between EPA                                                               
and  the  Army  Corps  of Engineers  on  wetlands  mitigation  in                                                               
Alaska. This is  specific guidance that allows the  Corps and the                                                               
EPA  the ability  to work  on wetlands  mitigation, to  allow for                                                               
greater  opportunities   for  mitigation  outside   the  specific                                                               
watershed where  the fill is to  be placed. This is  an allowance                                                               
to  projects like  this one  that crosses  significant number  of                                                               
wetlands.  This  is  very  key outcome  (from  within  the  Trump                                                               
Administration)  to  other  large natural  resource  developments                                                               
moving forward.                                                                                                                 
                                                                                                                                
9:22:03 AM                                                                                                                    
Within  Alaska,  particularly  within the  Alaska  Department  of                                                               
Environmental Conservation (DEC), Mr.  Richards said they applied                                                               
for air  quality permits for two  major plants: the LNG  plant in                                                               
Nikiski and  the gas  treatment plant on  the North  Slope. Those                                                               
applications  go to  DEC  because they  have  been delegated  the                                                               
responsibility for  the Clean  Air Act permitting  by EPA  at the                                                               
direction  of the  Alaska State  Legislature. They  were able  to                                                               
chime in on this DOI question  on federal land overreach and that                                                               
is key to being heard at the federal level.                                                                                     
                                                                                                                                
9:23:49 AM                                                                                                                    
MR.  RICHARDS said  the Department  of Transportation  and Public                                                               
Facilities (DOTPF) has ongoing  coordination for project planning                                                               
and scheduling of  DOTPF projects as they  move forward including                                                               
major  road projects,  State  Transportation Improvement  Program                                                               
(STIP)  projects under  construction  at the  timeframe near  and                                                               
around execution of  the projects. DOTPF was part  of the state's                                                               
discussion of rerouting in the Kenai Spur Highway area.                                                                         
                                                                                                                                
He reviewed  that they  applied to  FERC in  April 2017  and they                                                               
asked questions to determine if  they have sufficient information                                                               
to publish a  schedule. After the AGDC's  responses were provided                                                               
to them, the schedule was published,  and it gives them 18 months                                                               
to complete  the FEIS, with  a record of  decision at the  end of                                                               
2019. This is a major milestone.                                                                                                
                                                                                                                                
Since  April 2017  they have  had about  1,400 FERC  requests and                                                               
have responded  expeditiously to  about 98  percent of  them. The                                                               
rest require  field work relating to  cultural resource, wetlands                                                               
validation,  ichthyoplankton trawls  in front  of the  LNG plant,                                                               
and  air  quality monitoring,  and  some  of  that data  will  be                                                               
gathered over the summer.                                                                                                       
                                                                                                                                
MR. RICHARDS  said the ASAP  has validity and benefit  to Alaska.                                                               
Through the direction  of the state legislature  they continue to                                                               
work forward  to get to  the point  of obtaining the  final SEIS.                                                               
This milestone  and record of  decision that will come  in August                                                               
will give  them a  permit to  be able  to construct  that project                                                               
should the  desire ever be  there, but  for the AKLNG  project it                                                               
means now there is a  published National Environmental Policy Act                                                               
(NEPA)  document  that  FERC can  now  reference.  So,  following                                                               
President Trump's Executive Order  13.807 (EO), which established                                                               
discipline   and   accountability   in  the   environmental   and                                                               
permitting process  for the infrastructure,  FERC is  directed to                                                               
utilize the existing NEPA document  and not duplicate efforts and                                                               
to  work with  the cooperating  agencies that  have already  gone                                                               
through this review for the  very same pipeline. The projects are                                                               
similar; they  are both  buried pipelines and  have a  common GTP                                                               
location and  the ASAP  pipeline covers about  80 percent  of the                                                               
AKLNG route.                                                                                                                    
                                                                                                                                
9:27:18 AM                                                                                                                    
On  the technical  side they  have been  advancing key  plans and                                                               
strategies  to   be  ready   for  the   next  stage   of  project                                                               
development.  Their project  execution plan  has been  updated to                                                               
respond  to  the  FERC  questions that  resulted  in  changes  in                                                               
sequencing of  the pipeline construction rather  than going north                                                               
to  south   to  go  from   south  to  north.  This   will  create                                                               
efficiencies  in camp  and equipment  movements.  They have  also                                                               
continued  discussions with  world-class  engineering permit  and                                                               
construction  contractors for  execution of  the FEED.  This will                                                               
allow  them to  ultimately get  to  a chance  to have  additional                                                               
funding to  execute those  contracts to provide  a lump  sum turn                                                               
key estimate  for final investment  decision (FID).  Working with                                                               
their  key sourcing  strategies they  are seeing  that real  cost                                                               
savings  are available  in  the world  market  for materials  and                                                               
equipment.  They have  also engaged  again with  the JDA  member,                                                               
Sinopec, in looking  at technical interactions where  they had to                                                               
do  their  own  due  diligence   with  the  project.  They  spent                                                               
countless days and hours of going over discrete details.                                                                        
                                                                                                                                
They  also looked  where the  steel for  the pipeline  would come                                                               
from  beginning  with  the  tariff  talks  that  are  under  way.                                                               
Certainly, there  are world  providers in  Europe and  Asia. Most                                                               
recently,  they have  had discussions  with U.S.  producers about                                                               
steel coil  and pipe. This  is very positive,  because previously                                                               
they didn't  see 42-inch X80  pipe being  rolled in the  U.S. But                                                               
last  week they  learned of  pipe manufacturing  in Arkansas  and                                                               
coil manufacturing in Illinois that  could provide pipe that will                                                               
meet  project specifications.  This is  a huge  benefit for  U.S.                                                               
sourcing for this project.                                                                                                      
                                                                                                                                
9:30:25 AM                                                                                                                    
MR. RICHARDS  said AGDC understands  the project will have  a big                                                               
impact  on  Alaskans  not  only in  construction  but  in  energy                                                               
delivery and  lower cost energy.  The community of  Nikiski where                                                               
the LNG  plant is located will  be the most impacted,  because in                                                               
order to construct the plant,  the Kenai Spur Highway, which runs                                                               
right through  the plant  site, must be  rerouted. The  route has                                                               
been selected after taking comments  from the community about the                                                               
options.  It is  called  the West  LNG  Route, which  essentially                                                               
routes  directly around  the plant.  It  is the  shortest of  the                                                               
routes and the least expensive;  it also impacts the least number                                                               
of landowners  and is something  they can  be executed in  a very                                                               
timely manner.  Since the  rerouted highway  will become  part of                                                               
the national highway system, AGDC  has been working with DOTPF to                                                               
make sure the route is  in compliance with federal highway system                                                               
design standards.                                                                                                               
                                                                                                                                
9:32:24 AM                                                                                                                    
CHAIR GIESSEL asked for questions.                                                                                              
                                                                                                                                
SENATOR  BISHOP asked  the sequencing  for pipeline  construction                                                               
during winter versus summer.                                                                                                    
                                                                                                                                
MR. RICHARDS answered they would look  at how to best utilize the                                                               
construction  camps  and  equipment necessary  with  the  various                                                               
seasons. So,  they would optimize  the construction  cadence that                                                               
would work best with the challenges of break up and freeze up.                                                                  
                                                                                                                                
CO-CHAIR TARR recognized Representative Millett.                                                                                
                                                                                                                                
SENATOR MICCICHE thanked them for  the meeting in Nikiski, adding                                                               
that there is more work to do.                                                                                                  
                                                                                                                                
SENATOR  MEYER  said  they  mentioned  having  to  cross  several                                                               
streams  and  wetlands  and  asked how  the  "Stand  for  Salmon"                                                               
initiative impacts the project if it passes.                                                                                    
                                                                                                                                
MR.  RICHARDS answered  that the  ADF&G  permitting system  works                                                               
currently, and  the initiative adds  more regulatory  actions and                                                               
uncertainty, which  translates into additional  construction risk                                                               
for the project.                                                                                                                
                                                                                                                                
9:35:35 AM                                                                                                                    
REPRESENTATIVE BIRCH  said the  2020-2030 forecast  demand growth                                                               
world-wide for  LNG is  about 20 bcf/day,  but projects  that are                                                               
under  construction  and   consideration  are  approximately  100                                                               
bcf/day,  five times  the forecast  demand growth  and asked  who                                                               
looks at  that competition objectively?  Where do we  measure up?                                                               
Does FERC play a role?                                                                                                          
                                                                                                                                
LEIZA  WILCOX,  Vice   President,  Economics  and  Communication,                                                               
Alaska  Gasline  Development  Corporation (AGDC),  answered  that                                                               
FERC does  not look at  the worldwide  demand and supply  for the                                                               
project, because  all the LNG  projects are visibly  selling into                                                               
the market  and all markets  will have more  opportunities behind                                                               
the scenes than the actual demand,  because that is the nature of                                                               
competition.  The   Department  of  Energy  in   granting  export                                                               
licenses  has to  make sure  that U.S.  demand is  satisfied. So,                                                               
Alaska  LNG,  when  it  was granted  the  30-year  license,  went                                                               
through that test.                                                                                                              
                                                                                                                                
9:37:41 AM                                                                                                                    
SENATOR VON IMHOF  asked her thoughts on an article  in the front                                                               
page  of  today's  paper  saying  that  renewable  resources  are                                                               
decreasing in  cost and  that LNG projects  around the  world are                                                               
renegotiating their contracts to try to lower their costs, also.                                                                
                                                                                                                                
MS. WILCOX answered  that renewable resources are  clearly a huge                                                               
growth  area but  still  take  up a  very  small  portion of  the                                                               
worldwide  energy   demand.  However,  they  have   been  beating                                                               
forecasts in rate of growth. A  huge portion of the energy mix is                                                               
still coming  from coal and  nuclear power, but nuclear  power is                                                               
being phased out in several  countries. Also, renewable resources                                                               
frequently, while  taking up a  large portion of the  demand, are                                                               
not rate baseload  sources of energy and as coal  is being phased                                                               
out, natural gas is replacing  that baseload as the cleaner fuel.                                                               
There is no question that  renewable resources on some level will                                                               
compete with  all energy  sources, but in  the market  the buyers                                                               
are  still very  interested in  clean natural  gas, primarily  to                                                               
replace the  baseload of power  generation from coal and  in some                                                               
cases, nuclear.                                                                                                                 
                                                                                                                                
