Legislature(2007 - 2008)TERRY MILLER GYM
07/11/2008 09:00 AM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | HB3001 | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RULES STANDING COMMITTEE
SENATE SPECIAL COMMITTEE ON ENERGY
July 11, 2008
9:13 a.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
Representative Beth Kerttula (AGIA Subcommittee)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
Senator Lesil McGuire
Senator Donald Olson
Senator Gary Stevens
Senator Joe Thomas
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
MEMBERS ABSENT
HOUSE RULES
Representative John Harris (AGIA subcommittee, Chair)
SENATE SPECIAL COMMITTEE ON ENERGY
All members present
OTHER LEGISLATORS PRESENT
Representative Bob Buch
Representative Mike Chenault
Representative Sharon Cissna
Representative Harry Crawford
Representative Nancy Dahlstrom
Representative Andrea Doll
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative Berta Gardner
Representative Carl Gatto
Representative Max Gruenberg
Representative Mike Hawker
Representative Lindsey Holmes
Representative Kyle Johansen
Representative Reggie Joule
Representative Scott Kawasaki
Representative Wes Keller
Representative Mike Kelly
Representative Gabrielle LeDoux
Representative Bob Lynn
Representative Kevin Meyer
Representative Mary Nelson
Representative Mark Neuman
Representative Kurt Olson
Representative Bob Roses
Representative Woodie Salmon
Representative Paul Seaton
Representative Bill Stoltze
Representative Bill Thomas
Senator Con Bunde
Senator Bettye Davis
Senator Johnny Ellis
Senator Hollis French
Senator Gary Wilken
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act approving issuance of a license by the commissioner of
revenue and the commissioner of natural resources to TransCanada
Alaska Company, LLC and Foothills Pipe Lines Ltd., jointly as
licensee, under the Alaska Gasline Inducement Act; and providing
for an effective date."
- HEARD AND HELD
SENATE BILL NO. 3001
"An Act approving issuance of a license by the commissioner of
revenue and the commissioner of natural resources to TransCanada
Alaska Company, LLC and Foothills Pipe Lines Ltd., jointly as
licensee, under the Alaska Gasline Inducement Act; and providing
for an effective date."
- HEARD AND HELD
ROUND TABLE DISCUSSION: ECONOMIC ISSUES
Chevron - John Zager, General Manager
ConocoPhillips Alaska, Inc. - Wendy King, Vice President of
External Affairs
ExxonMobil Corporation - Marty Massey, U.S. Joint Interest
Manager
BP Exploration - Dave Van Tuyl, Alaska Gas
Commercialization Manager
TransCanada - Tony Palmer, Vice President, Alaska Business
Development
Alaska Oil and Gas Conservation Commission - Cathy
Foerster, Engineering Commissioner
Legislative Budget & Audit - Steve Porter, Consultant; Dan
Dickinson, Consultant
Administration - Patrick Galvin, Commissioner, Department
of Revenue; Consultants
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (H) READ THE FIRST TIME - REFERRALS
06/03/08 (H) RLS
06/03/08 (H) WRITTEN FINDINGS & DETERMINATION
06/04/08 (H) RLS AT 9:00 AM CAPITOL 120
06/04/08 (H) Subcommittee Assigned
06/04/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/04/08 (H) Heard & Held
06/04/08 (H) MINUTE(RLS)
06/05/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
06/05/08 (H) Heard & Held
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06/06/08 (H) Heard & Held
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06/07/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
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06/24/08 (H) RLS AT 1:00 PM MAT-SU
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06/26/08 (H) RLS AT 1:00 PM KENAI
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07/01/08 (H) RLS AT 9:00 AM BARROW
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07/02/08 (H) BILL CARRIES OVER TO FOURTH SPECIAL
SESSION
07/08/08 (H) RLS AT 1:00 PM KETCHIKAN
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07/09/08 (H) RLS AT 1:30 PM TERRY MILLER GYM
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07/11/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
BILL: SB3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (S) READ THE FIRST TIME - REFERRALS
06/03/08 (S) ENR
06/03/08 (S) REPORT ON FINDINGS AND DETERMINATION
06/04/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/04/08 (S) Heard & Held
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06/05/08 (S) ENR AT 9:00 AM TERRY MILLER GYM
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06/20/08 (S) 9am - 5pm - Testimony <Invitation Only>
06/24/08 (S) ENR AT 1:00 PM MAT-SU
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07/01/08 (S) BILL CARRIES OVER FROM 3RD SPECIAL
SESSION
07/01/08 (S) ENR AT 9:00 AM BARROW
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WITNESS REGISTER
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Participated in the round table discussion.
STEVE PORTER, Consultant
Legislative Budget & Audit Committee
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Participated in the round table discussion.
JOHN ZAGER, General Manager
Chevron Corporation, Alaska
Anchorage, Alaska
POSITION STATEMENT: Participated in the round table discussion.
CATHY FOERSTER, Engineering Commissioner
Alaska Oil and Gas Conservation Commission (AOGCC)
Department of Administration (DOA)
Anchorage, Alaska
POSITION STATEMENT: Participated in the round table discussion.
DAVE VAN TUYL, Gas Commercialization Manager
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Participated in the round table discussion.
TONY PALMER, Vice President
Alaska Business Development
TransCanada Alaska, LLC
Calgary, Alberta
POSITION STATEMENT: Participated in the round table discussion.
WENDY KING, Vice President of External Affairs
ConocoPhillips Alaska, Inc. (ConocoPhillips)
Anchorage, Alaska
POSITION STATEMENT: Participated in the round table discussion.
MARTY MASSEY, U. S. Joint Interest Manager
ExxonMobil
Houston, Texas
POSITION STATEMENT: Participated in the round table discussion.
RICH RUGGERIO, Senior Manager of the Americas
Gaffney, Cline & Associates
Houston, Texas
POSITION STATEMENT: Participated in the round table discussion.
DAN DICKINSON, Consultant
Legislative Budget & Audit
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Participated in the round table discussion.
PAUL BLOOM, Vice President Public Sector and Infrastructure
Investment Banking
Goldman Sachs
Seattle, Washington
POSITION STATEMENT: Answered questions during the round table
discussion.
DEEPA PODUVAL, Principal Consultant
Black & Veatch
Houston, Texas
POSITION STATEMENT: Answered a question during the round table
discussion.
BRUCE SCHWARTZ, Vice President
Credit Risk Management and Advisory Group
Goldman Sachs
Seattle, Washington
POSITION STATEMENT: Answered questions during the round table
discussion.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the joint meeting of the House
Rules Standing Committee and the Senate Special Committee on
Energy to order at 9:13:00 AM.
HB3001-APPROVING AGIA LICENSE
SB3001-APPROVING AGIA LICENSE
9:13:33 AM
CHAIR HUGGINS announced the schedule for the meeting. He then
directed legislators to defer their questions on Denali - The
Alaska Gas Pipeline ("Denali project") until the hearing on July
12, 2008.
9:15:43 AM
The presenters introduced themselves.
9:17:09 AM
CHAIR HUGGINS described the protocol for the round table
discussion. He then asked Commissioner Galvin to provide an
overview of the administration's position on the availability of
gas, what variables come to play in that availability of gas
over time, and what the increased increments would be for gas
off-take.
9:18:54 AM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
informed the members that the potential off-take is unknown for
the time pipeline service begins and afterward. He opined that
the amount of off-take would be a combination of the production
of the existing gas reserves, the amount requested by the
operators of the fields, and the amount allowed by the Alaska
Oil and Gas Conservation Commission (AOGCC). The Department of
Revenue (DOR) anticipated that the currently producing fields
could be used for the initial run of gas; in addition, there are
other fields in various phases of potential development. The
expectation by DOR is that production would be 3.5 billion cubic
feet (bcf) per day or more, he said. In the context of whether
or not the project is viable, the administration would examine
the entire range of possibilities.
9:21:06 AM
STEVE PORTER, Consultant, Legislative Budget & Audit Committee,
Alaska State Legislature, opined that "the key though, is not
how much we expect to see in the future on gas off-take because
the bidder is going to bid ... so, whatever they believe they
have in reserves is what they'll bid. ... The key is ... Point
Thomson." He said that the delay in production caused by the
revocation of the leases at Point Thomson would encourage the
owners to negotiate. The delay would also hurt the state in two
ways; by the cost to the net present value of a delay of 10
years, and the impact of the increased cost of the tariff during
the delay. He asked Commissioner Galvin to estimate the cost to
the state of those two issues.
9:23:06 AM
COMMISSIONER GALVIN stated that a 10 year delay of production at
Point Thomson is an inaccurate representation. Also, the
administration does not have a choice between "the idea that
we're going to bring it in on 'x' date or bring it in at 10
years and that the production flow is going to be potentially
the same ... I think is a compete oversimplification of the
issue." He explained that the issue of Point Thomson is very
complex and is related to the gas line debate, but is not
relevant and critical to the approval of the TransCanada
license. Commissioner Galvin addressed the economic trade-off
as related to the gas that is available at the beginning of the
line and the relationship of Point Thomson to the debate.
