Legislature(2017 - 2018)BARNES 124
01/23/2017 01:00 PM House RESOURCES
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| Audio | Topic |
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| Start | |
| Overview(s): Update on the Alaska Lng Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 23, 2017
1:07 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Dean Westlake, Vice Chair
Representative Harriet Drummond
Representative Justin Parish
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative David Talerico
MEMBERS ABSENT
Representative Chris Tuck (alternate)
OTHER LEGISLATORS PRESENT
Representative Mike Chenault
COMMITTEE CALENDAR
OVERVIEW: UPDATE ON THE ALASKA LNG PROJECT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
BILL MCMAHON, Senior Commercial Advisor
ExxonMobil Corporation
Houston, Texas
POSITION STATEMENT: On behalf of the participants of the Alaska
LNG Project (AKLNG) related to progress on AKLNG, and on behalf
of ExxonMobil related to its perspective on a state liquefied
natural gas (LNG) project, provided testimony prior to the
Alaska Gasline Development Corporation update on AKLNG, and
answered questions.
DAMIEN BILBAO, Vice President
Commercial Ventures
BP
Anchorage, Alaska
POSITION STATEMENT: Provided testimony prior to the Alaska
Gasline Development Corporation update on the Alaska LNG
Project, and answered questions.
DARREN MEZNARICH, Manager for Alaska North Slope Gas
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Provided testimony during the Alaska
Gasline Development Corporation update on the Alaska LNG
Project, and answered questions.
FRANK RICHARDS, P.E.
Senior Vice-President for Program Management
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Alaska Moving Forward: Alaska LNG Project Update"
dated 1/23/17, and answered questions.
KEITH MEYER, President
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Provided opening remarks during the Alaska
Gasline Development Corporation update on the Alaska LNG
Project.
LIEZA WILCOX, Vice President
Commercial and Economics
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Participated in the PowerPoint presentation
entitled, "Alaska Moving Forward: Alaska LNG Project Update,"
dated 1/23/17, and answered questions.
ACTION NARRATIVE
1:07:41 PM
CO-CHAIR GERAN TARR called the House Resources Standing
Committee meeting to order at 1:07 p.m. Representatives Tarr,
Birch, Drummond, Parish, Rauscher, Talerico, Westlake, and
Josephson were present at the call to order. Representative
Johnson arrived as the meeting was in progress. Also present
was Representative Chenault.
1:08:27 PM
CO-CHAIR TARR reviewed materials related to legislative
briefings such as the update of the Alaska LNG Project (AKLNG).
She urged the committee to review sections of Senate Bill 138
[passed in the 28th Alaska State Legislature] specific to the
responsibilities of the Alaska Gasline Development Corporation
(AGDC), and direction to the Alaska Industrial Development and
Export Authority (AIDEA) and the Alaska Energy Authority (AEA),
Department of Commerce, Community & Economic Development
(DCCED).
^OVERVIEW(S): UPDATE ON THE ALASKA LNG PROJECT
OVERVIEW(S): UPDATE ON THE ALASKA LNG PROJECT
1:12:17 PM
CO-CHAIR TARR announced that the only order of business would be
a continuation of the overview of the Department of Natural
Resources, including an update on the Alaska LNG Project
(AKLNG).
1:12:57 PM
BILL MCMAHON, Senior Commercial Advisor, ExxonMobil Corporation,
paraphrased from the following written testimony [original
punctuation provided]:
Co-Chair Tarr, Co-Chair Josephson and members of the
House Resources Committee, for the record, my name is
Bill McMahon. - I am a Sr. Commercial Advisor and have
34 years of experience with ExxonMobil and have worked
on commercializing Alaska natural gas since 1992. •
Thank you for the opportunity to address the committee
this afternoon. My testimony will be given in two
parts: - The first part will be on behalf the Alaska
LNG Project (AKLNG) participants - AGDC, ExxonMobil,
BP and ConocoPhillips. The four parties have worked
hard to complete the technical and regulatory handover
and the commercial transition of AKLNG to a State LNG
project run by AGDC. I will be sharing our progress
since September. - The second part will be sharing
ExxonMobil's perspectives on a State Alaska LNG
project and how our company is supporting the AGDC
effort. - Following my testimony, Damian Bilbao and
Darren Meznarich will be sharing BP and ConocoPhillips
perspectives, respectively. - As always, we look
forward to answering your questions. •
Following the Administration's decision to pursue a
State LNG project, ExxonMobil, as Lead Party under the
Pre-FEED JVA (Joint Venture Agreement), completed an
extensive handover process with AGDC for all the Pre-
FEED JVA work products, including the underlying
technical data. In addition, on behalf of the
applicants in the FERC pre-filing, ExxonMobil also met
with regulators and AGDC to discuss the coming
changes. On January 4th, the FERC was advised by
letter that ExxonMobil, BP and ConocoPhillips have
withdrawn from the Pre-File Docket, leaving AGDC as
the sole applicant. •
During testimony on August 25, the key components of
the technical and regulatory handover and the
commercial transition were shared. Today, I would like
to list the achievements since that time: - All 77
Pre-FEED deliverables agreed under the AKLNG Joint
Venture Agreement are finished and have been
distributed to AGDC, ExxonMobil, BP and
ConocoPhillips. - The final two draft Resource Reports
(11 and 13) were submitted by the applicants to FERC,
completing the draft Resource Reports required to
advance the EIS pre-file process. - FERC and the other
coordinating agencies have provided over 2,700
comments on the twelve Resource Reports that were
submitted. - The AKLNG project team provided a summary
of all of the comments and questions to all parties,
including AGDC. The AKLNG project team completed
dozens of project technical and regulatory handover
sessions with AGDC, including weekly sessions and
extended workshops. - These handover sessions, which
were completed prior to year-end 2016, provided a
smooth and efficient handover of activities to AGDC
for a State LNG project. AGDC is now positioned to
take on the full responsibility for the technical and
regulatory aspects of its project. - Agreements were
executed prior to year-end as part of the commercial
transition from AKLNG to a State LNG project. These
agreements provide for the use of historical and Pre-
FEED data and information by all the Pre-FEED JVA
parties for any project, including a State LNG
project. •
Work continues on agreements for AGDC to acquire
ownership of an LLC held by ExxonMobil, BP and
ConocoPhillips affiliates and provide interim access
to some of its assets. The LLC owns land in Nikiski
and DOE LNG export authorizations.