REPRESENTATIVE TALERICO  said  Mr.  Richards  mentioned  that  80                                                               
percent  of the  corridor is  covered by  the Corps  of Engineers                                                               
currently  and asked  if the  Corps  is actively  looking at  the                                                               
other 20 percent of the route in the SEIS.                                                                                      
                                                                                                                                
MR. RICHARDS answered  that they are looking at  the remaining 20                                                               
percent right now.                                                                                                              
                                                                                                                                
CHAIR GIESSEL announced  that the committee would now  move on to                                                               
the   marketing  and   finance  update,   the  meat   of  today's                                                               
presentation.                                                                                                                   
                                                                                                                                
9:41:24 AM                                                                                                                    
MS.  WILCOX  said  to  make  sure she  covered  all  the  overall                                                               
messages she  would highlight the major  commercial and financial                                                               
milestones and  activities taken  since she  was last  before the                                                               
committee.  The major  announcement has  been securing  the first                                                               
set of binding terms on a gas  sale and a "gas purchase for major                                                               
gas sale"  between BP and AGDC  that was reached in  May. Work is                                                               
progressing on  detailed agreements with  BP and the  other major                                                               
suppliers  for  the  project.  This  sets  the  stage  for  major                                                               
analysis and decision making on the royalty gas, as well.                                                                       
                                                                                                                                
The other  milestones on the  financial front are  the engagement                                                               
of Goldman  Sachs and Bank  of China as capital  coordinators for                                                               
the project. These  parties have been brought up to  speed on the                                                               
details of the  project and are now working on  the next level of                                                               
detail on project financial models  with those parties as well as                                                               
legal and finance counsel. All of  this is in preparation for the                                                               
initial  look  at the  project  by  the financial  investors  for                                                               
equity considerations,  and she  expects a  work product  to come                                                               
out at the end of the 3rd or 4th quarter.                                                                                       
                                                                                                                                
MS.  WILCOX said  she will  highlight for  this body  the initial                                                               
overview  of the  project. Just  like they  have to  do with  the                                                               
market  in Asia,  they need  to get  the potential  investors who                                                               
will need to go through  due diligence familiar with the project,                                                               
as well.                                                                                                                        
                                                                                                                                
She  would  also  provide  slides  on  the  evolution  of  AGDC's                                                               
economic and  financial modeling  as they  get more  detailed and                                                               
more  specific to  the  project structure  and  she would  finish                                                               
reviewing the  steps AGDC has  taken to cooperate with  the state                                                               
agencies  that  are  doing  their own  evaluation  of  their  key                                                               
decisions  as well  as the  evaluation on  the overall  financial                                                               
impact of the project on the State of Alaska.                                                                                   
                                                                                                                                
9:44:54 AM                                                                                                                    
Slide  11:  Balancing  three  drivers in  the  evolution  of  the                                                               
economic and financial modeling                                                                                                 
                                                                                                                                
MS.  WILCOX  said  all infrastructure  and  resource  development                                                               
projects  have  similarities.  Three   key  drivers  have  to  be                                                               
balanced to  make the  project economic.  One group  is customers                                                               
who want the  competitive price. They are looking  at the variety                                                               
of projects in the market and  comparing them to each other. That                                                               
price  has to  be competitive  for the  long term.  They look  at                                                               
other   factors  such   as   proximity,  reliability,   political                                                               
stability of  the suppliers,  diversification of  their portfolio                                                               
(key consideration  for customers that  rely on the LNG  as their                                                               
baseload for power), but price in the end is the major factor.                                                                  
                                                                                                                                
Another group that  needs to be satisfied is  the resource owner,                                                               
the State of Alaska, and the  lessees on the North Slope that are                                                               
selling their gas. So, the price  of the gas has to be sufficient                                                               
to justify its production.                                                                                                      
                                                                                                                                
The third group is financing, and  the price needs to be adequate                                                               
for debt and equity market returns.  Risks and returns have to be                                                               
balanced.                                                                                                                       
                                                                                                                                
9:46:43 AM                                                                                                                    
Slide 12: Economic Value Drivers                                                                                                
                                                                                                                                
MS.  WILCOX said  the illustration  shows the  impact on  project                                                               
economics  from  various  components  of the  value  chain.  Some                                                               
things have a very large impact  on project economics and cost of                                                               
supply such as  market price, but AGDC has  very little influence                                                               
over them.                                                                                                                      
                                                                                                                                
The things the State of Alaska  will focus on are major decisions                                                               
associated with  payment in lieu  of tax (PILT) and  the upstream                                                               
gas  price  to the  extent  that  it's  involved in  the  RIK/RIV                                                               
deliberations, key  decisions on which the  legislature will have                                                               
a large degree  of influence. They are key to  everything else on                                                               
the project.                                                                                                                    
                                                                                                                                
MS. WILCOX said on the surface  the PILT has the lowest impact on                                                               
project economics just because the  per unit number is the lowest                                                               
of all the factors. However, 100  percent of that payment goes to                                                               
Alaskan communities and  the State of Alaska, one  of the reasons                                                               
that even  though AGDC is  the current  owner of the  project, is                                                               
exempt from property taxes. That factor  has been in all of their                                                               
models, economics, and negotiations.  The upstream gas price, for                                                               
example,  while potentially  a higher  number than  that, only  a                                                               
quarter of it ultimately goes to the state.                                                                                     
                                                                                                                                
9:49:29 AM                                                                                                                    
Slide 13: Status of Agreements                                                                                                  
                                                                                                                                
MS. WLCOX  explained that  they look at  the agreements  with the                                                               
market as  having a key assumption  in the split as  to where the                                                               
LNG is  going. So,  they are progressing  the anchor  capacity of                                                               
roughly  75 percent,  which the  party in  the joint  development                                                               
agreement (JDA),  Sinopec, still  expresses interest in  with the                                                               
JDA parties. Roughly 75 percent  of the LNG exported from Nikiski                                                               
would go to that anchor customer.                                                                                               
                                                                                                                                
She said  the other 25 percent  of LNG exported (net  of in-state                                                               
gas) is  reserved for any  of the  other customers. They  have 15                                                               
letters of  intent and MOUs signed  and expect a subset  of these                                                               
agreements will  be turned into definitive  agreements. Some very                                                               
high-quality parties  are in  that stack and  the quality  of the                                                               
party, the  credit worthiness  of the buyer,  the ability  of the                                                               
buyer to  commit for the  long term,  the price offered,  and the                                                               
speed  with which  they are  willing  to move  on the  definitive                                                               
agreement will all  be part of the decision-making  on which ones                                                               
of  these  are going  to  become  definitive agreements.  Goldman                                                               
Sachs and Bank  of China are going  to be engaged in  the step by                                                               
step in  all of these  discussions to  vet the contracts  to make                                                               
sure  the  contracts  can ultimately  be  financed,  because  the                                                               
purchase of  LNG contracts ultimately  is what will  backstop the                                                               
financing.                                                                                                                      
                                                                                                                                
MS. WILCOX said she had already  made most of the points on slide                                                               
14, other  than to  say they had  a meeting with  a work  team of                                                               
about  40  people   in  March,  but  that  is   hardly  the  only                                                               
interaction  they have  had  with these  parties.  They had  good                                                               
meetings  at the  World Gas  Conference two  weeks ago  where JDA                                                               
parties  affirmed   their  desire  to  conclude   the  definitive                                                               
agreements  this  year.  They have  worked  through  a  framework                                                               
period of defining  their roles and worked  through major project                                                               
due diligence. Currently, they are  helping Sinopec interact with                                                               
the  producing   companies  to  conduct  due   diligence  on  the                                                               
resource.                                                                                                                       
                                                                                                                                
9:51:28 AM                                                                                                                    
Slide 15: Gas Supply Agreements                                                                                                 
                                                                                                                                
Additionally,  Ms.   Wilcox  said,   they  consider   gas  supply                                                               
agreements key to  the next step in the  project financing, which                                                               
is the  raising of equity,  and that is  why they have  been very                                                               
focused on this  for the first half of the  year. Because the gas                                                               
supply is  coming from two  anchor fields  and LNG can  go almost                                                               
anywhere in the Asian market, but  the gas can only come from two                                                               
places for the  financing period of the project, it  is clearly a                                                               
key consideration for financing of the project.                                                                                 
                                                                                                                                
Slide 16: Modeling Status and Development                                                                                       
                                                                                                                                
MS. WILCOX said  when they started their modeling  it was focused                                                               
on a tolling  structure, which is still  the underlying structure                                                               
of the  project: so, that  the mid-stream invests and  receives a                                                               
toll for capacity.  While the commercial structure  has shifted a                                                               
bit to have a gas purchase and  an LNG sale component in it, they                                                               
have  been  modifying  and  basically   making  the  models  more                                                               
sophisticated. So, the  basic cash flow numbers  they shared with                                                               
the  legislature came  from that  generation of  models prior  to                                                               
Goldman Sachs coming  in and starting the work  on conducting due                                                               
diligence and  making sure the model  is detailed enough to  be a                                                               
true project  finance model. That  work is now on-going,  and she                                                               
expects  that as  they roll  out that  first equity  look at  the                                                               
project  in  4th quarter  it  will  be  presented with  that  new                                                               
generation of  numbers behind it with  a new level of  detail. As                                                               
they  go along  the  investment model  becomes  more complex  and                                                               
includes more detailed  assumptions and has more  oversite by the                                                               
capital coordinators such as Goldman  Sachs. In addition, the DOR                                                               
has full  access to information  in the model and  state agencies                                                               
are doing their own evaluation of the project.                                                                                  
                                                                                                                                
9:54:05 AM                                                                                                                    
MS.  WILCOX said  slide 17  had nothing  particularly new  on the                                                               
model structure;  they are current inputs.  However, the in-state                                                               
number should  be $500 million  not $600 million.  The assumption                                                               
will  remain the  same broadly  but the  level of  detail in  the                                                               
model  will increase.  AGDC's  price  expectation is  $8.00-$9.00                                                               
delivered to  Asian, with $0.80 shipping  (for 15-20-year offtake                                                               
agreements).                                                                                                                    
                                                                                                                                
9:55:34 AM                                                                                                                    
SENATOR VON IMHOF  had a question on slide 14.  The middle of the                                                               
page  says Sinopec  is on  track for  75 percent  of the  project                                                               
offtake. What  does this exactly  mean? Is there an  exchange for                                                               
what? And is  there a minimum offtake that they  must take at any                                                               
point?                                                                                                                          
                                                                                                                                