Firstly, the Point Thomson resource issue is a combination of
the technical aspects of the field; for example, when gas
production begins and the legal aspects of the ownership of the
land and the development of the project. The development plan
of the lessee would determine whether there would be a quick
movement to gas off-take or further delay; the administration
would not be able to determine that. Commissioner Galvin
advised that the choice of whether Point Thomson gas is
available at full volume on "day one," or not available for 10
years, is basically irrelevant because it is an
oversimplification of the issues for the state. The issues for
the state are to manage its resources and to move the gas line
project forward.
9:26:25 AM
CHAIR HUGGINS acknowledged that for this process assumptions
would have to be made. He asked, "Specifically, as it applies
to Point Thomson, for the open season, it doesn't matter to me
licensee or no licensee ... are you assuming Point Thomson
available?"
9:27:01 AM
COMMISSIONER GALVIN said no.
9:27:05 AM
JOHN ZAGER, General Manager, Chevron Corporation, Alaska,
observed that the North Slope, including Point Thomson, has 35
tcf (trillion cubic feet) of proven gas; however, a 4.5 bcf
(billion cubic feet) per day pipeline requires about 50 tcf.
Furthermore, a bullet line to Cook Inlet requires 500 million
cubic feet (mmcf) per day and a Y-line to an LNG plant requires
2.5 [bcf]. In fact, the total needed is roughly 100 tcf. He
opined that eventually, Point Thomson would be an important part
of the supply of gas and "the sooner you get Point Thomson on
production, and find that out, the better it is for everybody."
Mr. Zager further explained that the other big unknown is to
find gas. "Yet-to-find (YTF) gas won't be there for the open
season, and so Point Thomson is critical ... [and] getting the
Point Thomson issue resolved clearly and concisely can only be
to everybody's advantage," he said.
9:28:56 AM
MR. PORTER re-stated his question to Commissioner Galvin. He
remarked:
From a process management standpoint only, if you
decide to take back the Point Thomson leases ... it
will cost the state 10 years. ... I do believe that
the Department of Natural Resources is very interested
in solving this problem, but I do think that it's also
very important to understand the impact on this gas
pipeline project.
9:30:08 AM
COMMISSIONER GALVIN re-stated his belief that 10 years is "an
absolutely misleading number." In further response to Mr.
Porter, he said that there would be two years of litigation up
to a supreme court decision.
9:30:21 AM
MR. PORTER interjected that the first issue is litigation on the
current [unit] issue.
9:30:24 AM
COMMISSIONER GALVIN said that the timeline on the unit issue is
approximately two years.
9:30:46 AM
MR. PORTER said that the next issue would be the lease holder's
claim of ownership of the certified wells. He asked whether the
administration would attempt to get back the certified wells.
9:31:13 AM
COMMISSIONER GALVIN assumed that these two issues would be
addressed "in series."
9:31:22 AM
MR. PORTER responded that the court has separated these issues
and "put them in series."
9:31:43 AM
COMMISSIONER GALVIN disagreed. He added:
Frankly, I'm the commissioner of revenue, I'm not the
Department of Law. This is probably not the
discussion to have in this, Mr. Chairman, and I'm not
sure how far you want to go with this.
9:31:58 AM
MR. PORTER said:
I made a two year timeline; it had to do with best
interest findings, suit on the best interest findings,
regional leases, owners...
[Indisc. comments by several unidentified speakers.]
9:32:43 AM
CHAIR HUGGINS remarked:
The commissioner has stipulated that it's assuming
Point Thomson not available for initial open seasons.
We will come back to Point Thomson. ... I'd like to
hear from Ms. Foerster.
9:33:10 AM
CATHY FOERSTER, Engineering Commissioner, Alaska Oil and Gas
Conservation Commission (AOGCC), Department of Administration
(DOA), informed the members that the determination of gas off-
take and filling the pipeline has four pieces; in fact, the
Alaska Oil and Gas Conservation Commission (AOGCC) plays a role
in each piece. She explained that piece number one is Prudhoe
Bay, and the AOGCC concluded that within reason, Prudhoe will be
able to supply a significant portion of the gas needed to fill
the gas line, assuming production remains level and there is not
a major shutdown. The second piece is that the other oil fields
are in different phases "of their production lives"; for
instance, the Endicott field may soon be granted a gas off-take
allowable. The third piece is the amount of undiscovered gas
that is unknown until exploration begins; however, exploration
will not begin unless there is a clear assurance of the market.
The fourth component is Point Thomson. She opined that the
availability of Point Thomson for the 2010 open season is based
on the following: endless litigation that halts development;
the DNR and current leaseholders come to terms, Exxon proceeds
and the AOGCC reservoir study facilitates the granting of an
"allowable" to Exxon and its partners; or DNR returns the leases
to Exxon but the AOGCC must wait until 2015 to evaluate oil
production and grant the allowable off-take for gas.
Commissioner Foerster concluded that after Prudhoe, the bulk of
the gas will come from explorers who must be given a clear
signal that there will be a market for gas.
9:37:46 AM
COMMISSIONER GALVIN responded that typical industry practice is
that a pipeline in a new area anticipates approximately 33-40
percent of the total firm committed gas will be recognized
proven reserves at the time the commitments are made. He
pointed out that with or without Point Thomson, this project is
significantly above that.
9:39:01 AM
CHAIR HUGGINS remarked:
Mr. Commissioner, one comment on that, which appears
to be incongruent, in the sense of treble damages, if
the state participates for in-state gas from the North
Slope over 0.5 bcf. And then you're talking about the
proven reserves and what is out there, it's not
congruent.
9:39:22 AM
COMMISSIONER GALVIN reminded the members that the issue
regarding treble damages applies to the state providing benefits
to a competing pipeline with a capacity over the estimated
amount needed to provide in-state needs. The present discussion
is the question of financing the [proposed] pipeline and the
reasonable expectation of how much gas is going to be proven at
the time the FTs [firm transportation commitments] are made.
9:40:00 AM
REPRESENTATIVE FAIRCLOUGH asked Commissioner Foerster for the
original projection for oil extraction from Prudhoe Bay and when
that field would be dry.
9:40:18 AM
MS. FOERSTER answered that nine billion barrels was the original
projection. In further response, she said that production has
exceeded the projection; in fact, there are two billion barrels
left to produce and it is incumbent to facilitate its
production.
9:41:29 AM
REPRESENTATIVE FAIRCLOUGH observed that technology has allowed
for a greater extraction of oil than originally projected. She
asked if the AOGCC believes that improved technology will
continue to increase the level of the extraction of oil, or
whether at the time of the service of the gas pipeline, the
higher priced commodity will not be recovered.
9:42:26 AM
MS. FOERSTER opined that the owners and operators at Prudhoe Bay
are some of the "best on the planet." If new technology reveals
new access to oil, the North Slope top producers will produce
the oil and find a new source of gas for the pipeline. At this
time, the interests of the state and the interests of the
operators are more closely aligned. Moreover, the producers
will not take action that would cost them billions of dollars.
She further explained that the operators are pursuing technology
to continue to produce oil while extracting the gas; thus, the
technology to advance oil production will advance gas
production.
9:44:11 AM
REPRESENTATIVE FAIRCLOUGH pointed out that until June 5, 2008,
legislators thought that Point Thomson was included as a source
of gas for the pipeline project. Although she said that she
agrees that the administration should hold Exxon accountable for
its plans for development, there is a fiscal cost, an economic
strategy, and possible consequences to the state. She remarked:
Commissioner Galvin is talking, it's going to come,
and we should just have faith. And you're telling me
we should have faith because Prudhoe's going to
provide it. But then we say that it is through that
technology. So we're back in the gray of where's the
gas. ... I just want to make sure that when we build
the line we have gas to put into it and that we are
not trading gas off at $10 versus a commodity that
we're selling at $140 and upwards.
9:45:57 AM
DAVE VAN TUYL, Gas Commercialization Manager, BP Exploration
(Alaska) Inc., agreed with Commissioner Foerster that the
initial projection for Prudhoe Bay production was nine billion
barrels. BP and its co-owners have invested $40 billion in
capital improvements to get more from Prudhoe; in fact, eleven
billion barrels have been produced and the current forecast is
thirteen billion barrels. At the same time, BP remains
committed to get its gas to market. He expressed his concern
that if Point Thomson is not available, the success of the
initial open season is in doubt. The additional [gas] off-take
at Prudhoe puts additional pressure on Prudhoe liquids recovery;
furthermore, the off-take rate approved by the AOGCC is unknown.
He concluded that without additional known resources Prudhoe
liquids recovery is jeopardized; a situation not in BP's, or the
state's, interest.