Before I move on to my ExxonMobil comments, I will
pause and see if there are any questions about the
AKLNG accomplishments in 2016.
Changing hats, I will now share ExxonMobil's
perspectives on a State Alaska LNG project and how our
company is supporting the AGDC effort. •
As you know, one of the motivations for the
Administration to assume control of the project was to
assess the potential advantages that may only be
available to a State project. •
These potential advantages, as expressed by the
Administration, include reducing the cost of supply
through a tax-exempt project structure and using low
cost funds from third party investors willing to take
a utility rate of return on a governmentbacked
project. •
Both of these opportunities could potentially make a
significant reduction in the cost of supply for Alaska
LNG, as highlighted in the Wood MacKenzie study
commissioned by AGDC, ExxonMobil and BP, and as
presented to this committee by David Barrowman of Wood
Mac on August 24, 2016. Cost of supply is a key
measure of competitiveness in the global LNG market. •
In addition to opportunities to reduce cost of supply,
a State backed LNG project also has the potential to
reduce regulatory risks through government to
government cooperation. •
ExxonMobil wants a project to succeed and is willing
to pursue all commercially viable alternatives to
develop Alaska resources on mutually-agreed terms. •
While AGDC is now responsible for advancing a State
LNG project, ExxonMobil will still have a major role
in the development of Alaska North Slope natural gas.
First, through continued investment to develop Prudhoe
Bay and Point Thomson and, second, by making gas
available for sale for the project. •
To date, the Producers have invested billions of
dollars at Prudhoe Bay and Point Thomson to
successfully develop these fields. Investments
continue at these fields to support the ongoing
operations. •
ExxonMobil will continue to make its gas available to
any project under bilateral, mutually-agreed and
commercially-reasonable terms. - In 2015 when Governor
Walker sought assurances from each producer about gas
availability, ExxonMobil immediately established a
negotiating team, executed a confidentiality agreement
with the Administration and had several preliminary
meetings. - With completion of the handover to a State
LNG project, ExxonMobil remains ready to re-engage on
negotiations for gas sales and purchase agreements. -
These commercial and fiscal terms will need to be
predictable and durable so all of the parties'
involved, including potential buyers and financiers,
understand the underlying framework, particularly
given the magnitude of the required investments and
commitments, which are measured over decades •
In closing, ExxonMobil wants to help make a State LNG
project successful. - We are pleased to have
participated in the successful handover from AKLNG to
a State project. - ExxonMobil is committed to work
towards completion of the required transactions with
AGDC on the Alaska LNG Project LLC (ALPL). - We are
ready to re-start bi-lateral discussions on purchasing
ExxonMobil gas from PBU and PTU for a State project. -
Lastly, ExxonMobil looks forward to the progress of a
State LNG project. If AGDC can adequately achieve cost
reductions, secure regulatory approvals, advance
through the project gates to a final investment
decision (FID) and complete project execution and
construction, everyone will benefit. •
Before I turn the microphone over to Damian Bilbao of
BP, I would be happy to answer any questions that you
may have
1:22:22 PM
REPRESENTATIVE BIRCH asked whether AKLNG is a project in which
Mr. McMahon would commit to invest one-half of his net personal
wealth.
MR. MCMAHON responded that ExxonMobil uses a stage-gate approach
to megaprojects because large sums of money are required to
advance a project. For example, [pre-front end engineering and
design (pre-FEED)] cost the four participants over $500 million.
In order to advance large projects with confidence, one must
proceed through a disciplined state-gate process and as risks
are reduced, more capital can be exposed.