MS. WILCOX  replied that means they  could take up to  75 percent                                                               
of the three-train export volume  from Nikiski. Roughly speaking,                                                               
if the  maximum capacity of the  three trains is 10  million tons                                                               
per year, they would  sign up for 15 million tons  of it. That is                                                               
an  indication  of what  they  are  willing  to sign  an  offtake                                                               
agreement for.  There may be  some downshift provisions in an LNG                                                               
agreement,  some come  in on  the Gulf  Coast contracts,  but for                                                               
greenfield facilities  they are generally limited,  because every                                                               
greenfield  facility  needs to  know  that  it  can pay  for  its                                                               
financing.  The  banks  that  are financing  75  percent  of  the                                                               
project  cost  through  the  debt   will  make  sure  that  those                                                               
agreements  contain the  appropriate  take or  pay provisions  to                                                               
ensure that financing.                                                                                                          
                                                                                                                                
9:57:22 AM                                                                                                                    
SENATOR VON  IMHOF said  that answered  everything except  for in                                                               
exchange for what.  Would Sinopec pay a tariff in  order to cover                                                               
the cost of  that in exchange for what, a  slightly smaller price                                                               
at the pump?                                                                                                                    
                                                                                                                                
MS. WILCOX answered  that the exchange will be for  an LNG price.                                                               
Part of  what they are seeking  from the JDA parties  in the deal                                                               
are beneficial  financing terms from  the Bank of China  to allow                                                               
for a customer  price that doesn't harm the  project but provides                                                               
for a  beneficial deal for  the off-taker. It is  frequently part                                                               
of LNG  project financing  that the buyer  country banks  step up                                                               
and finance  on beneficial terms  with buyer  country off-takers.                                                               
To the extent  there are savings from capital  coming from China,                                                               
she would  expect the buyer to  take advantage of it  but without                                                               
creating harm to the project.                                                                                                   
                                                                                                                                
9:59:47 AM                                                                                                                    
REPRESENTATIVE BIRCH  said one of  her slides indicated  that the                                                               
lease  price  is the  component  that  the  state has  the  least                                                               
influence  on  but that  it  has  the  most  impact and  said  as                                                               
recently as  last week prices  for gas in British  Columbia (BC),                                                               
which  is  attempting export  through  Kitimat,  were as  low  as                                                               
$0.82/mmbcf; Henry Hub  was around $2.85 at the  same time. Given                                                               
the sensitivity  of price  on making  this project  successful or                                                               
not, and 75 percent going  to Sinopec, they witnessed dynamics in                                                               
the tariff world  in terms of impacting Alaska  seafood sales. He                                                               
asked how that risk is evaluated and who accepts that risk.                                                                     
                                                                                                                                
MS. WILCOX replied  clearly for a project of this  size the trade                                                               
considerations  are key  generally on  the buyer's  side, because                                                               
they are the  ones needing to pay the tariff  into the market. It                                                               
will be a  consideration in the buyer's decision  to conclude the                                                               
contract,  because  once  it  is concluded  the  price  won't  be                                                               
discounted   for  tariffs.   She   assumed   they  have   similar                                                               
consideration for any of the source  of LNG that they are buying,                                                               
because  different countries  have different  issues. That  being                                                               
said, this  project is very  well regarded in the  government and                                                               
trade circles of both countries.                                                                                                
                                                                                                                                
10:01:50 AM                                                                                                                   
SENATOR  MICCICHE referenced  slide 12  and said  upstream prices                                                               
and  gas sales  agreements as  one  of the  most impactful  value                                                               
drivers  and  asked percentage  of  the  required supply  BP  has                                                               
secured? How  much further can  a financing package  move without                                                               
securing the  additional minimum  volumes. What  kind of  risk is                                                               
included in the JDA's to the state?                                                                                             
                                                                                                                                
MS.  WILCOX replied  that BP  is  the working  interest owner  of                                                               
about 26 percent in Prudhoe Bay  and 32 percent at Point Thomson.                                                               
So, BP's  gas supply agreement  reflects the full major  gas sale                                                               
contribution from that working interest  owner. The state's share                                                               
(RIK or  RIV) is also  within that working interest  owner share.                                                               
So, in  the end that  gas will come  as part  of the RIV  that BP                                                               
produces or if  the state chooses to RIK it  will have a separate                                                               
agreement for the purchase of that gas.                                                                                         
                                                                                                                                
She related that they don't  expect partial production out of the                                                               
fields. They expect all of the  gas supply to come to the project                                                               
at  the same  time in  those percentages.  That is  why they  are                                                               
working diligently on  the other gas supply, as  well. They don't                                                               
expect any  risks to the  state to  be present in  the agreements                                                               
from  the gas  supply. How  much risk  the project  will have  is                                                               
subject  to negotiation  and they  will certainly  be working  to                                                               
minimize that.  Their project model  expects to pass on  the cost                                                               
of the  gas supply  to the  customer to the  extent there  is any                                                               
requirements to buy a certain amount of gas at a certain price.                                                                 
                                                                                                                                
MS.  WILCOX said  that the  financing is  very much  a matter  of                                                               
degree. Just the  fact of reaching this milestone  is a benchmark                                                               
that a  potential equity investor  can look  at and say  okay the                                                               
project is making progress. Every  time a milestone is reached it                                                               
de-risks  the  project. One-hundred  percent  of  the gas  supply                                                               
would have to be locked up in  order to raise the post FID equity                                                               
to  actually close  the  deal.  It doesn't  mean  you can't  keep                                                               
working on the  terms, but those will be conditional.  As more of                                                               
these  agreements  are  concluded  and included  in  the  project                                                               
considerations, so the price and  volumes and terms are known and                                                               
essentially, the financing will become more certain and cheaper.                                                                
                                                                                                                                
10:05:36 AM                                                                                                                   
CO-CHAIR TARR  recognized Representatives Rauscher and  Ortiz and                                                               
Speaker Edgmon online. She asked for  an update on the impacts on                                                               
the project of the President's trade conflicts with China.                                                                      
                                                                                                                                
MR. RICHARDS responded  that steel pipe is  included in President                                                               
Trump's tariff and  that would be impacted. What  they didn't see                                                               
particularly related  to this project is  module construction for                                                               
the  plants  and  compressor  stations.  The  modular  units  for                                                               
compressor stations were  not in the code. China  did not include                                                               
LNG in  their tariff code, a  positive sign. Alaska gas  has high                                                               
visibility in  China and hopefully  will not be impacted  much by                                                               
the tariffs.                                                                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI said  for many  years ExxonMobil  testified                                                               
that the breakeven  point on this project was $12  and asked what                                                               
the breakeven  point is now and  what would the tariff  be. Also,                                                               
what return  does he expect at  $8 or $9 LNG  purchase. What kind                                                               
of  progress is  there  in  the agreements  for  the minimum  gas                                                               
supply?                                                                                                                         
                                                                                                                                
10:08:42 AM                                                                                                                   
MS. WILCOX  answered the  fact that the  breakeven point  for the                                                               
project has gone  from $12 to $8-ish is a  reflection of the fact                                                               
that  the  commercial  structure  has changed.  It  is  not  just                                                               
through the state  stepping in and continuing the  project; it is                                                               
also through  the fact  that the project  finance model  is being                                                               
used  for  the  entire  project and  seeks  investors  wanting  a                                                               
utility-level rate of  return rather than an oil  and gas company                                                               
upstream  rate of  return,  which requires  a  higher pricing  in                                                               
order  to  execute  the  project in  the  competitive  market.  A                                                               
project  finance  structure is  necessary  in  the current  price                                                               
environment.  It achieves  a return  of about  8-10 percent  with                                                               
current  assumptions. At  $9,  the return  would  be higher.  The                                                               
state could  invest in the  project and if  it chose to,  that is                                                               
what it could expect that kind of return.                                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI  asked what tariff she  anticipates and what                                                               
progress  they have  had with  other producers  on the  remaining                                                               
minimum gas supply agreements.                                                                                                  
                                                                                                                                
10:11:18 AM                                                                                                                   
MS.  WILCOX  responded  by  explaining  the  project  setup:  the                                                               
project buys the  gas; it sells the LNG and  receives a price for                                                               
the LNG and then  it pays a toll. The toll to  the project at the                                                               
price  levels it  can afford  is  somewhere around  $6. The  toll                                                               
generates the  return for  the project  investor and  covers debt                                                               
and  operations. The  pricing of  the LNG  gas supply  agreements                                                               
need to  be structured so that  the seller of the  LNG can afford                                                               
the  toll and  doesn't face  excessive risk  on downside  prices.                                                               
Gulf  Coast  projects have  covered  this  risk exclusively  with                                                               
tolls  in  the  pricing  structure  for  the  LNG.  They  have  a                                                               
commodity  price, which  is indexed  to Henry  Hub and  then they                                                               
have a tolling part of the project.                                                                                             
                                                                                                                                
Progress they are  making with the other major  gas sellers: they                                                               
are  nearing completion  on the  similar level  of detail  on the                                                               
binding terms that  was concluded with BP, and in  some cases, at                                                               
the same time they are  negotiating detailed gas sales agreements                                                               
or sections of  them, because not every producer  has an interest                                                               
in including  a term sheet  and might  go straight to  a detailed                                                               
agreement, which takes longer.                                                                                                  
                                                                                                                                
10:13:14 AM                                                                                                                   
CHAIR   GIESSEL  asked   for  more   detail  on   what  expansion                                                               
opportunity is  available to additional  producers and the  $1 to                                                               
$1  spread  for wellhead  gas  purchase  on  slide 17.  She  then                                                               
invited the Department of Revenue to comment.                                                                                   
                                                                                                                                
10:13:50 AM                                                                                                                   
MIKE BARNHILL, Deputy Commissioner,  Department of Revenue (DOR),                                                               
said he  organized his presentation  around a progress  report on                                                               
the five questions from the co-chair:                                                                                           
? DOR Fiscal Model(s)                                                                                                           
? DOR Work Plan                                                                                                                 
? Overview of Risks to State of Alaska                                                                                          
? Payment-in-lieu-of-Taxes (PILT)                                                                                               
? Fiscal implications of Upstream Infrastructure Costs                                                                          
                                                                                                                                