9:48:05 AM
REPRESENTATIVE FAIRCLOUGH stated:
I lost already on the vote for an amendment on cost
recoveries in the Prudhoe Bay area specifically, and
I'm wondering, because I've heard about investment
strategies since the new taxation went into effect, as
specific to allowable costs, cost credits. Is that
affecting at all the technology that's being invested
by the LLC, or the group that owns Prudhoe Bay? Is
the technology still working since you already have a
proven reserve, that you're still investing your
monies in the same way, with the floor on your cost
recoveries?
9:48:49 AM
MR. VAN TUYL acknowledged that the structure of Alaska's Clear
and Equitable Share (ACES) [legislation] provides a disincentive
to investment in known fields; however, the owners of Prudhoe
have not given up on technology development or on being
appropriate stewards of the resource. The fiscal environment is
an additional challenge.
9:49:33 AM
REPRESENTATIVE DOOGAN asked Mr. Palmer, "Is it your expectation
that the pipeline of whatever size it is you would build ...
would be fully subscribed with known gas reserves at the open
season, or is it more common for producers to buy more space on
the pipeline, in the expectation that they will find more gas?"
He then asked each of the producers' representatives, "Is it
your expectation that, if you were going to go ahead and commit
to capacity on [a 4.0 bcf per day] pipeline, that you only
commit to putting reserves and that the pipeline wouldn't go
forward unless the full [4.0 bcf per day] was committed with
proven reserves."
9:51:40 AM
TONY PALMER, Vice President, Alaska Business Development,
TransCanada Alaska, LLC, answered that TransCanada's AGIA
application contains a requirement for customers to have a
minimum of 10 years of proven reserves to support their 25 year
contracts. Individual customers can have different strategies
as to how much proven reserves they have to support the
contract; it is normally the case that producers do not have 25
years of proven reserves.
9:52:49 AM
MR. VAN TUYL stated that Representative Doogan's question asked
what BP's open season strategy might be. He opined that he
could not answer that question because an open season is a
competitive process. He noted that it is common practice for a
builder of a prospective pipeline to consult with shippers to
discuss each party's risk as it applies to future exploration.
Mr. Van Tuyl expressed BP's concern that the structure of AGIA
makes that discussion, negotiation of rates, and agreement
impossible. Also, he opined that reserves are proven at the
time the facilities required to process those reserves are
constructed; thus, this would not happen until after open
season.
9:55:04 AM
REPRESENTATIVE DOOGAN remarked:
Mr. Chairman, if I might, in order to not force every
other person at that table to tell me that they're not
going to answer my question because of competitive
reasons ..."
CHAIR HUGGINS asked Representative Doogan to wait for comments
from the other witnesses.
9:55:24 AM
MR. ZAGER stated that his company intends to commit gas to the
pipeline. He said, "If we talk about the proven reserves as the
numbers ... for Prudhoe [are] at 25 and Point Thomson at 10,
without Point Thomson you are about half the capacity you need,
that's 25 tcf left to prove, to commit, and say $5 an mcf that's
$125 billion. Those are the kinds of numbers that can ruin
companies." He explained that another perspective of a "proven
ratio" is that, in a basin, for example the Western Canadian
sedimentary basin, there are areas of proven, probable, and
possible fields. He opined that a company would be confident of
these fields, but would not invest in them before the
construction of a pipeline. However, in this case, [the
companies] are counting that Prudhoe Bay and Point Thomson are
proven, and would move straight to exploration. The structure
of the proposed open season does not incentivize explorers to
come to the open season; this is due to the guaranteed expansion
and guaranteed rolled-in rates. He said,
Normally in an open season where you didn't have
guaranteed expansion in the future, and you didn't
have guaranteed rolled-in rates, it's kind of a one
shot thing. If you know there's an open season in
five years and you're in or you're out, you've got to
go drill now, prove up your reserves, and commit to
the open season. If I'm an explorer here today, I'm
thinking, "Wow, why should I go do that, I'm going to
wait until the pipeline is under construction, I know
what the tariff is going to be, why would I take that
construction risk? ... Because some poor company had
to put their money up for gas they didn't have, and
maybe I can pick that up at a discount."
Mr. Zager concluded that this is not a common situation, where
one can apply "rules of thumb from other basins." He asked, "Is
the state going to step up and take part of that risk? We're
talking about numbers that are several times larger than the
[Alaska Permanent Fund]."
9:59:08 AM
WENDY KING, Vice President of External Affairs, ConocoPhillips
Alaska, Inc. (ConocoPhillips), noted that extrapolating the
experience of other pipelines and other basins is something she
has spoken about previously. The sizes of the FT commitments on
this pipeline are very unique. She pointed out that the size of
ConocoPhillips's 25 year shipping commitment could be 25-50
percent of its market capital, or larger. Thus, comparing this
project to others with a much lower toll "is a dangerous place
to go." Referring to Representative Doogan's question, she
provided her company's perspective that there would be a
conversation amongst the working interest owners in each field.
Each owner must analyze the field and models, and work with the
Alaska Oil and Gas Conservation Commission to determine the
investment needed to deliver the volume of gas. At open season,
however, there will be individual shipper commitments determined
by individual market decisions. These are the market decisions
that are "something we will not talk about." Ms. King said,
"Somebody is going to have to take a firm shipping commitment in
[TransCanada's] proposal for gas volumes that have not been
found to date. And that is a significant risk that will be
asked of the shippers." She concluded that a company holding a
FT commitment must be paid [even] if the gas volumes do not
show.
10:01:46 AM
MARTY MASSEY, U. S. Joint Interest Manager, ExxonMobil,
remarked:
We kind of looked at this from a basis of "We will own
the pipe equal to our throughput." And so that's a
significant risk mitigator on making that FT
commitment because you're actually making it to
yourself. ... In terms of how much we would commit and
how much we would in an open season that is a
competitive issue. However, from our perspective we
would be participating in the project as an owner and
a shipper, and we would anticipate to be balanced.
MR. MASSEY continued to say that Point Thomson is absolutely
critical to the decision; in fact, Exxon may not be able to go
forward with the project without knowing that Point Thomson gas
is going to be available. He opined that Point Thomson is a gas
field and Exxon would prove to the AOGCC that "blowing down
Point Thomson is the right answer." Mr. Massey acknowledged
that the AOGCC may not agree; thus Exxon has proposed the
initial production system [scheduled for] 2015. Mr. Massey
opined that 4.5 bcf per day is the "sweet spot" for this
pipeline and enough gas needs to be found to fill it.
10:04:29 AM
CHAIR HUGGINS asked for comments on this issue from Mr. Palmer.
MR. PALMER said that he can not comment on Point Thomson because
it is an issue between the state and the leaseholders. He
reiterated that TransCanada would like to move as much gas as
possible and as early as possible. Additionally, due to the
lower toll, its preference is for a 4.5 bcf per day pipeline.
TransCanada does require that customers have a minimum of 10
years of proven reserves and is requesting 25 year contracts
from customers. Individual shippers have the prerogative as to
how they go forward; however, TransCanada is looking for
sufficient gas to make the project proceed. He advised that in
the case of a basin opening pipeline, 25 years of proven
reserves for all customers are unnecessary.
REPRESENTATIVE DOOGAN observed that the net message is that [the
legislature] is not be concerned about the amount of gas
available for open season because "if the people who have the
gas, and know what the gas is, aren't going to tell me how
they're going to approach this, then it's not really a matter of
what's in front of me. And I would offer the further
observation that these sort of round tables don't work very well
if every time you ask a sensitive question everybody hunkers
down in their silo."
CHAIR HUGGINS said that others may come to a different
conclusion.
REPRESENTATIVE GARA noted that all agree that gas production at
Point Thomson would improve this project. He opined that the
state would be best off if it was able to drop the lawsuit, but
Exxon has not offered a reliable development plan that would
produce gas very quickly at Point Thomson. Exxon has offered a
plan; however, there is no one here from the Department of
Natural Resources to explain the shortcomings of Exxon's plan.
Representative Gara advised that the state should proceed with
the litigation to the point where the state is well protected.
He remarked:
The point is, you don't plan on what was [shown on]
yesterday's slide, which is 'war until the end.' At
some point you play chicken, and hopefully you get to
chicken quicker. So, I guess, I don't know if there's
anybody on the panel that can answer this, but the
answer is has Exxon's first offer to us, is it good
enough that we should drop the lawsuit and move ahead,
or should we keep the litigation going? And so, I
guess I wish there was someone from DNR up there who
could explain that from the administration's
perspective. I don't know if Commissioner Galvin can.
... Is there a plan to move ahead now that fully
protects us and gets the gas as quickly as possible?
I think the answer is "no."
REPRESENTATIVE GARA concluded that if Exxon has not presented a
good offer the state should not drop the lawsuit.
SENATOR STEDMAN asked members to focus on questions.