DAMIEN BILBAO, Vice President, Commercial Ventures, BP,
paraphrased from the following written testimony [original
punctuation provided]:
Co-Chair Tarr, Co-Chair Josephson and members of the
House Resources Committee, for the record, my name is
Damian Bilbao. I am the Vice President of Commercial
Ventures for BP here in Alaska. I first arrived in
Alaska to work for ARCO Alaska as an intern and fell
in love with this State. My family and I have lived in
Alaska for almost 10 years with interruptions for
overseas assignments. I would like to first follow
Bill's remarks by recognizing the great work done by
the Joint Project Team under ExxonMobil's leadership.
Steve Butt and the team delivered exactly what they
were asked to do when the Pre-FEED JVA was signed, and
then some. They did that work safely, professionally,
on schedule and on budget. BP thanks them. My
responsibilities within BP include Alaska LNG, our
North Slope fields operated by other companies and our
interest in the Trans-Alaska Pipeline. I would like to
pause and recognize that along with the R1 2 Prudhoe
Bay field, TAPS is celebrating a 40 year anniversary
in 2017. I would also like to recognize that this past
December 18th Alaska celebrated the 45th anniversary
of the signing of the Alaska Native Claims Settlement
Act. Without the tremendous support and license from
Alaska's native communities, the State would have a
much different history. I would ask that as we discuss
Alaska LNG today we remember that this State only has
the luxury of discussing an Alaska LNG project because
of cooperation shown in establishing ANCSA. Ensuring
another 40 years of economic security for Alaska will
require collaboration to find common ground. It is for
this reason, the future economic health of Alaska and
BP's participation in that opportunity, that BP
continues to support an Alaska LNG project led by the
State of Alaska. BP's support derives from three
important beliefs: 1) The resource opportunity in
Alaska is strong, the talent is deep and there is a
history of coming together to fix big problems. 2) The
demand for LNG will continue to grow in Northeast Asia
beyond 2025, and much of that growth will come from
players like China. 3) Alaska LNG can compete for the
growing demand, as was shown in the Wood Mackenzie
report presented before the legislature in August
2016; however certain non-technical solutions are
required for that to be achieved. R1 3 The State is
positioned to lead this commercial effort in three
focus areas: 1) The competitiveness of a tolling model
where gas owners pay a utility-like company to
transport their gas to the Cook Inlet, liquefy the gas
and load it on to ships. 2) Preserve the federal
regulatory schedule, because failure to do so could
add years to the schedule and impact the reputation of
the project, and 3) Identify options to fund both the
next phase of the project, Front End Engineering and
Design or FEED, as well as the most financially
demanding phase, construction, which would occur after
a Final Investment Decision, or FID. ·
BP does not believe these three areas will require
contracting with large companies to begin the process
of purchasing pipe or steel, but rather will require
deep analysis by subject matter experts familiar with
commercial aspects of the LNG business. Now, while BP
supports a State led project, we believe it is also
important for BP to do more than sit back and wait for
AGDC to answer these three questions. BP must actively
support AGDC. I am very pleased to share with you that
AGDC and BP have signed a Cooperation Agreement that
will bring together our efforts and resources on the
three focus areas that I outlined above: 1) assessing
a tolling model, 2) preserving regulatory progress and
3) identifying financing options for the path forward.
BP is committing people and funding to this joint
effort although it will be an effort led by a much
smaller group of people R1 4 than completed the Pre-
FEED deliverables which Bill McMahon just summarized.
BP appreciates AGDC's commitment to working together
and we look forward to updating the legislature over
the course of the year. This is an important year for
BP in Alaska and we look forward to celebrating the
anniversary of Prudhoe Bay and TAPS first 40th
anniversary. While BP has worked with our co-owners to
produce over 12 billion barrels of oil from Prudhoe
Bay, there are still billions more in Prudhoe and
across the North Slope. As the Governor's Chief
Advisor on Oil and Gas, John Hendrix, said during his
recent speech at Meet Alaska on January 13th, we must
all pursue our future as "One Alaska". BP agrees. It
is only as One Alaska that the State will continue to
solve big problems. BP looks forward to continuing to
work with this legislature, the administration,
Alaska's native corporations, our contractors and
upstream co-venturers in support of a One Alaska
future. Thank you.
1:30:25 PM
DARREN MEZNARICH, Manager for Alaska North Slope Gas,
ConocoPhillips Alaska, Inc., expressed the support of
ConocoPhillips Alaska, Inc. for the state's effort to advance a
liquefied natural gas (LNG) project. A state-led project would
have attributes that enhance the competitiveness of an Alaska
North Slope (ANS) gas project, and that can lower its cost of
supply. For example, AGDC can structure for federal and state
tax efficiencies, including seeking federal tax-exempt status.
Also, AGDC can advance low-cost financing and investor options.
The aforementioned key elements can be foundational to a project
and important to LNG buyers, project lenders, and investors.
ConocoPhillips Alaska, Inc. intends to make its gas available to
a state-led project on mutually-agreed, commercially reasonable
terms. ConocoPhillips Alaska, Inc. will continue to support
AGDC and is working to make its gas available.