He shared an  organizational chart and said  they are considering                                                               
consultants  that  the  legislature  funded  for  FY19  and  that                                                               
several staff within the Tax  Division are subject matter experts                                                               
for institutional knowledge and complex tax questions.                                                                          
                                                                                                                                
10:18:04 AM                                                                                                                   
MARIA   TSU,  Alaska   Gasline   Project  Financing   Specialist,                                                               
Department of  Revenue (DOR), related  her finance  background of                                                               
about 20 years.  She started as the  project financing specialist                                                               
is February  and works closely with  the AGDC team half  the time                                                               
and with the Department of Revenue  and DNR staff for the half of                                                               
her time. Close  cooperation has proved to be  very beneficial to                                                               
what DOR is  trying to achieve in terms of  understanding all the                                                               
moving parts of this project.                                                                                                   
                                                                                                                                
10:19:52 AM                                                                                                                   
Slide 4                                                                                                                         
MS. TSU  said she would provide  an update on the  various models                                                               
DOR is responsible  for and their goals, which are  to provide an                                                               
objective view  of project posed  in terms of the  opportunity as                                                               
well  as the  risks  to  the state.  They  hope  to evaluate  the                                                               
various fiscal implications  of the project for  the state broken                                                               
into three different aspects. The first  is if the state were not                                                               
a direct investor  in the project, what kind of  revenues flow to                                                               
the state from royalties, taxes, and PILT.                                                                                      
                                                                                                                                
Second  would be  in  the event  the state  does  take an  equity                                                               
ownership  position, whether  that  is  through an  appropriation                                                               
made  to AGDC  where  they  invest in  the  project or  otherwise                                                               
secure  financing resources,  or whether  other state  sources of                                                               
capital are invested in the  project: what revenues would flow to                                                               
the state from that.                                                                                                            
                                                                                                                                
Finally, bringing  the two  pieces together  they are  looking at                                                               
the  implications  for  the  state's  fiscal  situation  with  or                                                               
without the  project. The DOR  is providing a role  in evaluating                                                               
financial  risks to  the  state  and whether  there  are ways  to                                                               
mitigate those  risks. Finally,  they see  an important  goal for                                                               
the DOR  to assist the  state and  the legislature in  making the                                                               
decision to invest in the project  as an equity investor and what                                                               
the financing options would be.                                                                                                 
                                                                                                                                
10:22:36 AM                                                                                                                   
MS. TSU  said several modeling efforts  are under way. One  is to                                                               
work  with  AGDC  to  model   the  project  economics,  which  is                                                               
sometimes referred to as the  mid-stream. A second model looks at                                                               
the up-stream  in terms of  implications for taxes  and royalties                                                               
and the net revenues that would flow to the state.                                                                              
                                                                                                                                
The PILT needs  its own special modeling effort:  how it compares                                                               
to a  property tax structure, the  pros and cons of  one approach                                                               
versus another, and the impacts  on the project economics as well                                                               
as the payments to the state and communities.                                                                                   
                                                                                                                                
Fourth is  a fiscal model  that provides  an overview of  how the                                                               
first three  pieces work  together and how  revenues flow  to the                                                               
state in the different scenarios.                                                                                               
                                                                                                                                
A fifth  model is of the  broader economic benefits to  the state                                                               
of Alaska, which would require additional consultant resources.                                                                 
                                                                                                                                
MS. TSU explained  that they are approaching these  models by key                                                               
functionalities:  first calculate  the economics  of the  project                                                               
around key assumptions  and then do scenario  analysis around the                                                               
base  case   assumptions.  Conduct   stress  testing   to  better                                                               
understand  risks and  effectiveness of  mitigation measures  and                                                               
then review the benefits and the risks to the state.                                                                            
                                                                                                                                
10:25:19 AM                                                                                                                   
Slide 6 Status of DOR's fiscal models                                                                                           
                                                                                                                                
MS. TSU  said the  DOR project model  is still  under development                                                               
and models  the economics of  the project  to the state,  so that                                                               
would be  directly associated with  the state's  equity ownership                                                               
in  the project,  whether that  is  through AGDC  or other  state                                                               
investment, which could be other  sources of capital appropriated                                                               
by the legislature,  or other state funds which  would have their                                                               
own fiduciary process to review  the opportunity. She is engaging                                                               
with  the outside  consultant, Greengate  LLC, who  has a  lot of                                                               
expertise in the area.                                                                                                          
                                                                                                                                
10:26:40 AM                                                                                                                   
The DOR royalty  and tax fiscal model models  the upstream, which                                                               
will  focus on  the royalty  and tax  and this  is where  the Tax                                                               
Division will be  particularly helpful to the extent  the DOR has                                                               
an  existing fiscal  model that  is  used to  create the  Revenue                                                               
Sources  book   every  year  as   well  as   the  forward-looking                                                               
projections to  revenues. It's  very detailed  and seems  like an                                                               
ideal  tool for  this  purpose to  provide the  state  a look  at                                                               
assumptions with and  without project scenarios. They  are in the                                                               
early stages of assessing the data needs with the help of DNR.                                                                  
                                                                                                                                
MS. TSU said a  vital part of the question that  came to them was                                                               
to discuss the project benchmarks  that DOR needs to complete its                                                               
work  and she  said in  this endeavor  it is  helpful for  her to                                                               
split  her time  with AGDC  and have  access to  their model  and                                                               
commercial  teams.  And  as  AGDC   starts  to  finalize  various                                                               
portions, to the  extent that their model can  closely model what                                                               
AGDC  is doing  will allow  progress to  be made.  She said  that                                                               
concludes her remarks on the modeling question.                                                                                 
                                                                                                                                
10:28:49 AM                                                                                                                   
CHAIR GIESSEL thanked the department  for answering each question                                                               
through the power point. She said  Ms. Tsu's name was listed with                                                               
state  employees who  are not  primarily AGDC  employees who  are                                                               
working part  time or on  call for AGDC  it is important  to note                                                               
that she works with AGDC but not for AGDC.                                                                                      
                                                                                                                                
MS. TSU agreed and added that  her role has evolved since she was                                                               
first  hired. As  time  went on,  it became  clear  that the  DOR                                                               
needed its own  modeling effort to model the  questions the state                                                               
has and  to address the issues  that it is responsible  for. They                                                               
also understand that given the  importance of the state's role in                                                               
this  project, there  is  a clear  understanding  that DOR  needs                                                               
quite a  bit of  transparency into  the project  negotiations and                                                               
how things are structured.                                                                                                      
                                                                                                                                
CHAIR GIESSEL said she is  comforted by that clarity, because Ms.                                                               
Tsu's role  is to stand  with the  state, which is  separate from                                                               
that semi-independent organization called  AGDC. There is concern                                                               
that  there  is not  an  executive  branch interference  in  what                                                               
should be a separate stand-alone entity called AGDC.                                                                            
                                                                                                                                
MR. BARNHILL  remarked that this modeling  effort is foundational                                                               
to everything the DOR is doing.                                                                                                 
                                                                                                                                
10:32:47 AM                                                                                                                   
REPRESENTATIVE BIRCH said one of  his concerns is over the "push"                                                               
to compel an investment by  the Alaska Permanent Fund Corporation                                                               
in a  project that may not  have been fully vetted.  Part of that                                                               
concern  is  offset  by  the prudent  man  investment  rule  that                                                               
governs  the  fund's  investments.  He asked  if  Ms.  Tsu  could                                                               
explain  her  understanding  of  this   rule  as  it  relates  to                                                               
responsible  investment decisions  by the  Permanent Fund  board,                                                               
based on her experience with the fund.                                                                                          
                                                                                                                                
MS. TSU  explained the concept  like this: as the  Permanent Fund                                                               
considers a particular investment  opportunity, they consider how                                                               
a similarly  situated investor  with similar  opportunities would                                                               
see that as  an investment to undertake,  whether it's beneficial                                                               
in the  context of the  overall diversification in  the portfolio                                                               
structure to ultimately achieve  the investment results that they                                                               
are looking for.                                                                                                                
                                                                                                                                
10:35:28 AM                                                                                                                   
CHAIR  GIESSEL went  on to  question 2  about Alaska's  potential                                                               
investment.                                                                                                                     
                                                                                                                                
MR. BARNHILL  said the second  question is to describe  the DOR's                                                               
work plan  and the department  looks to authorities that  are set                                                               
out in law,  regulations, and administrative orders  (slide 7) to                                                               
define what  their role  is and therefore  their work  plan going                                                               
forward.                                                                                                                        
                                                                                                                                
The first  law that guides  what they do is  SB 138 that  set out                                                               
five roles for  DOR in conjunction with the  AKLNG project. These                                                               
continuing  tasks  are:  report  to legislature  on  a  range  of                                                               
financing options  for the state  to invest in this  project. The                                                               
DOR didn't  participate in the  development of the  draft interim                                                               
report which was  submitted to the legislature in  2015. That was                                                               
done under  the auspicious of  an investment firm  called Lazard.                                                               
They  did  a very  thorough  analysis.  SB  138 called  upon  the                                                               
department to  submit that and they  did. It also calls  upon the                                                               
DOR  to convert  that  draft  interim report  to  a final  report                                                               
submitted  concurrently with  when the  DNR submits  an agreement                                                               
under AS 38.05.020(b)(11) for legislative  approval. A variety of                                                               
agreements are set out in that  statute; for example, a gas sales                                                               
agreement to which the state is  a party. They remain in constant                                                               
communication  with  the  DNR;  one  way  is  with  their  weekly                                                               
meetings on Thursdays.  At this point, they don't  have Lazard on                                                               
contract, but they will bring someone on going forward.                                                                         
                                                                                                                                
Another  point: submit  a report  to  legislature on  a plan  and                                                               
recommend legislation to  permit co-owners with the  state in any                                                               
investment   in    the   AKLNG   project.   SB    138   specified                                                               
municipalities,  regional  corporations and  residents.  Lazard's                                                               
report has  some slides  on this. The  timing is  concurrent with                                                               
the DOR submitting agreements to the legislature for approval.                                                                  
                                                                                                                                