MS. FOERSTER advised that the AOGCC is the agency that is
charged by the constitution with preventing the waste of both
oil and gas hydrocarbons and encouraging greater ultimate
recovery of both oil and gas hydrocarbons. The perception of
the AOGCC is that a good development plan for Point Thomson is
one that answers two questions. The first question is whether
the oil rim is producible; the second question is whether the
gas cap is "cycleable." She opined that these questions should
be answered without spending an inordinate amount of money. She
remarked:
If you're Exxon and its partners and you have done
enough technical work to convince yourself that this
should be developed as a gas field, but you've got an
agency that wants to protect the recovery of both the
oil and the gas, you should put forth a plan that
answers those two questions, but that doesn't waste a
lot of your money. ... The State of Alaska should be
pleased with that approach because they want those
questions answered so that they can then allow this
agency to either grant a gas off-take allowable or say
... "get the oil first." ... The plan that Exxon has
put forward, from everything that I can see in the
plan, and from everything that the consultants ... can
see, the Exxon plan does exactly what the state wants
Exxon to do ... from a technical basis.
COMMISSIONER FOERSTER then acknowledged that the DNR has more
than the technical issue to deal with.
CHAIR HUGGINS advised that the issue today is not resolution
between the state and the owners of the leases at Point Thomson.
RICH RUGGERIO, Senior Manager of the Americas, Gaffney, Cline &
Associates, related his experience as an individual who has been
on the same side of the table as the pipeline owner, and also as
one requesting firm transportation [commitments]. He opined
that the question with AGIA is one of timing, and whether the
timing is right. He agreed that this is a unique and expensive
project that presents a number of risks. He remarked:
One thing that I've found ... and I think this will be
the exercise that [the producers] will have to go
through, if we're actually talking about a basin where
there is a lot more gas that had been known, that
creates one dynamic at the open season. As a person
maybe looking at firm transport, I have to be thinking
about, "Is one of the big parameters how much I'm
willing to pay? Is one of the big parameters how long
I'm willing to pay?"... And in that situation I'm
sitting there knowing that [there are] others with
enough gas to compete against me. ... I also have to
think about what future leases I have in the area and
what exploration I'm planning on doing and what may be
coming in. The other side of that is really where
Alaska is right now, and that is you don't have an
overabundance or an oversupply of known resources,
discovered resources, to fill the full capacity of the
25 year commitment. And so, therefore it doesn't mean
that you can't hold an open season ... [and] it
doesn't mean that you can't negotiate. ... What it
does mean though, there are a number of additional
risks ... that have to somehow be addressed in the
final deal. ... As the risks get larger, each of these
companies will take a different perception as to what
the cost of that risk is and how it will fit into
their economics and then subsequently, how they bid.
... What [the availability of gas from Point Thomson]
really does , whether it's known or not known at the
time when the open season comes, it just changes the
dynamics of how they will package, how they will
negotiate, how they will come to table with an offer
of what they're willing to do to make a pipeline work
for Alaska.
10:18:17 AM
The committee took an at-ease from 10:16 a.m. to 10:37 a.m.
10:37:48 AM
CHAIR HUGGINS called the committee back to order.
10:38:49 AM
SENATOR WIELECHOWSKI referred to the oil companies' risk of
making a 25 year commitment to the [TransCanada] pipeline
without proven reserves. He pointed out that [ConocoPhillips
Alaska, Inc.] is making a commitment to [the Denali project]
without enough gas to fill that line; in fact, the companies are
15 tcf short including gas from Point Thomson. He asked Ms.
King, "You're already going there, aren't you?"
10:40:01 AM
MS. KING stressed that she is here today "looking at this in the
context as a shipper on this pipeline." She opined that
companies may take the risk; however, they must weigh all of the
economic criteria, such as prices and market conditions. Also
critical are the factors of understanding the costs of the
project and deliverability. Ms. King pointed out that the
pipeline, in requiring "sufficient gas to make this project
succeed," is looking for fiscal predictability. The pipeline
builder wants to know that it is going to be paid, whether the
gas is there or not. Referring to other pipeline projects, she
concluded that pipelines do advance a project to an open season
in order to "have that conversation with their customers."
10:41:28 AM
MR. VAN TUYL agreed with Ms. King that the [pipeline] requires a
massive commitment. He further observed that the key, in
looking at the commitment as a shipper, involves the cost of the
project and the terms offered to get the gas to market. BP
believes that the Denali project will be a success, although the
project costs are unknown. As a shipper, BP will evaluate the
costs and terms of the project, as it is critical that the cost
of getting the resource to market is as low as possible.
10:43:18 AM
SENATOR WIELECHOWSKI recalled that Mr. Massey indicated that at
Point Thomson, Exxon "want[s] to go to blow down and we're
waiting to convince AOGCC of that." Senator Wielechowski
remarked:
What I see being set up is a clash between the state
and Exxon, ... a clash on a significant amount of
waste to the state, where you have your internal
hurdle rate for what you need to earn, profit-wise, on
a field. And maybe developing the oil and condensates
in Point Thomson doesn't quite meet that; still
profitable, still means billions of dollars for the
state, but doesn't meet your hurdle rate. So you
would just prefer to go ahead and blow it down. And I
guess my question is ... without having drilled wells
in Point Thomson, or done a whole lot of research,
quite frankly, in 20 years, how do you come to the
conclusion that blow down is the proper course of
action there?"
10:44:27 AM
MR. MASSEY stated that in his judgment, based on the technical
data, blow down at Point Thomson will be in the best interests
of the producers, the owners, and the state. He acknowledged
that there is some uncertainty; however, Exxon's study will need
to lead the AOGCC to the same conclusion. Exxon's proposal is
to "put this thing on production. We're going to cycle; we're
going to learn what the condensate yield is from actually
cycling these wells. We're going to put two wells in the oil
rim, we're going to test that oil rim and find out, without a
doubt, what the gravity is, what it's able to produce." Mr.
Massey further discussed Exxon's movement on the Point Thomson
project.
10:46:12 AM
SENATOR STEDMAN requested that Commissioner Galvin bring forward
from the Department of Revenue analysis on Point Thomson and the
potential value of the delay to getting that field online. He
recognized that the matrix may be based on a two year, five
year, or ten year delay because of the unknowns of a quick
settlement or a long, protracted disagreement.
10:47:11 AM
COMMISSIONER GALVIN agreed to produce an analysis; although he
cautioned that an analysis would be complicated by an uncertain
production profile between oil and gas.
10:47:27 AM
SENATOR STEDMAN then asked Commissioner Galvin and TransCanada,
"Is there any exposure to the state as far as will there be a
request from TransCanada for the state to underwrite any of the
FT commitments that are fallen short?" He compared this
situation to help from the federal government. Additionally, he
asked whether TransCanada would step up to cover a short-fall.
10:48:20 AM
MR. PALMER referred to the previous testimony regarding
negotiations between customers and pipelines. He observed that
customers always want pipelines to have the longest possible
depreciation schedule and the shortest possible contract terms.
It is no surprise that pipeline companies usually want the
opposite. TransCanada has put forth a balanced proposal, but has
yet to have negotiations with customers. Mr. Palmer said that
he expects that some customers will want negotiated tolls and
negotiations on many of the proposed terms. However, it is not
TransCanada's proposal that either the state or TransCanada
would take the risk of yet to find (YTF) gas. Further,
subsequent to granting of the license and conducting an open
season, TransCanada will look at the circumstances at that time.
10:50:29 AM
SENATOR STEDMAN asked for Commissioner Galvin's response on
whether there is potential risk in AGIA that the state would
have to underwrite YTF gas.
10:51:42 AM
COMMISSIONER GALVIN responded that there is nothing in AGIA to
increase that risk; in fact, given the state's analysis, AGIA
minimizes the risk in terms of the potential of a request from
the shippers to transfer risk from them to the state. He
concluded that the issue may come up for discussion, but the
state is in a better position by having a pipeline that is
moving forward as opposed to relying upon the Denali project.
10:52:30 AM
SENATOR STEDMAN expressed his understanding that this issue is
not addressed in the AGIA application; however, his concern is
for the future business relationship with TransCanada given the
changing dynamics of the industry. He warned about the
possibility of the legislature [faced with] decisions "to step
up to the plate on these financial commitments in order to get a
gas line."
10:53:27 AM
COMMISSIONER GALVIN re-stated that the discussion is more likely
to come up with the shippers/producers. He said:
It is possible that it may come forward as a result of
trying to get gas committed to this line. In the
context of this particular issue, there's nothing
about the license, or entering into a relationship
with TransCanada, that increases the likelihood of
that happening.