REPRESENTATIVE BIRCH asked for an estimate on the tariff cost
per [thousand cubic feet of natural gas (Mcf)] to transport LNG
from its source at the North Slope to Southcentral.
MR. BILBAO responded that there have been no joint efforts to
define a tariff under an AGDC-led project. He referred to his
previous comments related to the structure and financing of the
project and work that remains to be done.
MR. MEZNARICH added that the Wood Mackenzie study of August
2016, includes aspirational targets for cost reduction.
CO-CHAIR TARR asked for closing comments from the preceding
witnesses.
MR. MEZNARICH informed the committee ConocoPhillips Alaska, Inc.
has entered into a memorandum of understanding (MOU) with the
state and seeks to help move the project forward with AGDC. In
further response to Co-Chair Tarr, he explained the MOU
potentially forms a joint venture for LNG marketing and to
resolve the gas supply issue.
MR. BILBAO said BP's next step is to confer with AGDC to expand
on its cooperation agreement, and he offered to provide further
information on the cooperation agreement. ExxonMobil
Corporation has led the technical phase, ConocoPhillips Alaska,
Inc. is proceeding with marketing, and BP can support the
project's next step.
MR. MCMAHON said ExxonMobil Corporation is keen - now that the
handover and transition are complete - to restart discussions on
ExxonMobil Corporation gas that would be made available for the
project.
1:36:29 PM
REPRESENTATIVE RAUSCHER asked Mr. Bilbao whether he said [AKLNG]
could compete for the LNG market in Asia.
MR. BILBAO clarified that he said BP expects that LNG demand
will continue to grow, and there will be unmet demand beginning
in 2025. The growth of demand from Northeast Asia will be
greatest in China.
REPRESENTATIVE RAUSCHER questioned whether there is a "time of
no return" for [marketing ANS LNG].
MR. BILBAO said the right next step is to ensure a competitive
project; however, as the August report from Wood Mackenzie
indicated, the project today does not compete - not due to oil
or gas prices - but because the cost to deliver [ANS] gas to
Asia is not competitive with emerging sources of LNG such as
sources from the U.S. Gulf Coast. Commercial structure and a
financing plan have an impact on lowering the cost of ANS LNG,
and after that is accomplished, investors can make the decision
to advance and market the project.
REPRESENTATIVE PARISH asked whether there is another plan to
bring BP LNG to market in the event AKLNG fails.
MR. BILBAO noted that Alaska gas is BP's largest undeveloped
resource opportunity, thus BP seeks a successful gas project.
Although a major effort has been made by BP, ConocoPhillips
Alaska, Inc., and ExxonMobil Corporation to understand the
viability of an Alaska LNG project, there remain unanswered
questions. However, if it is confirmed that the project is not
viable, BP will consider alternatives.
1:41:37 PM
FRANK RICHARDS, P.E., Senior Vice-President for Program
Management, Alaska Gasline Development Corporation, Department
of Commerce, Community & Economic Development, introduced staff.
1:42:07 PM
KEITH MEYER, President, Alaska Gasline Development Corporation,
Department of Commerce, Community & Economic Development, said
he appreciated the previous comments made by each of the
producer parties, and noted AGDC enjoys a good and collaborative
working relationship with each.
MR. RICHARDS introduced a PowerPoint presentation entitled,
"Alaska Moving Forward: Alaska LNG Project Update" and
informed the committee that today's hearing is AGDC's
opportunity to provide the report to the legislature on the
update of the Alaska LNG Project as required by Senate Bill 138.
He began with a history of AGDC and its obligations. In 2009,
there were concerns Southcentral would not have enough natural
gas to meet its requirements for power generation and heating,
thus the legislature began discussing the development of an
instate natural gas pipeline. Related proposed legislation
culminated in House Bill 369 [passed in the 26th Alaska State
Legislature], which created a four-party entity comprised of the
Alaska Housing Finance Corporation, Department of Revenue, the
Department of Transportation & Public Facilities, the Alaska
Railroad, Department of Commerce, Community & Economic
Development, and the [Alaska Natural Gas Development Authority
(ANGDA), created by voter initiative Measure 3, passed 11/5/02
and terminated by House Bill 4, passed in the 28th Alaska State
Legislature], tasked to determine if it was economically viable
to develop an instate gas pipeline. In 2011, the Alaska Stand
Alone Pipeline (ASAP) plan was presented to the legislature. In
2013, House Bill 4 created AGDC as an independent state
corporation, granted it powers to act as a corporation and
advance a project, and funded it with approximately $355
million. Thus the ASAP project advanced through pre-FEED, front
end engineering and design (FEED), a class 3 cost estimate, and
a project execution plan. In 2014, Senate Bill 138 gave further
authorities to AGDC to act as the state's representative in the
LNG plant portion of the AKLNG export project. In 2015, during
the buyout of TransCanada - representing the gas treatment plant
and pipeline portion of AKLNG - AGDC was given the authority to
act as the state's representative for its 25 percent interest.