There  may  be  a  scenario  in  which  the  DNR  doesn't  submit                                                               
agreements  for  legislative  approval under  that  statute,  and                                                               
everyone will find out at roughly  the same time if that scenario                                                               
comes to pass. In the event  it does, the DOR will still finalize                                                               
the Lazard  report within  a reasonable period  of time  and will                                                               
provide  advice and  recommendations  to the  legislature on  co-                                                               
owner participation by  municipalities, regional corporations and                                                               
Alaska residents. He assured them that  they won't use that as an                                                               
opportunity to duck responsibilities.                                                                                           
                                                                                                                                
MR. BARNHILL  said the next  goal is to  consult with the  DNR on                                                               
gas  sales  agreements under  AS  38.05.020(b)(11)  and they  are                                                               
doing that.                                                                                                                     
                                                                                                                                
Next,  they are  re-engaging the  Municipal Advisory  Gas Project                                                               
Review Board (MAGPR Board). He  explained that SB 138 called upon                                                               
the  governor  to   establish  an  advisory  group   made  up  of                                                               
representatives from the municipal community.  By the time it was                                                               
passed,  Governor Parnell  had already  established such  a group                                                               
under  Administrative  Order  (AO)  269 and  that  is  where  the                                                               
acronym comes from.                                                                                                             
                                                                                                                                
Both the AO  and SB 138 task the governor  with engaging with the                                                               
municipal community and  asking this advisory group  to report to                                                               
the governor  on a number  of items: should there  be adjustments                                                               
or  changes to  the state's  oil and  gas property  tax under  AS                                                               
43.56, changes or  adjustments to the municipal  analogue to that                                                               
in AS  29.45, there should be  an evaluation of the  impacts of a                                                               
project like on municipalities.                                                                                                 
                                                                                                                                
10:43:05 AM                                                                                                                   
The  MAGPR  Board has  12  members  and  is  chaired by  the  DOR                                                               
commissioner or his  designee. Mr. Barnhill said  he is currently                                                               
the commissioner's designee,  but the board has not  met in quite                                                               
a while.  A report was  submitted to  the governor in  early 2016                                                               
and it  is posted on  their website.  People have asked  what the                                                               
board  plans to  do,  and the  DOR needs  to  quickly "climb  the                                                               
learning curve"  on community impact  issues as well as  how PILT                                                               
works through  the remainder  of this year.  Sometime in  Q4 2018                                                               
they  will  engage  with  the   board.  They  have  had  informal                                                               
communications with  members of  the municipal community  and see                                                               
this  as  an opportunity  for  constructive  engagement on  these                                                               
issues. Various  folks have  indicated that there  is a  range of                                                               
perspectives  on how  PILT  should  be constructed,  distributed,                                                               
allocated,  and   measured.  The  ability  to   achieve  concrete                                                               
consensus in  the municipal community  may be strained,  but that                                                               
doesn't mean they shouldn't engage  with them, and they intend to                                                               
do that.                                                                                                                        
                                                                                                                                
MR. BARNHILL concluded  that is what they see as  SB 138 tasks in                                                               
front of  them and they are  committed to fulfilling all  of them                                                               
within the time specified.                                                                                                      
                                                                                                                                
10:45:16 AM                                                                                                                   
Outside  the parameters  of SB  138, Mr.  Barnhill said,  AGDC is                                                               
doing  a  "first  equity  look"  at the  end  of  this  year.  He                                                               
anticipates part  of that will be  an invitation to the  state as                                                               
an investor  to also take  a look, and  they want to  be prepared                                                               
for that. Ms. Tsu is on staff to help with that effort.                                                                         
                                                                                                                                
The first step  will be to identify and  provide a recommendation                                                               
to the  governor and  the legislature on  the sources  of capital                                                               
that  could be  used  to participate  in  the opportunity.  Three                                                               
sources of capital are seen.  They are not mutually exclusive and                                                               
can be  used in combination. The  biggest one is the  $65 billion                                                               
Permanent Fund. He emphasized they  don't speak for the Permanent                                                               
Fund; it has its own  process, board, and authorities. Another is                                                               
the Retirement Management  Board; the DOR sits on  that board but                                                               
it doesn't  control the  decisions on  how to  invest in  it. The                                                               
treasury staff is under the DOR commissioner's supervision.                                                                     
                                                                                                                                
MR. BARNHILL  said various pots  of money are invested  under the                                                               
authority of  the DOR commissioner  and include the  General Fund                                                               
(GF), the Constitutional  Budget Reserve (CBR), and  the Board of                                                               
Cost Equalization.  There are  dozens of types  of funds  and the                                                               
legislature's ability  to appropriate  from each of  those varies                                                               
based  on  statute.  To  the  extent  they  believe  as  part  of                                                               
evaluating  an  opportunity  to invest,  the  legislature  should                                                               
participate through  appropriation and  the DOR will  provide the                                                               
information on the statutes that govern that.                                                                                   
                                                                                                                                
Second is issuance of debt:  various entities within the State of                                                               
Alaska have  been give  the power statutorily  to issue  debt for                                                               
various purposes  relating to the  gas pipeline. The role  of the                                                               
DOR in approving  those may differ depending on  the statute, but                                                               
that is a source of capital.                                                                                                    
                                                                                                                                
Finally,   investment   of   state   funds   is   separate   from                                                               
appropriation of  state funds. The  Permanent Fund has  the power                                                               
to invest  its assets under  its purview pursuant to  the prudent                                                               
investor  rule,  its  statutes,  and  its  requirements  for  due                                                               
diligence. Likewise,  the commissioner has the  ability to invest                                                               
state funds  - the  CBR, the  GF, and  Power Cost  Equalization -                                                               
pursuant to the  requirements set out in statute  with respect to                                                               
the  commissioner's funds,  the  prudent investor  rule, and  the                                                               
fiduciary standard  of care  set out in  AS 37.10.071.  There are                                                               
also specific statutory  authorities in some cases  on what can't                                                               
be invested  in. These used to  be called the legal  list, but in                                                               
most  cases  the  legislature  has   dispensed  with  legal  list                                                               
requirements in favor of the prudent investor rule.                                                                             
                                                                                                                                
Investing state  funds without getting an  appropriation from the                                                               
legislature has some substantial hurdles;  the biggest one is the                                                               
due diligence and compliance with statutory duties.                                                                             
                                                                                                                                
10:50:25 AM                                                                                                                   
Finally, Mr.  Barnhill said,  every case needs  an approval  of a                                                               
fiduciary  before  an  investment  is made.  This  all  begs  the                                                               
question of  what if they go  through the whole analysis  and the                                                               
fiduciary decides to pass on it.  That is not necessarily the end                                                               
of the story. In some cases,  the legislature still has the power                                                               
to  appropriate  state  funds,  but  not  for  retirement  system                                                               
assets.  The legislature  could return  to some  sort of  a legal                                                               
list and authorize investment in  a particular type of investment                                                               
so long as  its compliant with the prudent investor  rule and has                                                               
fiduciary approval.                                                                                                             
                                                                                                                                
MR.  BARNHILL explained  that  he spent  time  talking about  the                                                               
three approaches  because this project  has been on the  radar of                                                               
every   gubernatorial   administration   since  1977,   and   the                                                               
department  is  staffing up  to  provide  recommendations at  the                                                               
appropriate time.                                                                                                               
                                                                                                                                
The next point is to  identify and recommend a capital structure,                                                               
and Ms.  Tsu has  expertise in  how to  combine these  sources of                                                               
capital, particularly debt  and equity, that make  the most sense                                                               
and achieves the best return at the lowest cost of capital.                                                                     
                                                                                                                                
10:53:18 AM                                                                                                                   
SENATOR  WIELECHOWSKI said  in the  last  presentation they  were                                                               
trying to  get the  price of state  participation down  to around                                                               
$6-$10 billion.                                                                                                                 
                                                                                                                                
MR. BARNHILL  responded that $44  billion is what they  are using                                                               
for a total project cost, and  at 25 percent, the State of Alaska                                                               
would be investing $11 billion.  Within that $11 billion is where                                                               
structuring analysis would be done on debt versus equity.                                                                       
                                                                                                                                
SENATOR BISHOP  commented that one  of the most  important things                                                               
the state can  do is the modeling, and asked  how it is weighted:                                                               
on the side of caution or optimism?                                                                                             
                                                                                                                                
MS. TSU  replied that it starts  out by being objective  in terms                                                               
of taking  the base  case set  of assumptions  based on  the most                                                               
likely set of commercial terms  that AGDC is looking to negotiate                                                               
and then looks at sensitivities  around those assumptions. Having                                                               
an  experienced LNG  project finance  expert,  such as  Greengate                                                               
LLC,  who  works  with  other  government  sponsors  of  the  LNG                                                               
projects, they  have the perspective  of the lenders who  tend to                                                               
be banks and very risk averse.  He brings that perspective to the                                                               
table. He  spent two  days with  staff last week  and one  of the                                                               
work plans  they discussed  was after  building the  mechanics of                                                               
the model and  looking at base case assumptions  that there would                                                               
be an effort to calibrate  the model to current market conditions                                                               
and try to be as  realistic as possible about available financing                                                               
and  make other  adjustments in  terms of  trying to  inject some                                                               
realism. For  instance, projects like  this have delays  and it's                                                               
reasonable to  look at  a set  of assumptions  where construction                                                               
delays occur and how that impacts the project economics.                                                                        
                                                                                                                                
In conclusion,  she didn't  want to say  whether the  modeling is                                                               
optimistic versus  pessimistic. It's  trying to be  objective and                                                               
realistic, and  then having the  benefit of an  expert consultant                                                               
to guide assumptions that are  reasonable in the marketplace, and                                                               
then looking at a reasonable  set of stress conditions that could                                                               
cause  the project  to  experience downside  risk  and what  that                                                               
would mean for the state.                                                                                                       
                                                                                                                                
10:57:45 AM                                                                                                                   
MR.  BARNHILL  added that  between  the  Permanent Fund  and  the                                                               
retirement  system the  state has  about $90  billion of  capital                                                               
invested in  various capital markets  around the world.  It's not                                                               
unusual  to  evaluate  investments  in "bite  sizes"  of  $1-$500                                                               
million. For every one of  those proposed investments, there is a                                                               
standard and  very rigorous set  of due diligence  practices that                                                               
are  applied looking  at  risks. Ultimately,  you  are trying  to                                                               
answer the  question: is the  projected return  commensurate with                                                               
the expected  risks and are  you being compensated for  the risk?                                                               
Risk is wanted  in an investment context, he said,  but the state                                                               
needs to be adequately compensated for  it. That is where it gets                                                               
the bang for the buck.                                                                                                          
                                                                                                                                