10:54:12 AM
MR. VAN TUYL responded to a comment about the negotiated rates
offered under TransCanada's application and AGIA and provided
the rationale for BP's participation in the Denali project. He
informed the members that BP will participate in any open season
that offers commercially reasonable terms; however it has
concerns with the terms required by AGIA. He remarked:
In ... the 2000 certificate policy statement by FERC
[Federal Energy Regulatory Commission] there
established the ability for pipeline companies and
perspective shippers, such as BP, to actually
negotiate rates. And in the certificate policy
statement they describe what they characterize as a
free and open negotiation, where sort of everything is
on the table and you start with a blank sheet of
paper. A concern that BP has as a shipper ... is that
[AGIA] really prevents TransCanada from offering
certain terms because they're stipulated in AGIA. We
want as a shipper, to be able to, like I said, get our
gas to market in the most reasonable terms, and not be
subject to things like a termination provision. ...
Again, we
look forward to the alternative proposal that Denali's
going to come forward with to offer to all shippers.
10:56:49 AM
COMMISSIONER GALVIN recalled the discussion about FERC and what
it is going to do. He encouraged the body to recognize that
over the years the pipeline business has transitioned to the
pipeline and the shippers negotiating their rate agreements, as
opposed to the rates being fully adjudicated by FERC after its
receipt of an application by the pipeline company. The state,
by the vehicle of AGIA, has embedded itself in the negotiations.
Commissioner Galvin opined that BP prefers a situation similar
to the Denali project, wherein there is an unfettered
relationship with negotiations for terms without the state's
say. However, there would be a potential, down the road, that
the state can argue for the public interest before FERC. He
concluded that AGIA makes sure that the state's interest is
embedded in the relationship between the pipeline and the
shippers.
10:58:49 AM
CHAIR HUGGINS asked Commissioner Galvin to comment on the
liability of BP back to the pipeline company if the project does
not go forward.
10:58:57 AM
COMMISSIONER GALVIN deferred the question to Mr. Palmer.
10:59:10 AM
MR. PALMER confirmed that that provision, and others, are in
TransCanada's AGIA application. These provisions are within the
bounds of the restrictions of AGIA and try to balance the risk
and reward for the shippers and the pipeline company.
11:00:20 AM
CHAIR HUGGINS asked for a summary of TransCanada's AGIA
application provisions.
11:00:31 AM
MR. PALMER summarized the ratio provisions, the rate of return,
and the risk sharing provisions.
11:01:08 AM
CHAIR HUGGINS asked Mr. Van Tuyl to continue his testimony.
11:01:21 AM
MR. VAN TUYL clarified the role of FERC in negotiated rates.
Although FERC allows parties to work out arrangements, it is the
ultimate arbiter and, in fact, has to approve the negotiated
rate. The negotiated rate is then made available to all
prospective shippers. He opined that negotiated rates are
important to FERC as a means for risk management. In response
to Chair Huggins, he said his concern about the liability is
that if BP makes a firm transportation commitment to a company,
there must be confidence that there will be some risk sharing in
the event that the company can not deliver.
11:03:01 AM
DAN DICKINSON, Consultant, Legislative Budget & Audit, Alaska
State Legislature, discussed how risks are shared. He suggested
that the companies whose firm transportation commitments would
be underwriting the pipeline should look at the provisions in
the TransCanada license and differentiate between those that are
the state's must-haves and TransCanada's must-haves. He opined
that the issue under discussion is not included in the state's
must-haves, but rather was included by TransCanada. Mr.
Dickinson stated that he was interested in the comments from the
companies who will have gas, about "which of those terms they
find objectionable and [in] which ones ... the state is behind
that or an alternative commercial view is behind that."
11:04:33 AM
MR. VAN TUYL expressed BP's concerns with the following terms in
TransCanada's proposal: the right to terminate [the project]
even after customers have signed binding agreements; the
limitation on negotiated rates even though negotiated rates are
preferred by FERC on pipeline projects; the quality of the cost
estimate of the offer that will be made to shippers at open
season; the AGIA requirement to subsidize competitors through
the expansion provision; the required Alberta tie-in arrangement
that does not allow free and open competition for service out of
Alberta; the return on equity; and the possible withdrawn
partner liability against TransCanada.
11:09:07 AM
MS. KING expressed ConocoPhillips' perspective on some of these
same points: the set requirements in AGIA; the terms, now
endorsed by the state, in [TransCanada's] application that are
normal to the discussion on tariffs; the floating return on
equity that may be the highest ever in Canada; the Alberta Hub
tie-in arrangements that may not have the lowest rates
available; the debt equity requirements for expansion that add
the risk of subsidizing later shippers; and the benefits to
future shippers. She concluded that explorers will be motivated
to wait to explore because they will have the benefit of having
initial shippers subsidize their exploration efforts.
11:12:38 AM
CHAIR HUGGINS asked for comments from Exxon.
11:12:55 AM
MR. MASSEY agreed with the aforementioned issues. In addition,
Exxon believes that the TransCanada proposal is an initial
offer; if the state approves the TransCanada license
application, Exxon will negotiate "to the point that we achieve
what we believe to be an acceptable deal." The must-haves will
be addressed; however, they will be dealt with to achieve a
commercial and viable project. He opined that there are many
complex issues that require all of the parties, including the
state, TransCanada, BP, ConocoPhillips, and Chevron, to work
together toward a successful project.
11:14:15 AM
CHAIR HUGGINS invited the representative from Goldman Sachs to
speak.
11:14:35 AM
PAUL BLOOM, Vice President Public Sector and Infrastructure
Investment Banking, Goldman Sachs, referred to the June 10,
2008, Goldman Sachs report to the Legislative Budget & Audit
Committee. He assured the members that the issue of the
withdrawn partners was analyzed and Goldman Sachs believes that
the issue as presented is one that investors want to better
understand. In fact, the issue does create uncertainty and adds
an element of risk to the financing of the project. However, he
pointed out that the Goldman Sachs analysis states that "we
don't believe that the numbers that have been thrown around are
going to be the ultimate numbers that could be associated with
that problem." Furthermore, Mr. Bloom concluded that the
financing for the project is many years away and there are a lot
of ways for that particular risk to be mitigated and not cause a
problem for the financing.
11:16:00 AM
CHAIR HUGGINS asked for viable solutions to the problem.
11:16:08 AM
MR. BLOOM responded that TransCanada could indemnify shippers
against any potential impacts on the project. He further
suggested that TransCanada could work with FERC to keep the
[cost of the liability] out of the rate base, or could seek a
settlement with the withdrawn partners. He opined that there
are other approaches; however, Goldman Sachs would not provide
"a road map to withdrawn partners to ... worm their way into
this situation."
11:16:54 AM
CHAIR HUGGINS asked TransCanada whether those are viable
options.
11:17:04 AM
MR. PALMER said, "Mr. Chairman, I think I've addressed this
issue exhaustively over the course of the last six months." He
reminded the members that TransCanada has a different opinion as
to the liability; in fact, it is a contingent liability and
there is no liability today. Furthermore, the Legislative
Budget & Audit Committee contacted every withdrawn partner and
no claims have been indicated. He explained that the entity is
being dissolved, that TransCanada is not using the assets
created 30 years ago, and that the obligations, if any, are not
part of the tolls.
11:18:28 AM
REPRESENTATIVE SAMUELS asked, "If the state took some FT, on the
TransCanada pipeline, and if there's no problem from your
perspective, and we partnered, will you indemnify us, so we can
just be done with it?"
11:19:05 AM
MR. PALMER stated:
We have committed that if you become a shipper, or any
other party becomes a shipper, we will not include
those, any liability, that may come home to
TransCanada, in the tolls. So, as a shipper on our
pipeline, you know that you're not going to see a
liability ... which we obviously think will not come
home, or we wouldn't be going forward ... because our
liabilities would exceed our revenues, certainly, much
more than our profits.
11:20:07 AM
REPRESENTATIVE SAMUELS agreed that the liability would not be
rolled into the tolls; however, the fear remains that if one
becomes a partner then the liability goes to the partnership.
Therefore, even though the liability will not roll into the
tolls, "the deal that gets cut between these withdrawn partners
and TransCanada Corporation, if we end up having to pay a
portion of that ... just because we're a partner, then that risk
is on the state. I just want to know, will you indemnify us?"
11:20:48 AM
MR. PALMER clarified that if you become a partner of
TransCanada, not just a shipper...
11:21:19 AM
REPRESENTATIVE SAMUELS said yes. He added, "If we become a
partner ... if the state takes FT and becomes a partner and with
TC Alaska, so TC Alaska becomes the entity, if the liability
somehow attaches ... then you should just answer 'yes' and
indemnify us.
11:21:50 AM
MR. PALMER remarked:
Representative Samuels, through the chair, you won't
be surprised to hear that TransCanada is not going to
commit on the witness stand here today to indemnify
universally any potential partner that joins TC Alaska
for something of this nature. In the event that
parties wish to become partners, and we have extensive
discussions with them about how they might become
partners, we will undertake, at that time, to review
what issues need to be resolved in order for those
parties to become partners.