1:48:36 PM
MR. RICHARDS continued, noting there was a joint venture
agreement executed and pre-FEED work initiated for AKLNG, also
in 2014. Now in 2017, at the termination of the agreement
between the producer partners and AGDC, the responsibility for
AKLNG now falls to AGDC. Mr. Richards acknowledged that the
responsibility to advance AKLNG is a tremendous burden taken
very seriously by AGDC (slide 3). He informed the committee
AGDC has a seven-member board of directors who are Alaskans and
who want to advance the project for Alaskans. He gave short
background information on board members (slide 4).
MR. RICHARDS restated that update reports are due to the
legislature every four months and this is the first opportunity,
after the "handoff" from the AKLNG project management team, to
present how the project is now to advance. He stressed that the
project management team's work and the transition were well-
executed. Briefly, AKLNG is an integrated project with the
following components: Point Thomson pipeline; gas treatment
plant at Prudhoe Bay; mainline pipeline from Prudhoe Bay to
Southcentral; LNG plant at Cook Inlet. Natural gas will be
sourced from the Point Thomson Unit (PTU) and the Prudhoe Bay
Unit (PBU), treated on the North Slope by a gas treatment plant
(GTP) at mile post zero (MP 0) of the pipeline. The pipeline
will proceed from MP 0 to Nikiski, supported by eight
compression stations, delivering natural gas to an LNG
production facility designed to produce 20 million metric tons
per annum (MMTPA) of product (slide 6).
1:53:43 PM
REPRESENTATIVE PARISH asked for the approximate cost for each of
the three elements of the project.
MR. RICHARDS said the cost of the LNG facility is approximately
50 percent of the project, approximately 25 percent is
represented by the pipeline, and approximately 25 percent is
represented by GTP on the North Slope. In further response to
Representative Parish, he said the original range of the cost
estimate was $45 billion to $65 billion, and the most recent
estimate is below "that low-end cost range."
REPRESENTATIVE BIRCH observed tariffs are important and the cost
of producing energy in Alaska is very high. He held a question
on an estimate of the range of tariffs for later in the
presentation.
MR. RICHARDS returned to the status of the project, and stated
that the joint venture agreement (JVA) initiated in 2014, and
terminated in 2016, represented approximately $500 million worth
of engineering, analyses, and information gathered to understand
the construction of the project in Alaska. All of the
abovementioned work and the 77 project deliverables have been
provided to AGDC, BP, ConocoPhillips Alaska, Inc., and
ExxonMobil Corporation. At the end of 2016, transition meetings
were held to facilitate the transfer of a tremendous amount of
data and work product. The project management team held
meetings in Alaska and Houston that led to a better
understanding of the material related to engineering and
environmental licensing, which was needed as AGDC assumes the
filing with the Federal Energy Regulatory Commission (FERC). The
resource reports represented approximately 33,000 pages of
documents submitted to agencies.
CO-CHAIR TARR surmised a lesson learned from the transition out
of the Alaska Gasline Inducement Act (AGIA) [passed in the 25th
Alaska State Legislature] was who would own the data. She asked
whether there is related direction under Senate Bill 138.
1:59:13 PM
LIEZA WILCOX, Vice President, Commercial and Economics, AGDC,
asked for clarification.
CO-CHAIR TARR stated her intent is for the committee to
understand a significant factor to advancing the project is to
have all of the previously gleaned information available even
though the leadership structure of the project has changed.
MS. WILCOX agreed, and added that the legislation did not enable
the transfer of pre-FEED data that was part of the pre-FEED JVA
agreement; however, the ability to use the data to advance the
project and make regulatory filings was part of the transition
agreement that was negotiated.
MR. RICHARDS added that AGDC has also received all of the data
through the AGIA agreement with TransCanada, thus AGDC holds all
of the work done with TransCanada and ExxonMobil Corporation,
all of the work done on ASAP, and all of the work product
developed on AKLNG, which is a very large library of electronic
data. He continued with the status of the project, relating
that the $500 million investment was toward the design premise
of a three-train GTP on the North Slope, feeding a 42-inch
diameter pipeline, and leading to a three-train LNG plant (slide
7). One of AGDC's priorities in 2017 is to reduce regulatory
risk. He explained that FERC has the responsibility to license
LNG plants, thus AGDC will file a FERC Natural Gas Act (NGA)
Section 3 application to acquire the right to construct and
operate an LNG plant. Another priority is to reduce the overall
cost of supply to the project through financing and by reducing
the cost of the environmental regulatory regime. Also, efforts
will be focused on reducing the cost of the project and
representing an economically-viable project to buyers. Further,
AGDC will "live within our means" to the point of acquiring
project financing to advance the project and engage customers
(slide 8).
2:03:34 PM
REPRESENTATIVE JOHNSON asked whether approval from FERC applies
if AGDC reduces the scale of the project.
MR. RICHARDS said yes. The environmental impact statement (EIS)
presented to FERC will be for the impacts to wetlands, flora,
fauna, and air quality for the largest possible project.