10:59:03 AM                                                                                                                   
SENATOR  STEDMAN  said  some  are  concerned  about  the  state's                                                               
exposure  as an  equity investor,  because it's  normal for  mega                                                               
projects to go over by 20 percent  - if it's only 20 percent it's                                                               
a success  and it's not  so good if  you're over by  100 percent.                                                               
Once  you  are  in,  you  are  in.  He  knows  AGDC  has  put  in                                                               
contingencies, but that is different  than cost overruns, and $10                                                               
billion isn't  out of  the realm of  possibilities. How  can they                                                               
factor in  the state exposure  at capital  calls if they  draw on                                                               
the Permanent Fund or some other fund?                                                                                          
                                                                                                                                
MR. BARNHILL  agreed absolutely that  cost overrun is a  risk and                                                               
remembered the TransAlaska Pipeline  System (TAPS) ended up going                                                               
three  times over  the original  estimate.  That risk  has to  be                                                               
evaluated. The downstream ramifications  of cost overruns will be                                                               
part of the analysis. Additional  state liability with respect to                                                               
equity exposure  in this project  is probably a question  for the                                                               
Department  of  Law.  Probably  the  more  this  project  can  be                                                               
constructed  in a  way that  is  non-recourse to  the state,  the                                                               
better.                                                                                                                         
                                                                                                                                
11:01:43 AM                                                                                                                   
CO-CHAIR  TARR said  if the  state  takes over  the project,  the                                                               
return on  investment can  be lower  than with  previous partners                                                               
and asked  if the department  uses a  standard rate of  return on                                                               
investment in the  evaluation. Is it anticipated  that there will                                                               
be  additional  joint  venture  agreements  to  put  the  overall                                                               
financing  package together  and  what  responsibility would  the                                                               
state have to those other entities?                                                                                             
                                                                                                                                
MS.  TSU  answered   that  the  return  to  the   state  must  be                                                               
commensurate  with  the   risk.  To  the  extent   the  state  is                                                               
potentially taking  a lot  of risk  on this  project just  by the                                                               
nature  of  it  being  a   green  field  project,  it  should  be                                                               
compensated.  A  project  can  be de-risked  by  setting  up  key                                                               
milestones to  meet as it progresses,  and as the project  is de-                                                               
risked the level  of return the state might expect  to receive on                                                               
a going  forward basis might be  less than at a  very early stage                                                               
of the  project when risks  are quite  high. "So, there  are ways                                                               
the state can potentially get  comfortable with accepting a lower                                                               
return, for example, by waiting  until more of the milestones are                                                               
met and more of the project is de-risked..."                                                                                    
                                                                                                                                
MS. TSU said  she thought the state would have  to participate in                                                               
order to move the project  forward, to prevent the state's equity                                                               
interest  from being  diluted,  and  for the  state  to not  lose                                                               
control of  the project. The  construction development is  one of                                                               
the high-risk  phases of the  project. For example, if  the state                                                               
would make  an investment in the  project when it is  largely de-                                                               
risked,  at that  point it  can  evaluate a  solid projection  of                                                               
returns  to  the project  and  potentially  get comfortable  with                                                               
making an  investment in the  project where it would  be expected                                                               
to earn infrastructure-like returns of  mid to high single digits                                                               
with  a  very  stable  inflation protected  revenue  stream.  She                                                               
summarized that  the risks to the  state depend on what  phase of                                                               
the project the  state decides to invest in and  the returns need                                                               
to reflect that level of risk.                                                                                                  
                                                                                                                                
CO-CHAIR TARR  asked if she  was talking  about the CBR  or other                                                               
opportunities  for investment;  did  she evaluate  those as  just                                                               
that entity  participating in  a lump  sum sort of  way or  is it                                                               
anticipated that there would be  other business arrangements. For                                                               
example, AGDC has  already formed other subsidiaries  for some of                                                               
the  work.  How  complicated  does the  structure  get  as  these                                                               
different things are evaluated?                                                                                                 
                                                                                                                                
MS. TSU  responded that how  the state  invests will depend  on a                                                               
legal  structure  that  holds the  state's  investment.  If  it's                                                               
through an appropriation, AGDC in  some ways represents the legal                                                               
structure through  which that investment  is made.  Similarly, if                                                               
one of  the other funds would  make an investment a  legal entity                                                               
would  have to  be  created to  hold that  structure.  If it's  a                                                               
source  of  capital   that  is  not  the  state,   it  is  AGDC's                                                               
responsibility to  form whatever  structures, joint  ventures, or                                                               
limited liability vehicles needed.                                                                                              
                                                                                                                                
CHAIR GIESSEL noted that Ms. Tsu  was referring to the risk chart                                                               
on slide 11, which they wouldn't get to today.                                                                                  
                                                                                                                                
SENATOR  STEDMAN  followed up  that  the  Permanent Fund  is  the                                                               
ultimate  backup  plan  the  state  has  for  its  pension  plan,                                                               
economic mayhem,  or whatever may happen  to us, and the  AGDC is                                                               
insulated from the Permanent Fund,  the CBR, the pension plan and                                                               
any  other asset  they may  have. Anything  AGDC owns,  the state                                                               
owns, too.  And since Arctic  projects have a  higher probability                                                               
of substantial  cost overruns  in the billions,  he asked  if the                                                               
department  could in  its analysis  isolate  the Arctic  projects                                                               
from  other world-wide  projects.  He summarized:  "I don't  mind                                                               
betting the cow, but there is no way I'm betting the farm."                                                                     
                                                                                                                                
11:09:26 AM                                                                                                                   
MR. BARNHILL responded that he would take his advice to heart.                                                                  
                                                                                                                                
CHAIR GIESSEL asked if he had any closing remarks.                                                                              
                                                                                                                                
MR. BARNHILL  said he would  go into more  of the minutie  of the                                                               
investment  analysis  process,  but  one  concept  he  wanted  to                                                               
introduce to the committee is  the "investment policy statement,"                                                               
which  looks  at  things  like   the  investment  horizon,  asset                                                               
allocation,   and  appropriateness   for   particular  types   of                                                               
investments for different investment horizons.                                                                                  
                                                                                                                                
CHAIR GIESSEL thanked him for  his presentation and asked whether                                                               
the  DOR in  collaboration  with  the 3rd  floor  is planning  to                                                               
propose  any  statute  changes related  to  this  project.  Also,                                                               
Senator Stedman pointed  out that there was a  clear wall between                                                               
the AGDC  and the State of  Alaska and asked what  scenario might                                                               
pierce  that corporate  veil and  make the  state liable  for any                                                               
kinds of lawsuits or cost overruns.                                                                                             
                                                                                                                                
MR. BARNHILL said  that answer would come from  the Department of                                                               
Law.                                                                                                                            
                                                                                                                                
CHAIR GIESSEL said  she would pose it to them  and get the answer                                                               
to the  committee. She thanked  the department for the  work they                                                               
are doing and related her confidence and trust.                                                                                 
                                                                                                                                
11:11:59 AM                                                                                                                   
CHAIR GIESSEL welcomed the Department  of Natural Resources (DNR)                                                               
to  present  saying they  are  responsible  for safeguarding  the                                                               
molecules. She noted  a list of questions that were  posed to the                                                               
department that they would be answering in their presentation.                                                                  
                                                                                                                                
11:13:00 AM                                                                                                                   
ANDY MACK,  Commissioner, Department of Natural  Resources (DNR),                                                               
said  their presentation  was  based on  seven  questions in  the                                                               
letter they  received on June 26.  (slide 2) The first  10 slides                                                               
addressed question  1 and  there is  no slide  on question  7. He                                                               
thanked  the legislature  for the  funding  appropriated in  this                                                               
year's budget and  said having it is critical  to moving forward.                                                               
The reason they  have a lot of  work to do is that  they are very                                                               
optimistic  about what  they see  happening. A  joint development                                                               
agreement was signed  that was the result of  the Governor making                                                               
a very  clear and strategic  decision to  go into the  market and                                                               
find  out what  it might  be interested  in buying  and how  they                                                               
would  view the  State of  Alaska and  the resource  that was  in                                                               
place.                                                                                                                          
                                                                                                                                
He was able to  travel to Asia with the Governor  for a couple of                                                               
days that  resulted in  the JDA the  included the  endorsement of                                                               
President  Xi. It  is  a significant  and  strong indicator  that                                                               
large  companies  -  Sinopec,  Bank  of  China,  and  CIC  -  are                                                               
interested in engaging in Alaska.  Critical in the paradigm shift                                                               
is that  the old  process looked at  an equity-based  model which                                                               
required a  certain level of  return, particularly for  the three                                                               
companies  involved in  that  project. The  risk  profile of  the                                                               
project has shifted entirely and  75 percent of the project cost,                                                               
if they can get to an agreement, is borne by the debtor.                                                                        
                                                                                                                                
The JDA is great  and the announcement on May 7  that BP and AGDC                                                               
had  come  to  some  agreement   regarding  term  and  price  was                                                               
critical. DNR had not experienced  that event, and it caused them                                                               
to  focus  very  clearly  on   defining  their  obligation.  This                                                               
presentation is  about the determination  of RIK or RIV.  Slide 9                                                               
describes where they stand in the process.                                                                                      
                                                                                                                                
COMMISSIONER  MACK asserted  that the  prudent investor  rule for                                                               
the Permanent  Fund is  in AS  37.13.128. He is  on the  Board of                                                               
Trustees for  the Permanent Fund and  as such, he thought  it was                                                               
premature to  talk about the  source of  state funding as  it had                                                               
not been discussed. He cautioned against speculation.                                                                           
                                                                                                                                
He said  slide 3 illustrated  the DNR team  organizational chart.                                                               
When  he came  into  this  job in  2016,  the  existing team  was                                                               
constructed to  participate in the  integrated AKLNG  project and                                                               
was no  longer needed. That  team basically stood down  while the                                                               
important pieces  were retained. Black  & Veatch was part  of the                                                               
old team and  is still on contract. He said  $750,000 is going to                                                               
be used to  supplement some of the contracts,  which were cobbled                                                               
together to  keep the process  going. So, they might  report back                                                               
that they are funding other contractors as needed.                                                                              
                                                                                                                                