11:22:07 AM
MR. PORTER observed that there is an impression that AGIA
somehow brings a lower tariff or that TransCanada proposes a
lower tariff.
11:22:48 AM
CHAIR HUGGINS interrupted in order to conclude the discussion on
liability. He asked Commissioner Galvin whether the state "is
planning on seeking indemnification as part of this process."
11:22:54 AM
COMMISSIONER GALVIN answered:
I think the assumption that Representative Samuels had
imbedded in his question was that the state would
decide at some point to take our royalty in kind, take
an FT commitment of our own. And in picking up on
TransCanada's offer in the application, would further
decide to parlay that FT commitment into equity
position on the line. We have not made that
decision, no. And so, the question of how we would
deal with the withdrawn partners in the context of
becoming an equity participant is not one that we have
addressed.
11:23:13 AM
CHAIR HUGGINS said:
That's one part. The other part though, is we as a
state have an expectation. These people sitting in
front of you also have that liability factor and if
part of the AGIA process ... you are one of the
architects; the question applies for [and] to them as
an entity.
11:23:58 AM
COMMISSIONER GALVIN stated that the state has analyzed this
issue as it relates to the likelihood of the success of this
project. He opined that it is a separate issue and there is no
perceived liability on the part of the state associated with
this issue, thus the question of indemnification is not
relevant. The question of the withdrawn partners, and whether
it is a barrier to potential success, has been determined that
it is not.
11:24:27 AM
MR. VAN TUYL re-stated several reasons that this issue is a real
risk.
11:25:32 AM
MR. MASSEY advised that Exxon's position on this issue is that
it is a fairly low risk, but the exposure must be dealt with
before participating with TransCanada on the Alaska portion of
the pipeline.
COMMISSIONER GALVIN agreed that Mr. Massey's comments are "the
crux of the issue." The discussion started with the question of
"what are the issues that the shippers will look at when making
shipping commitments to the project?" He acknowledged that
there are many issues to address prior to making shipping
commitments such as termination risk, quality of the cost
estimates, the Alberta tie-in, return on equity, [the liability]
issue, and the rolled-in rates issue. Commissioner Galvin
stressed that there will always be a discussion of how to get
the gas into the pipeline; in fact, this provides an indication
of the framework for the future negotiations between the
pipeline and the shipper. Each identified issue is a part of
the negotiation and the state feels that this is a starting
point. Furthermore, in the grand scheme of things [each party]
will have to give up something in order to get to an agreed
position. He recalled that another identified hindrance was the
question of rolled-in rates and whether rolled-in rates would
lead to a "dead end." Commissioner Galvin pointed out that
today's testimony indicated that the rolled-in rate question
would be adjudicated by FERC even though the state and the
pipeline are advocating for rolled-in rates. He concluded,
In the end, this is going to be a deal cut between the
state, the pipeline, and the shippers. ... What we
have presented to you in the grand scheme of things is
that by going forward with the TC Alaska project, we
increase the state's ability to achieve our goals. ...
What you're hearing today is the negotiation process
that is going to unfold inevitably. And we believe
that with TC Alaska ... these are all issues that they
will address with shippers ... in the end to get this
project going.
11:30:22 AM
MR. DICKINSON asked whether the characterization of "[the] state
is willing to look at these issues," implies that the state may
look at some of the must-haves as the commercial negotiations
proceed. He said, "Is the AGIA going to be a straight jacket or
it is going to be something else to those terms that must be
considered? And ultimately, [is] the state ... going to be part
of a solution, which may be more fluid than we can anticipate
now?"
11:31:10 AM
COMMISSIONER GALVIN responded that the state has not identified
any of the must-haves as a straight jacket or an absolute
commercial barrier to the project. He opined that the parties
will be able to work out reasonable terms within the confines of
AGIA.
11:31:42 AM
CHAIR HUGGINS stated that his constituency identified one of the
"gates" to the issuance of this license to TransCanada is
whether it brings a potential liability with it. He asked, on
behalf of his constituents, for Commissioner Galvin to solve
this issue as soon as possible.
11:32:23 AM
COMMISSIONER GALVIN assured the members that a resolution had
been looked for ahead of licensing; however, this is something
that will be negotiated to a resolution post licensing.
11:32:55 AM
CHAIR HUGGINS said, "So you're deferring on the solution."
11:33:11 AM
REPRESENTATIVE SAMUELS asked if the representatives of the other
owners had heard Mr. Massey's presentation on Exxon's views of
the economics of the project.
11:33:42 AM
A variety of responses were given.
11:33:46 AM
REPRESENTATIVE SAMUELS then recalled previous analysis that
"this thing is so knee deep in money that if we can just get
TransCanada to build a pipeline, these guys are going to fold
their cards and they're going to show up at that open season,
period." He then re-stated Exxon testimony that the project is
not knee deep in money and is a high risk proposition because of
its size. Representative Samuels asked Ms. Poduval to explain
the economics used for the "big picture."
11:35:41 AM
DEEPA PODUVAL, Principal Consultant, Black & Veatch, explained
that Black & Veatch's analysis to calculate the NPV (net present
value) looked at the year to year cash flow. This reveals how
much money the producers are spending each year on this project,
and how much money they are earning each year on this project.
The cash flows were then mapped and discounted back to 2008, and
the results were the NPV numbers. She emphasized that the
accounting treatment referred to by Mr. Massey does not change
the money that the producers earn year to year on this project.
She continued to explain that NPVs are always calculated on
actual cash flows. Ms. Poduval opined that the producers each
have different ways to look at investment decisions; in fact,
Exxon's testimony was that it does not have a single hurdle
rate, but looks at each project's returns and risks. Black &
Veatch's analysis does not model each of the producer's
different [investment decisions], but models "what are the cash
flows coming in and what are the cash flows going out for the
producers for this project?"
11:37:14 AM
MR. VAN TUYL related that BP sees this project as having real
significant risk. Furthermore, the FT commitments are of
significant value; in fact they are what allow the pipeline
company to obtain financing. He compared the value of FTs to a
debt-like payment that can be converted into a capital
equivalency. This enables one to evaluate the actual cost of the
value that is being transferred. Furthermore, the commitment to
a third party is a transfer of value and destroys the NPV that
the shipper would otherwise receive. Mr. Van Tuyl agreed that
there is no single hurdle rate for this project. The hurdle
rate depends on the long term cash flow generation, the capital
requirement, and the overall risk of the project. He concluded
that FT commitments are a real cost, a real value, and will show
as a footnote on BP's financial statements. In addition, even
though an FT commitment may not show as debt, financial
institutions consider them when they weigh their evaluations.
11:39:52 AM
MS. KING referred to previous testimony about how ConocoPhillips
accounts for, and values, FT commitments. She noted the
difficulty in communicating the aspects from an accounting
perspective. However, when and if ConocoPhillips can make a
long term shipping commitment on a pipeline project, that
commitment can be taken to the bank as cash. In fact, shipping
commitments are a valuable financial instrument. She asked, "If
the shipping commitment was not worth much ... why does every
pipeline project want one?" Shipping commitments are necessary
to finance a pipeline project and are also included in the
shipping company's financial analysis. Ms. King then emphasized
that ConocoPhillips does not have a single hurdle rate for
projects. She remarked:
ConocoPhillips has been actively working trying to
advance this project to date in multiple different
fashions that the government has asked us to work
under. Whether it be work with you under the stranded
gas act, or work with you under a different format; we
continue to try to find a way to advance the gas
pipeline project, but it doesn't mean that it's a risk
free investment, and we'll continue to balance those
risks as we look forward. ... One thing I would say
... the majority of the risk with this pipeline
transfers to the shippers. ... The one party that
doesn't carry much risk in this, when this project
comes on stream, is the pipeline.
MR. ZAGER stated his agreement with previous testimony "in the
context of taking on a shipper pay commitment when to a third
party commitment, such as TransCanada." He related his
experience in financial analysis and pointed out that "going
over balance sheets is wonderful, but where you find the good
information is the footnotes." Furthermore, he noted that
Chevron was not in an equal ownership position at Prudhoe Bay
and opined that the economics will be very different for fields
at Prudhoe Bay, Point Thomson and for the explorers. "When you
say 'knee deep in money' that's at a rolled up rate ... [and] it
needs to be broken down and looked another level before we jump
to any conclusions," he said. He suggested that the offset to
the perceived advantage of a third party pipeline builder is
that there is a much higher risk that the open season will fail
because of the YTF commitments. He remarked:
We'll look at that differently if we have a
commensurate ownership position than if we are
strictly making it to a third party. So ... the risk
is the whole thing fails because we can't adequately
resolve how to allocate that risk.
MR. ZAGER observed that the companies represented at the hearing
hold over $1 trillion of market capital and are a strong
ownership group standing behind the FT commitments. He then
referred to Commissioner Galvin's statement that the must-haves
in AGIA are really starting positions for negotiation. "That's
a revelation to me, and I think a positive sign that I can take
away from this, at least a recognition that there are certain
things that, at the end of the day, won't survive the limelight
of a real commercial analysis," he said.