Continuing to FERC's responsibility under NGA to permit LNG
plants and terminals, he said FERC must ensure LNG facilities
are safe and reliable; therefore, FERC follows a comprehensive
and well-established siting process. After an applicant has met
FERC guidelines for submittals, it proceeds to the EIS process
prescribed by the National Environmental Policy Act of 1969
(NEPA). Further, FERC is the lead federal agency to prepare an
EIS for AKLNG and along with other agencies, such as the U.S.
Army Corps of Engineers, will complete a thorough EIS (slide 9).
The first of three areas of the regulatory process is pre-
filing, wherein the project gets authorization to begin resource
reports, dialogue, and public comments. The primary focus is
developing resource reports which describe the project and its
impacts and mitigation to the environment. After acceptance by
FERC, the project enters the second area of the environmental
process during which a third party contractor - paid by the
project - drafts an EIS. This process is underway, with a
timeframe of 18 months for the draft EIS. The third area is the
final EIS, which is issued six months later (slide 10). Mr.
Richards said 13 resource reports are required, but 12 have been
submitted, because there is no [polychlorinated biphenyl (PCB)]
contamination on the project.
2:10:24 PM
REPRESENTATIVE BIRCH asked what is included in resource report
number "10. Alternatives".
MR. RICHARDS responded that for any EIS, the proponent must look
at alternatives for routing, including not completing the
project. For example, AKLNG must look at alternatives for
routing into Valdez, or through Denali National Park and
Preserve, in addition to the preferred route to Nikiski.
REPRESENTATIVE BIRCH inquired as to whether the Mackenzie River
[Canada] route remains one of the alternatives.
MR. RICHARDS expressed his belief that the Mackenzie River
option is prohibited by statute. However, there are many other
options such as an offshore source for natural gas, or various
locations for the LNG plant. The alternatives are wide and
varied so that FERC can answer possible legal challenges. The
resource reports represent 33,000 pages of description on
environmental factors, engineering, and to the safety and
reliability of the project, especially in reports numbered "11."
and "13." (slide 11). In response to the resource reports, AGDC
has received 2,943 comments categorized as editorial comments,
pre-FEED comments, and FEED comments, which are being processed
by AGDC and its pertinent contractors (slide 12). Over the next
six months AGDC will continue to adjudicate resource reports and
will file its NGA Section 3 application, complete with the
required nine exhibits ranging from articles of incorporation to
safety and reliability statements. The target date for the
application to FERC is 6/30/17 (slide 13).
2:16:57 PM
MR. RICHARDS turned to project execution, observing that AGDC's
mandate from the legislature is to be a lean, small, and
competent organization that relies on contractors to augment its
staff. Therefore, to address the needs of a large project, AGDC
will develop a project management team which will bring in
additional resources as needed to work with FERC and for the
management of commercial contracts to advance the project (slide
14). Finally, the project management approach will be a
strategic partnership with a lead contractor in support of its
FERC application, to review design, reduce cost, and avoid
delays. There will be a worldwide search for contractors to
provide expertise, which will also demonstrate to financial and
commercial markets that AKLNG has the resources necessary. Mr.
Richards advised that AGDC is not requesting additional funding
in the next fiscal year (slide 15).
REPRESENTATIVE JOHNSON, referring to a worldwide search for the
"right" lead contractor, inquired as to the potential impact of
the project on local businesses and instate contractors.
MR. RICHARDS acknowledged AGDC needs a lead contractor with the
expertise to act as a project and program manager, augment AGDC
staff, and develop the GTP, the pipeline, and the LNG facility.
Wherever possible, AGDC is mandated to utilize Alaskans and
Alaska resources "where economically feasible and viable." He
said Alaska contractors have the knowledge and expertise to work
in the Arctic. In fact, [board member Department of Labor &
Workforce Development] Commissioner Drygas has stated that AGDC
must ensure Alaskans are trained and ready to work on the
project. The lead contractor will need to provide expertise in
lump-sum, turn-key contracts.
REPRESENTATIVE BIRCH asked for an estimate of the unexpended
balance of uncommitted funds within AGDC.
MR. RICHARDS responded that AGDC was authorized with two funds:
the Instate Natural Gas Pipeline Fund and the AKLNG fund. The
balance of those two funds is approximately $104 million, which
will be used to accomplish regulatory, financial, and commercial
work. Further, AGDC is developing a budget that will be
presented to its board of directors for calendar year 2017 and
fiscal year 2018 (FY 18). He advised that authorization will be
required to expend funds for the operating portion of the budget
consisting of personal services, contractual services, lights,
rent, and travel.
2:24:48 PM
CO-CHAIR JOSEPHSON has heard concerns about the segregation of
funds and whether funds meant for House Bill 4 are being used
for [Senate] Bill 138.