Slide 4 shows  the DNR's broad framework. Their  obligation is to                                                               
maximize  the value  of the  state resource.  So, it  is forward-                                                               
looking. It's something that every  administration does, and they                                                               
take  their  responsibilities  seriously.  They  are  engaged  in                                                               
extensive  due diligence  to enable  a  sound decision  regarding                                                               
determination  of RIK  or RIV.  This  includes project  modeling,                                                               
understanding project structure, and  engaging with producers and                                                               
AGDC. He  said the  general best interest  of the  state statute,                                                               
which  is unrelated  to  royalty  sales and  AGDC  is covered  in                                                               
AS.38.05.180(a) on slide  4 and that slides 5-10  will be covered                                                               
by Mr. Wiggin, and Mr. Wright will cover the rest.                                                                              
                                                                                                                                
11:21:17 AM                                                                                                                   
MARK   WIGGIN,  Deputy   Commissioner,   Department  of   Natural                                                               
Resources (DNR),  said he would  present DNR's stance  on ongoing                                                               
efforts to analyze,  support, and advance the  AKLNG project. His                                                               
entire  presentation  would address  question  one  of the  seven                                                               
question from  June 26. He said  the flow chart on  slide 9 would                                                               
help them understand DNR's statutory  obligations as part of this                                                               
process. He  said the  legislature also has  a role  in reviewing                                                               
the DNR best interest finding  process and pointed out key blocks                                                               
in the RIK/RIV process where the legislature could intervene.                                                                   
                                                                                                                                
MR. WIGGIN  explained that  this very good  chart laid  out three                                                               
paths: RIV,  RIK, and the  amending of the leases  process, which                                                               
came out of SB 31.                                                                                                              
                                                                                                                                
Back to slide  5, on the potential RIK/RIV decisions.  He said it                                                               
will  not be  "selection of"  but rather  "the determination  of"                                                               
what  is in  the  best  interest of  the  state  (should it  take                                                               
royalty as  gas or take royalty  value from the AKLNG  project in                                                               
monies). The second  very large decision, which is  somewhat of a                                                               
subset, is  would DNR seek  to agree to  amend the leases  per SB                                                               
31.  The lease  amendment  process enshrined  in  SB 31  includes                                                               
particular items:                                                                                                               
-Eliminating  switching between  RIK and  RIV within  the leases,                                                               
which the state now has the option of doing every six months.                                                                   
-Establish  a  valuation  methodology  for  RIV  production.  The                                                               
current evaluation methodology is  a "higher of methodology." The                                                               
question  is "is  that  the  best and  does  it  fit the  project                                                               
structure."                                                                                                                     
-Issues related  to royalty raised from  net profit-sharing rates                                                               
(NPSR).                                                                                                                         
                                                                                                                                
The third bullet on slide 5:  should the process result in RIK as                                                               
being  in the  best interest  of the  state, then  obviously they                                                               
will  engage  further  discussions  about  gas  sales  terms  and                                                               
ultimately gas  sales agreements. This  has begun already  with a                                                               
draft term sheet.                                                                                                               
                                                                                                                                
The fourth  bullet: should the  process result in RIV,  they will                                                               
have  to engage  in this  valuation process  in terms  of how  to                                                               
value production  from the working  interest owners,  which isn't                                                               
simple.                                                                                                                         
                                                                                                                                
11:28:28 AM                                                                                                                   
Slide 6: If RIV is determined,  the legislature can revoke it. If                                                               
RIK  is determined  by the  DNR commissioner  to be  in the  best                                                               
interest of the state, the  RIK contract will likewise be subject                                                               
to the Oil and Gas Royalty Board and the legislative process.                                                                   
                                                                                                                                
MR. WIGGIN said  DNR will conduct and issue  a Lease Modification                                                               
Best Interest  Finding (BIF) for  either RIK or RIV.  Per current                                                               
leases, the state  can switch between RIV and RIK  on six months'                                                               
notice. If  the determination  is made  that RIK  is in  the best                                                               
interest of  the state, they will  be in a position  where (based                                                               
on all conversations  and assumptions) AGDC will  buy the state's                                                               
royalty gas volumes through a  non-competitive process. The state                                                               
is very familiar with this and so is the legislature.                                                                           
                                                                                                                                
Slide 7: The best interest  finding for this particular appraisal                                                               
will include:                                                                                                                   
-Price                                                                                                                          
-Impacts on state economy                                                                                                       
-Impacts on private investment                                                                                                  
-In-state needs for gas                                                                                                         
-Local investment and jobs                                                                                                      
-Social and environmental impacts                                                                                               
                                                                                                                                
11:33:00 AM                                                                                                                   
Slide 8: The  lease modification process was enshrined  in SB 138                                                               
and permitted DNR to change  lease terms potentially to advantage                                                               
the project.  In doing  so, there  will be  a very  rigorous best                                                               
interest finding. The assessment will include:                                                                                  
-Confirmation that eliminating the  switching between RIK and RIV                                                               
will materially  improve the  likelihood and  success of  the gas                                                               
project.                                                                                                                        
-The gas  project will have  to confirmation that  has sufficient                                                               
financial  commitment  for  a  work plan  and  budget  for  major                                                               
permits and regulatory filings.                                                                                                 
-The project has sufficient gas commitment from the lessees.                                                                    
-Each lease  will produce hydrocarbons  that will  be transported                                                               
by the gas project during the  initial project term. (This has to                                                               
do with making sure that all  leases are producing volumes of gas                                                               
to support the project.)                                                                                                        
                                                                                                                                
MR. WIGGIN  said that was the  end of his presentation  and asked                                                               
for questions.                                                                                                                  
                                                                                                                                
REPRESENTATIVE JOSEPHSON  said in the  original SB 138  model the                                                               
25 percent  share was derived  because they figured that  was the                                                               
aggregate of  12.25 percent plus  a 13 percent severance  tax. He                                                               
asked  if the  lease modification  on  slide 8  could adjust  the                                                               
royalty rate to a different figure altogether.                                                                                  
                                                                                                                                
MR. WIGGIN  replied that the  main lease modification  that would                                                               
take the  vast majority of  time is  the issue of  switching from                                                               
RIV to RIK.  The royalty rate issue is not  that significant. The                                                               
producers have expressed interest in  the state selecting one and                                                               
sticking with it for the additional project term.                                                                               
                                                                                                                                
11:36:59 AM                                                                                                                   
COMMISSIONER MACK  stated that with  the knowledge that  there is                                                               
an actual understanding  between AGDC and BP on  term price, they                                                               
have spent a  great deal of time in evaluating  moving forward on                                                               
their RIK determination. He said  the RIK process is pretty well-                                                               
known. A  royalty contract is  run through the Royalty  Board and                                                               
the  legislature has  the opportunity  to vote  for or  against a                                                               
royalty contract.                                                                                                               
                                                                                                                                
What is the legislature's authority  in an RIV situation? Does it                                                               
have the  ability to  object? Commissioner  Mack answered  that a                                                               
process  is  in place  for  an  RIV  selection, but  the  state's                                                               
priority is RIK. If they don't  take RIK, they have to inform the                                                               
legislature of the RIV determination  by letter in March 2019. If                                                               
they  do  so,  they  have  to  submit it  at  the  start  of  the                                                               
legislative session  per AS 38.05.182(a).  then there is  an open                                                               
period  under   AS  38.05.182(b)  for   60  days  in   which  the                                                               
legislature   by    concurrent   resolution   can    revoke   the                                                               
determination to  select RIV. That  would send the  whole process                                                               
back to the starting line.                                                                                                      
                                                                                                                                
COMMISSIONER  MACK  said  the confidentiality  agreements  are  a                                                               
specific item  in SB  138 (AS 38.05.020(b),  section 12,  and his                                                               
team has  talked directly  with the  working interest  owners and                                                               
focused on  what they  prefer and whether  they need  an absolute                                                               
decision on  switching and other  upstream questions. And  as Mr.                                                               
Wiggin mentioned,  they have  been in  direct dialogue  with AGDC                                                               
about a  gas sale for DNR;  the most important parts  of that are                                                               
term and price.                                                                                                                 
                                                                                                                                
11:41:56 AM                                                                                                                   
CHAIR  GIESSEL  asked   if  the  Prudhoe  Bay   leases  have  any                                                               
peculiarities that relate to the RIV/RIK determination.                                                                         
                                                                                                                                
COMMISSIONER MACK answered  he thought not, but  a more important                                                               
question from his perspective is  the settlement agreement around                                                               
PTU.  He  anticipates  discussions   around  that  agreement  and                                                               
binding  it with  what is  going on  in the  project and  what is                                                               
called for  in SB  138 regarding switching.  The basic  thesis at                                                               
Prudhoe Bay is the royalty set out in the leases.                                                                               
                                                                                                                                
CHAIR GIESSEL  said there  is some  controversy over  where field                                                               
cost  allowances  come  in  in  terms  of  deductibility  to  the                                                               
royalty. She  understands that a  disagreement exits  between DNR                                                               
and some producers, and he is now a decision-maker in that.                                                                     
                                                                                                                                
COMMISSIONER MACK responded that he couldn't comment on that.                                                                   
                                                                                                                                
CHAIR  GIESSEL asked  him to  explain the  implications of  field                                                               
cost allowance deductibility.                                                                                                   
                                                                                                                                
COMMISSIONER MACK  replied there is  a question on appeal  to the                                                               
commissioner's office  that primarily concerns leases,  which are                                                               
not  subject  to  current  field  cost  allowance  agreements  or                                                               
settlements  in  other  units.  The question  is  the  amount  of                                                               
expenses  if  deducted and  applied  and  their timing  on  state                                                               
finances.                                                                                                                       
                                                                                                                                
CHAIR  GIESSEL  asked if  field  cost  allowances are  deductible                                                               
against  royalty for  oil or  gas  could have  a material  effect                                                               
going forward.                                                                                                                  
                                                                                                                                
COMMISSIONER  MACK  replied that  he  couldn't  comment on  that,                                                               
because the issue is before  the commissioner now, but that could                                                               
be one of the potential considerations.                                                                                         
                                                                                                                                
11:45:44 AM                                                                                                                   
REPRESENTATIVE  BIRCH said  the Corps  of Engineers  released the                                                               
final SEIS  on the  Alaska Standalone  Pipeline Project  in June,                                                               
and within  a week the  administration attempted to  intervene on                                                               
their  independent  assessment  through an  Environmental  Impact                                                               
Statement  (EIS)  on  the  Pebble Project.  As  the  only  mining                                                               
engineer in the  legislature, he was concerned  about the process                                                               
he went  through in  evaluating which  projects are  permitted to                                                               
have  that  independent   Environmental  Impact  Statement  (EIS)                                                               
assessment by the Corp and which are not.                                                                                       
                                                                                                                                