11:45:50 AM
MR. MASSEY stated that it was important for members to
understand how the companies run their economics and value FT
commitments. He noted that Exxon commissioned a third party
analysis of the TransCanada application by Prof. Joseph P. Kalt,
John F. Kennedy School of Government, Harvard University, and
Compass Lexecon Economic Consulting, dated July 10, 2008. He
read from the analysis:
Under proper treatment of ship-or-pay commitments,
B&V's characterization of producers' economics of
investing in and developing North Slope gas as
"robust" evaporates.
11:47:45 AM
CHAIR HUGGINS announced that the meeting was recessed until 1:45
p.m.
1:52:46 PM
CHAIR HUGGINS called the meeting back to order at 1:53 p.m.
1:53:40 PM
MS. PODUVAL said that her firm does not disagree with the
producers in that there are significant risks to the project.
In fact, the NPVs being projected take into account the price,
tariff, and fiscal risks; however, along with the risks, there
are significant rewards to this project. She opined that the
development of the Denali project is an indication that the
producers recognize these rewards and want to go forward.
1:55:11 PM
COMMISSIONER GALVIN explained that the issue of FT [commitments]
as debt is two-fold. The first issue is, whether [FT
commitments] should or should not be incorporated into an
economic analysis and secondly, the effect [of FT commitments]
on a company's ability for financing. He asked the
representative from Goldman Sachs to speak to this issue.
1:56:32 PM
BRUCE SCHWARTZ, Vice President, Credit Risk Management and
Advisory Group, Goldman Sachs, said that Goldman Sachs is in
agreement that the FT contracts as described by the producers
have tremendous value to the pipeline company and that FT
contracts would be disclosed by the producers in a footnote to
their financial statements; however, footnotes are an integral
part of financial statements. In addition, footnotes are used
by analysts to evaluate a company's financial condition. They
are usually not capitalized by the financial equity community
and treated as a debt-like liability, but are viewed as
operating expenditures. However, when calculating enterprise
value and calculating a company's assets, the future expenditure
associated with FT contracts would be included. He further
explained that within the credit community and rating agencies
in North America, rating agencies generally do not include FT
contracts as debt-like liabilities. Internationally, inclusion
has occurred in isolated cases; however, he opined that FT
contracts may not be disregarded as agencies have moved toward
inclusion. Further, the magnitude of this project means it will
get more scrutiny from the rating agencies and he said that
"some type of debt-like attribution is a pretty good
assumption."
MR. SCHWARTZ then noted that when agencies look at such
contracts they do not see the obligations in isolation, but also
look at the benefit, such as the commercialization of Alaska's
natural gas reserves. He acknowledged the difficulty of
forecasting the impact on producer ratings; in fact, while FT
contracts may be treated by the rating agencies as debt, they
also would look at projects financed on a joint venture basis as
debt-like liabilities. Mr. Schwartz observed that during the
hearings the focus as been on FT contracts versus zero; however,
the correct frame of reference is "the total capital employed in
the pipeline for the producers versus the present value of the
FT contracts."
2:01:50 PM
SENATOR HUGGINS asked Mr. Schwartz whether destabilizing events
around the world and in the U. S. "come to bear on this
project."
MR. SCHWARTZ said that the credit and financial markets today
generally are in a chaotic state. In fact, for companies rated
"high yield or sub investment grade or below the rating agency
threshold of triple B minus or V. double A3, there are very,
very marked challenges." In the investment grade category,
where TransCanada and the producers are rated, investment grade
energy is viewed as a "safe haven in the financial world,"
because the companies have very strong cash flows and are very
well capitalized. He referred to his firm's findings that
regardless of a credit crisis or good times, this proposal is
looking to raise an extraordinary amount of funding, "that could
prove to have its challenges." In response to a question, he
said that this project is "potentially doable."
2:04:31 PM
MR. DICKINSON asked how a credit analyst would compare two
scenarios, one with the parent company putting up the money for
the project and making FT commitments to itself, and another
project where producers make an FT commitment to a third party,
and thus would not have cash out until the tariff was being
charged.
MR. SCHWARTZ opined that credit analysts can disagree; however,
drawing upon his experience he expressed his belief that "there
are definitive risk mitigation benefits to doing it through a
third party in the terms of that the third party would then be
on the hook for project completion." Also, there is the
opportunity to have "placed financing" through the FT agreements
in that the builder will need to source bonds in advance for
capital expenditures, versus [the shipper] signing the FT
agreement. On the other hand, credit analysts may not agree as
to what degree throughput agreements would result in risks to
producers, particularly in the case of YTF reserves. He
described a variety of economic factors affecting credit
analyses.
2:07:41 PM
MR. DICKINSON questioned whether a producer building a pipeline
would incur higher financing costs then a third party.
MR. SCHWARTZ said that it would depend on the financial strength
of the producer group; in the case of the producer group
represented [at this hearing], their costs would be dependent on
economics and project execution.
2:08:58 PM
CHAIR HUGGINS recalled that Mr. Scott Smith [Vice President,
Black & Veatch] said the biggest risk to the project are price
and capital costs and these risks would be "ring-fenced"
relative to the liability of certain parties. He asked Mr.
Schwartz to describe financial structures, including that which
would create ring-fencing.
MR. SCHWARTZ explained that ring-fencing is a concept of
isolating a company or subsidiary away from the rest of the
company. The technique is used in situations where the
subsidiary is extremely strong, and the parent company does not
want the actions or the financing of the parent company to
affect the subsidiary. There is the also the concept of non-
recourse financing, whereby a subsidiary is created, and the
obligations of that subsidiary, for example, the joint venture
pipeline company, can not seek recourse back to the parent
company in the case of default. He acknowledged that from a
financing structure, the most likely occurrence with the
proposed project is the [possibility] that there would not be a
guarantee from TransCanada and if there were troubles at the
pipeline company [recourse] would be isolated to it. Regarding
cost overruns and price, Mr. Schwartz opined that the producers
experience price risk on the cost of the natural gas and are at
risk for cost inflation on the pipeline.
SENATOR HUGGINS asked for advice regarding ring-fencing by
parties to AGIA.
MR. SCHWARTZ remarked:
If that were employed under AGIA I think the thing to
keep in mind when that's occurring is that if there
were a conceptual agreement that was put forth in the
TransCanada proposal which was driving the basis of
our findings, which is there would be solid FT
commitments from a very big group of shippers, such as
we have here today. [And] that that project even
though non-recourse to TransCanada, would be very
financeable because we have the strong counterparties
and there's good risk mitigation techniques involved
in it. ... I wouldn't want that term to also cause an
overreaction of concern that it couldn't receive
financing because it was non-recourse to TransCanada.
2:13:55 PM
REPRESENTATIVE ROSES noted that the representatives from
ConocoPhillips and BP want to participate today as shippers
rather than as owners. He asked Mr. Massey whether he had
changed his mind after testifying to the House Resources
Standing Committee that the 20 must-haves in AGIA were too
restrictive.
MR. MASSEY said no.
REPRESENTATIVE ROSES observed that any partner of TransCanada
must [abide] by the must-haves in AGIA.
MR. MASSEY said yes.
REPRESENTATIVE ROSES stated:
Yesterday when you were asked about partnering up in
the pipeline you stated that "we'll partner up with
whoever it is that delivers the best economic value to
us" and it appears that there may be some other
criteria about partnerships that has to do with the 20
must-haves. And that also has to do with ... if I
quoted it accurately, "before being a partner we would
want to resolve the withdrawal partner liability
issue." Did I hear that correctly?
MR. MASSEY indicated yes. He expressed his understanding of the
importance of the must-haves to the state. Furthermore, the
administration has stated its willingness to listen to "a good
case" if something needs to change. He said:
Comments about us working with TransCanada potentially
going forward, if that's what you do, then we're
talking about the things that they've got in their
application and we're also talking about the must-
haves, can we deal with those in a way that's
satisfactory to the administration and, ultimately,
the legislature. That's what we'll have to do to be
able to have a viable project.
2:17:20 PM
REPRESENTATIVE ROSES then questioned whether Mr. Massey believes
that the 20 must-haves are somewhat negotiable.
MR. MASSEY responded:
What I said is I understand how important those are to
the state, and that's really the bargain that you're
shooting for, is getting someone to support those
must-haves, you know, for $500 million. I don't know
if they're negotiable or not.
REPRESENTATIVE ROSES offered his understanding that each of the
shippers prefers to work through a "negotiated rate making
process." However, according to testimony by the shippers, the
structure of AGIA does not allow that process to take place. He
then asked whether his understanding was correct and if that
process is available under the Denali project.