MR. RICHARDS answered that there was clear language in related
statutes that identified the funds and their purpose, and to
which AGDC has complied. Funds used toward ASAP came from the
instate pipeline fund solely. He pointed out that AGDC has
accounting systems and is audited annually. Senate Bill 138
established the LNG natural gas pipeline fund which was used for
cash calls to pay for the state's 25 percent representation in
the project; funds from both sources are used toward operating
costs such as salaries, travel, lights, and rent. Mr. Richards
acknowledged concern about how funds will be used and stated
that AGDC has a "clear line of demarcation between those two
fund sources."
CO-CHAIR JOSEPHSON questioned whether the $104 million predates
the current administration and remained available to AGDC from a
prior appropriation, or from appropriations made in FY 16 and FY
17.
MR. RICHARDS further explained the Instate Natural Gas Pipeline
Fund was capitalized with $355 million for a pipeline project,
of which $135 million was spent on ASAP. In FY 15, the
legislature appropriated $167 million for the Department of
Education and Early Development, the Department of Natural
Resources, and the Department of Law. Some of the AKLNG fund
was appropriated in FY 15, when funds were directed to AGDC for
the buyout of TransCanada, and for calendar year 2016
expenditures for AKLNG.
CO-CHAIR JOSEPHSON redirected attention to slide 14 and asked
how decisions are made about what employees would be "housed
within your agency and ... which exactly would be part of some
new lead contractor."
2:29:07 PM
MR. RICHARDS stated AGDC has 22 employees who are augmented with
Alaska contractors, thus its project management team is made up
of experts with processing, engineering, geologic, and design
experience. The sought lead contractor will integrate with the
AGDC project management team - the goal is to have an owner's
representative team - and AGDC is not "turning over the keys"
but will retain oversight responsibility. The lead contractor
will bring in project controls staff, contracting expertise, and
environmental and regulatory expertise. He said, "It's a team
approach, but again, ownership responsibilities stay with AGDC."
REPRESENTATIVE RAUSCHER surmised an operator, not the state,
will operate the project after its completion.
MR. RICHARDS confirmed that AGDC will bring on "the expertise"
to operate the system. At the time of ASAP, there was an
operations plan to advance the project into an operations phase.
For AKLNG, an operations plan has not yet been fully developed;
AGDC, as a very small entity, must bring on required expertise
through contracts for operations.
REPRESENTATIVE WESTLAKE said he was encouraged by the foregoing
discussion. He asked for the source of the funds, which his
constituency will want to know.
MS. WILCOX said, "The question of short-term versus long-term
benefits for Alaska, of course, is in all of our minds at the
moment." She opined AGDC's view is that the project is
extremely important for the long-term fiscal health of the
state, and AGDC seeks to propose a project that carries those
benefits.
CO-CHAIR TARR directed the committee's attention to Senate Bill
138, Section 18, AS [31.25.110], creating the Alaska Liquefied
Natural Gas Project Fund, and [AS 31.25.100], creating the
Instate Natural Gas Pipeline Fund. Other relevant sections are
Section 21, defining the Alaska LNG Project as including Prudhoe
Bay and Point Thomson, and Section 33, defining North Slope
natural gas projects.
2:35:41 PM
MR. RICHARDS returned to the presentation, noting that the value
of the project to Alaska is to monetize a proven resource.
Currently, the gas is cycled daily to help with oil production
and because there is no way to get the gas to market. In
addition, the legislature directed AGDC to develop an access
point so that Alaskans can utilize the gas. Additional benefits
of the project are tens of thousands of jobs for construction
and maintenance of the project, and increased exploration and
development on the North Slope and in other parts of the state
(slide 16). Finally, Alaska's strategic advantages are: a time
of seven to nine days to Asia; a proven supplier and known
resource; a proven and known sovereign (slide 17).
MS. WILCOX gave a short personal history. She began her
commercial update by advising the committee that at this time
there is a global surplus of LNG. The LNG market is a
relatively young market and has experienced a period of
tremendous growth. Many projects that have come online recently
are "chasing demand," as demonstrated by a growing prevalence of
spot markets, and demand growth has slowed as new projects were
completed, leading to a slump in the market. Spot market prices
for LNG delivered to Japan have been around $6 per million
British thermal units (Btus) and have risen to about $7, but the
short-term surplus is prevalent. However, experts agree that
the demand for LNG will continue to grow, although the rate of
growth is uncertain.
REPRESENTATIVE BIRCH asked for an explanation of slide 19.
MS. WILCOX explained the bottom on the graph is a timeline, and
the left axis reflects millions of metric tons per annum (MMTPA)
which represents the capacity of LNG. The slide is entitled,
"Global LNG Balance," but the graph is entitled "Asian LNG
Supply/Demand Balance." Overall global demand is approximately
300 to 350 MMTPA. In further response to Representative Birch,
she confirmed that the aforementioned graph illustrates the
supply and demand of LNG that has been produced, transported,
and marketed to Asia by tanker.