COMMISSIONER MACK said  the department did not  intervene in that                                                               
process.  They have  a  very  long history  in  Alaska of  taking                                                               
definite positions  on a variety  of projects. They  are actually                                                               
cooperating  in the  Environmental Impact  Statement (EIS)  he is                                                               
referring to. "We  believe every project across the  state has to                                                               
stand  on its  own  merits,"  he said.  There  are  a variety  of                                                               
considerations:                                                                                                                 
1. Can it be done environmentally?                                                                                              
2. Does it  have support from the state or  the locality where it                                                               
is occurring?                                                                                                                   
3. Does it make financial sense for the state?                                                                                  
                                                                                                                                
He explained  that in 2017  the department provided a  permit for                                                               
the project,  and in 2018  another application  contemplated some                                                               
84 holes  to be drilled  and those  was permitted, as  well. They                                                               
were  very careful  in ensuring  that the  project proponent  was                                                               
mindful  of   the  district's  concerns.   In  2018,   they  were                                                               
determined to  be a cooperating  agency in the process  and asked                                                               
local communities and  tribes to consider the  scoping period but                                                               
got to  the point where they  didn't understand the size  of that                                                               
project, because it had changed from older proposals.                                                                           
                                                                                                                                
11:49:52 AM                                                                                                                   
SENATOR  MICCICHE said  his question  is about  timing and  DNR's                                                               
collaboration with DOR. While they  are largely supportive of the                                                               
project, there is the upstream  exposure to 35 percent deductions                                                               
on capex, O&M, the carry  forwards losses, and the pre-'79 leases                                                               
for royalty on  those costs to worry about. He  asked if anything                                                               
is left  in the early  years to consider on  RIK and RIV  and how                                                               
DNR is  dovetailing with DOR.  Can you deliver some  comfort that                                                               
collaboration is taking  place and is there a point  where he can                                                               
share with the legislature that  both departments are comfortable                                                               
with  the exposure  in  what  may be  remaining  for the  state's                                                               
share?                                                                                                                          
                                                                                                                                
COMMISSIONER MACK  responded that DNR  and DOR have  an excellent                                                               
relationship.  They  actually  have  a  scheduled  meeting  every                                                               
Thursday with  an open agenda.  The obligation is in  statute and                                                               
the  process is  often discussed  at length.  They are  also very                                                               
cognizant of the  requirement of many parts of  the law including                                                               
SB  138 where  it says  "DNR in  consultation with  DOR shall  or                                                               
may." Those  words are  repeated in that  particular law  about a                                                               
half dozen times.                                                                                                               
                                                                                                                                
SENATOR  MICCICHE asked  where the  remaining revenue  is on  the                                                               
priority list of both departments.                                                                                              
                                                                                                                                
COMMISSIONER  MACK  replied  that   they  are  getting  ahead  of                                                               
themselves  in  the  process.  They  have  been  focused  on  the                                                               
determination  of an  RIK  or  an RIV.  Once  that  is done,  the                                                               
question is  what is  in the  best interest of  the state  and if                                                               
revenue is  being derived from AGDC  and the sale of  the royalty                                                               
gas, how that is harmonized  and explained, and they just haven't                                                               
gotten there.  However, they  recognize it  as a  tension between                                                               
the need  of the project  to be  financial and the  obligation in                                                               
the constitutional and statutory  requirement for DNR to maximize                                                               
the  value  of   the  resource.  He  said  they   would  see  the                                                               
departments doing  their job  to get to  some decision  points on                                                               
RIV/RIK. They will have to  have additional discussions with AGDC                                                               
and they  will have  to report  back to  the legislature  on what                                                               
they  think their  ability to  provide  income to  the state  is.                                                               
Those revenues will be in a very detailed discussion.                                                                           
                                                                                                                                
11:53:51 AM                                                                                                                   
MR.  WIGGIN added  that they  had all  asked themselves  the same                                                               
questions. The  organization chart illustrates a  very good group                                                               
of commercial  analysts at DNR, along  with commercial consultant                                                               
from  Black  & Veatch  who  were  on  the  prior version  of  the                                                               
project. Along  with DOR staff  are working this  issue together.                                                               
Their  commercial   modelers  have   met  and  will   be  meeting                                                               
continuously to  make sure  to understand  the issues  related to                                                               
deductibility,  etc.  Part  of Mr.  Wright's  presentation  talks                                                               
about things like modeling.                                                                                                     
                                                                                                                                
CHAIR  GIESSEL asked  him to  elaborate  on slide  12 that  talks                                                               
about risks and  negative netback. Perhaps that  draws in Senator                                                               
Micciche's question.  She was  interested in  number 3  that says                                                               
the amount  of state risk can  be controlled by having  a minimum                                                               
price provision.                                                                                                                
                                                                                                                                
11:55:09 AM                                                                                                                   
STEVE  WRIGHT,  Consultant  and Advisor,  Department  of  Natural                                                               
Resources (DNR),  Anchorage, AK,  answered they had  been looking                                                               
mechanisms  for  mitigating  risk associated  with  the  project.                                                               
Slide 12 focuses  on the opportunity and  risk mitigation efforts                                                               
that  are currently  under  way.  When the  JDA  team signed  the                                                               
agreement that really  kicked off a new phase of  the project for                                                               
DNR  of  identifying  potential   buyers  and  investors  to  the                                                               
project. However, the issue around  risk exposure is one that DNR                                                               
has been working  on for many years. Under the  old equity model,                                                               
it was a  significant effort by the commercial team  and that has                                                               
carried over now with the  commercial analysts in the Division of                                                               
Oil  and Gas  working with  Black &  Veatch. They  have done  the                                                               
modeling  which the  commissioner  and  deputy commissioner  both                                                               
referenced. That information is on  slide 10 and there isn't time                                                               
to address it now.                                                                                                              
                                                                                                                                
Negative netback risk mechanisms to  mitigate that risk are front                                                               
and  center on  their  priority  list, Mr.  Wright  said. One  is                                                               
developing a gas  supply agreement with AGDC  that allows setting                                                               
a minimum  price provision.  That would  essentially set  a floor                                                               
that would ensure that DNR's  revenue from royalty gas sales, and                                                               
potentially  TAG gas  sales,  would never  fall  below a  minimum                                                               
level.  This  would be  a  significant  mechanism for  mitigating                                                               
negative netback risk.  Another way of doing that  is by electing                                                               
RIV  rather than  RIK, because  in  that scenario  the state  can                                                               
never receive zero or negative royalty value.                                                                                   
                                                                                                                                
CHAIR GIESSEL said a zero netback is alarming and unacceptable.                                                                 
                                                                                                                                
MR.  WRIGHT replied  that their  modeling  will have  a range  of                                                               
probabilistic  outcomes   on  what  that  could   entail  if  the                                                               
department  didn't   have  a  minimum  price   provision  in  our                                                               
contracts. They  are focused  on that aspect  of the  project and                                                               
are looking to work with DOR  and AGDC and their modeling efforts                                                               
to ensure  they are  using similar  assumptions, using  ranges of                                                               
uncertainty, in that quantitative  modeling that assures that the                                                               
range of outcomes are being fully captured.                                                                                     
                                                                                                                                
CHAIR GIESSEL  said that was  interesting especially in  light of                                                               
the fact that AGDC talks  about meeting the market's price, which                                                               
is  getting  lower  as  the   supply  increases.  She  said  this                                                               
legislature has concern on behalf  of the citizens of Alaska that                                                               
they will actually get significant  value from a very significant                                                               
project. She  remembered the workforce that  appeared here during                                                               
TAPS construction:  the impact on  schools and health  care, etc.                                                               
and wants  to make sure all  of that is mitigated  and still come                                                               
out cash ahead.                                                                                                                 
                                                                                                                                
12:00:07 PM                                                                                                                   
CHAIR GIESSEL said they are at  the end of their time and invited                                                               
committee members  to offer  questions in  writing; she  had two.                                                               
They have heard about more than  600 water body crossings and she                                                               
wanted to know  what his level of tolerance is  for their impacts                                                               
on fisheries.  Some other projects  have had a zero  tolerance on                                                               
fisheries. She  had also  asked DNR to  comment on  any potential                                                               
legislation they might  be collaborating on with  the third floor                                                               
related  to  this project  in  terms  of increased  authority  or                                                               
responsibility.                                                                                                                 
                                                                                                                                
12:01:39 PM                                                                                                                   
CO-CHAIR TARR  said Representative Millet  had a question  on the                                                               
next milestones and their timelines.                                                                                            
                                                                                                                                
12:02:20 PM                                                                                                                   
CHAIR GIESSEL  thanked all of  the departments and  entities that                                                               
presented today  and adjourned the  Joint Senate  House Resources                                                               
Committee meeting at 12:02 p.m.                                                                                                 
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HRESSRES - AKLNG - Response Attach 2 - AGDC Board Agenda & Exec Session Motion RE BP GSA - 5 - 10 - 18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Jt Resources - AKLNG Update
HRESSRES - AKLNG - Response Attach 3 - AGDC Org Chart - 6 - 28 - 18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Jt Resources - AKLNG Update
H & S Resources AKLNG Mtg Agenda 7-11-18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Jt Resources - AKLNG Update
HRESSRES - AKLNG - Response Attach 4 - AGDC Brd Directors Expenses.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Jt Resources - AKLNG Update
HRESSRES - AKLNG - Response Letter from AGDC to Sen Giessel - 7 -6 - 18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Jt Resources - AKLNG Update
HRESSRES - AKLNG - Presentation - AGDC - 7 - 11 - 18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Resources AKLNG Update
HRESSRES - AKLNG - Presentation - DNR - 7 - 11 - 18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Resources AKLNG Update
HRESSRES - AKLNG - Presentation - DOR - 7 - 11 - 18.pdf HRES 7/11/2018 9:00:00 AM
House and Senate Resources AKLNG Update
HRESSRES - AKLNG - Response Attach 1 - IR AGDC Contracts & Sub Contracts - 7 - 11 - 18.pdf HRES 7/11/2018 9:00:00 AM