2:43:25 PM
MS. WILCOX pointed out that the forgoing graph illustrates that
supply will be consumed by the growth in demand. The drop [in
demand] indicated in the years 2021-2022, is the time at which
long-term contracts lapse, and the "window in the market"
becomes evident. She said, "And at the moment there are quite a
few projects shopping that window ... and the buyers are
approached by many ... sophisticated parties," (slide 19). She
then provided a graph of global demand projected for 2025
illustrating: an increase in the number of countries that
import LNG; an increase in demand from China is projected; Japan
remains the largest consumer of LNG. She acknowledged there is
debate about the projected growth rate and whether demand will
be diverted to nuclear power (slide 20).
REPRESENTATIVE PARISH asked whether the foregoing projection
aligned with that of Wood Mackenzie [consultancy group].
MS. WILCOX said the projection is not a Wood Mackenzie forecast,
but was received from AGDC's marketing team. She turned to the
topic of tariffs and stated that tariffs generally relate to
pipelines in a similar manner as a toll. She directed attention
to a graph previously provided by Wood Mackenzie (slide 21),
noting that to evaluate projects, Wood Mackenzie seeks to bring
each project's components to a common denominator: a discounted
breakeven price over the life of the project. Thus the
"current project" illustrated on the [slide 21] graph is a 12
percent overall return on capital, and what would be its
breakeven price in today's dollars. The range represented by
the dotted lines is the capital investment of $45 billion to $65
billion, which placed the project "at the far end of
competitiveness for ... their presentation." Ms. Wilcox pointed
out that the common numbers between the three projects compared
are the project cost estimate of between $45 and $65 billion,
the volumes, and the upstream development costs and returns.
However, what brings the variability is the cost of capital that
is carried by the project, thus AGDC seeks to structure a
project that has promises from its customers to pay for the
capacity they reserve, because that will allow for less
expensive financing, and encourage investors and banks that will
offer lower interest on loans. She remarked:
The engineering work that has been done on the project
has a lot of influence on the tolls, but the
commercial and financing considerations have almost
just as much influence on them, and that is what we're
working on now.
2:49:48 PM
REPRESENTATIVE BIRCH asked for the correlation between MMBTU and
a thousand cubic feet of natural gas (Mcf); for example, gas on
the West Coast at $2 per Mcf would equate to [$2 MMBTU].
MS. WILCOX agreed. She next presented AGDC's objectives and
elaborated on the following two:
· operate as a public corporation responsible to its board
and operate in an environment with private parties in a
transparent manner
· structure for third-party finance is the work ongoing this
year with BP and other producers and the outside market, in
order to secure low-cost financing
REPRESENTATIVE JOHNSON has heard one way to getting a reduction
in long-term contracts is to have a stable price for gas that is
not tied to the price of oil. She asked for AGDC's position in
this regard and for further information.
MS. WILCOX returned attention to slide 21, and said AGDC has not
done a study, but traditionally LNG has been marketed as tied to
oil price; for example, a measure for pricing LNG is called "the
slope" which is basically 12 percent to 14 percent of an oil
price index. Recently, the price of LNG has been tied to the
Henry Hub [index price for natural gas]. Other pricing
structures have been tied to "a synthetic toll" wherein a
portion is tied to an upstream index and a portion is tied to a
toll. For AKLNG, a very large part of the cost of supply is
midstream; however, if AKLNG can lower the cost of midstream, it
can also offer a stable source with a fully-developed
infrastructure in place.
REPRESENTATIVE BIRCH questioned whether the project precludes
the ability of municipalities, or the state, to tax property
along the route of the pipeline.
MS. WILCOX explained the "no tax" option is for illustrative
purposes to show that even if taxes are zero, the project is
still challenged to meet the current market price.
REPRESENTATIVE PARISH surmised the upstream price is based on
reasonable, commercially agreed-upon terms purchased from the
three large producers.
MS. WILCOX said the upstream bar on the graph is not a price but
an assumption by Wood Mackenzie on what a reasonable return on
the upstream would be.
REPRESENTATIVE PARISH asked whether the state is now bound by a
contract, and if not, when a "formula" would be negotiated.
MS. WILCOX said AGDC does not have any current contracts with
"the upstream." If the state advances to the position of buying
gas from the upstream, it "would need to land those contracts
far in advance of being tens of billions of dollars in."
2:59:20 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:59 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012317_ House Resc. AGDC presentation.pdf |
HRES 1/23/2017 1:00:00 PM |
AK LNG UPDATE |
| FINAL_AK-Joint-News-Release-AK-LNG-Transition-123016.pdf |
HRES 1/23/2017 1:00:00 PM |
AK LNG UPDATE |
| KEY SECTIONS OF SB 138.pdf |
HRES 1/23/2017 1:00:00 PM |
SB 138 |
| 2017 BP and AGDC Cooperation Agreement.pdf |
HRES 1/23/2017 1:00:00 PM |
AK LNG Update |
| BP Legislative Testimony_Jan 2017_final.pdf |
HRES 1/23/2017 1:00:00 PM |
AK LNG Update |
| HRES Testimony 01-23-2017 -- Bill McMahon ExxonMobil.pdf |
HRES 1/23/2017 1:00:00 PM |
AK LNG Update |