2:19:08 PM
MS. KING stated that a shipper could have a "normal conversation
with the Denali pipeline when Denali gets to that point in
time." She pointed out several differences between the two
proposals. Ms. King questioned where the state stands on
endorsing the terms that are not the state's must-haves, but are
included in TransCanada's application.
2:20:10 PM
MR. VAN TUYL said yes to Representative Roses' question and
confirmed that BP's FT commitment evaluation includes the
availability for the shipper to talk to the pipeline company and
achieve the "right risk reward balance." He noted that Mr.
Schwartz spoke about the completion risk taken by a third party
and offered his understanding that this aspect is not available
under the TransCanada proposal. Furthermore, AGIA prevents the
negotiated rates that are of critical importance to a shipper,
he opined.
2:21:32 PM
MR. PALMER said that with regard to negotiated rates,
TransCanada is fully able to negotiate rates within the
boundaries of AGIA. Furthermore, several of the issues
discussed are matters that are dealt with on every project,
sometimes before the National Energy Board (NEB) or the Federal
Energy Regulatory Commission (FERC). Referring to the rate of
return, the debt equity ratio, and commercial terms, he noted
that his company and its customers usually discuss these matters
before regulatory agencies or in negotiations. Mr. Palmer
opined that the AGIA boundaries deal with the must-haves and
suggested that "the customers in this case are in a much better
position to negotiate with me than they would be in a normal
process where I have not had to reveal my hand through 12 to 18
inches of paper that I have filed publically in advance."
2:23:58 PM
MR. PALMER further suggested that TransCanada has 50 years of
experience attracting and dealing with potential customers, "and
I see no restrictions under AGIA for TransCanada to negotiate on
the terms that are not included in the must-haves."
COMMISSIONER GALVIN surmised that the question is whether AGIA
or the license would be a barrier to getting the shippers and
the pipeline together. He stressed that there nothing in AGIA
that would preclude TransCanada from negotiating an agreement
with the shippers on the terms, for example, the completeness
guarantees. Secondly, he offered his recollection that Ms. King
was seeking clarification as to whether the state is obligated
to hold TransCanada to the terms. His response is that the
state is not required to defend and advocate for those terms;
instead AGIA obligates the state to provide "the matching
contribution and so forth." Commissioner Galvin explained that
the opportunity provided by AGIA is simply to secure the must-
haves in the form of a license, in the statute. He agreed with
Mr. Massey that the state indicated its bottom line; in fact,
those remain embedded in the statute and are not subject to
negotiation by either the administration or TransCanada. He
concluded:
So, when we analyze that ... well, are those 20 must-
haves going to be a absolute barrier to getting the
parties together? And our analysis would indicate the
answer is "no," that these are all things that are
within the commercial framework, things that can be
negotiated and our reasonable expectation out of the
process given the opportunity on the other parameters
that are going to be discussed among the parties.
COMMISSIONER GALVIN opined that it is important for the
legislature and the public to understand that this is not a
take-it-or-leave-it proposition to the producers, but the
beginning of the discussion that will take place after the
issuance of the license.
2:27:42 PM
REPRESENTATIVE ROSES recalled that Mr. Massey testified that
[Exxon] has no interest in being a part owner "in anything where
those must-haves were mandatory." He asked whether his
assumption, "that the partners [with TransCanada] are going to
have to come from somewhere else" is correct.
2:28:49 PM
COMMISSIONER GALVIN questioned what that previous testimony was
based on one year ago. He remarked:
Were they testifying on the idea of coming to a point
a year, two years from now, before an open season,
where there's a discussion about "Are you willing to
take on a role as an empty commitment, and as part of
that do you want to participate as an owner?" After
the competitive part of going after the license has
been complete, the issue that they were facing a year
ago was a negotiation with the legislature, with the
state. ... Things change and we have to allow them to
change their position without holding them to a
statement ... because frankly, I think they should be
allowed to look at the situation as it evolves and
goes forward.
2:30:44 PM
CHAIR HUGGINS asked, "Are the must-haves negotiable?"
COMMISSIONER GALVIN answered, "No, you set them in statute,
they're not negotiable."
2:31:05 PM
SENATOR THOMAS said, "As I read Denali project, and some other
comments that have been made by folks, probably three-quarters
of the issues of the 20 must-haves are about settled, anyhow."
He then referred to slide 4 from the [Exxon] presentation on
July 10 2008, and asked Mr. Massey whether there were questions
from the board room that the "resource just simply exists, and
they're not worried about that."
MR. MASSEY said that they are very worried about that. Looking
at the known resources indicates that, without Point Thomson
gas, the project is very threatened; in fact, the source of gas
from the North Slope is also a worry. However, both [gas from]
the North Slope and Point Thomson is sufficient to keep the pipe
full at the optimum 4.5 bcf per day for over 10 years. He
opined that for this to be successful, alignment between the
other producers and the state is necessary.
2:34:41 PM
SENATOR THOMAS referred to slide 5 and asked whether in the
Lower 48, Mr. Massey's company generally sells its gas at the
wellhead.
MR. MASSEY said that is correct. He added that in the Lower 48
gas is sold at the well head for a good price and they are not
required to make FT commitments.
SENATOR THOMAS commented about the previous testimony that was
deemed proprietary. He then asked whether [Exxon] will be
joining with the other Prudhoe Bay producers in the Denali
project.
MR. MASSEY said that the information regarding Prudhoe and Point
Thomson, and about the gas available to support making an FT
commitment, is shared. However, the FT commitment is not gas,
but is the "financial backing that you make to pay for that FT
over an extended period, whether you have the gas or not ... and
some folk's view about whether there's going to be additional
gas available ... may make them make a higher commitment or a
lessor commitment."
2:37:23 PM
MR. MASSEY, in further response said, "Our view is that, for
this to be a successful venture, it requires alignment between
the three major producers and the state, so we're assessing
which approach is going to achieve that alignment as early as
possible. We don't need two projects of this magnitude
competing with one another for resources."
SENATOR THOMAS assumed a certain amount of due diligence.
2:38:29 PM
REPRESENTATIVE HAWKER paraphrased Commissioner Galvin and said,
"AGIA is not a barrier to shippers."
COMMISSIONER GALVIN clarified that what he said was "AGIA is not
a barrier to an agreement between the shippers and the
pipeline."
REPRESENTATIVE HAWKER said that what he has heard from the
administration is that the value AGIA brings to the table is
that it guarantees an independent, expandable pipeline. He
remarked:
I'm having a little problem here with the paradox in
that, this is good because it's a(n) independent
pipeline that makes certain we don't have the
producers involved in it. But, yet, the shippers ...
are in fact, the same producers. ... It continues to
trouble me.
2:41:15 PM
COMMISSIONER GALVIN explained that a year ago the discussion
about AGIA pertained to whether the terms of AGIA precluded the
producers from participating in AGIA at all. The state's
position was that the producers could participate; however, the
producers would need to act as an independent pipeline company
in their interactions with FERC and the shippers. Furthermore,
the state recognizes that the producers may become equity owners
in the pipeline. He stressed that "the pipeline will act as an
independent pipeline company because we have the commitments
required under the AGIA license."
REPRESENTATIVE HAWKER responded that the producer/shippers have
been equally consistent in saying "this will not get us to get
our gas to market." He opined that a bridge was needed between
the two sides.
COMMISSIONER GALVIN expressed his belief that the [shippers]
have not said that they "can not ship their gas on a TransCanada
pipeline. ... What they are saying is that they would much
prefer to deal with Denali project; it provides them a better
opportunity to work out the deal."
REPRESENTATIVE HAWKER disagreed. He remarked:
I think we actually did just say exactly the same
thing and that is, that under the current approach
we're not getting there from here.
COMMISSIONER GALVIN explained that the premise of Representative
Hawker's statement is that [issuing a license under] AGIA will
undoubtedly result in the shippers not participating. He said
that he does not believe that statement and that the state's
interests are best protected by the issuance of the license.
Furthermore, the shippers are allowed to come into the project,
although there will be a lot of discussion about the terms of
their involvement.
2:45:28 PM
MR. VAN TUYL clarified that it is FERC regulation that
determines how interstate pipelines are regulated; in fact, FERC
has strict rules to assure independence of the pipeline.
Secondly, there are concerns specific to TransCanada,
TransCanada's application, and to the terms of AGIA. Also to be
considered is the specter of making massive commitments to a
third party and the financial implications.
MR. VAN TUYL further explained that the issues with AGIA and the
proposal include the limitation on negotiated rates, the
provision to subsidize competitors in contradiction of FERC law,
the limitations on what may be negotiated, the withdrawn partner
liability, the termination clause, the quality of the cost
estimate, the return on equity, and the Alberta tie-in
requirement.
2:48:51 PM
MS. KING referred to the two potential pipeline projects:
Denali - The Alaska Natural Gas Pipeline ["Denali project"] and
TransCanada under the AGIA license. She compared the two
projects from the perspective of a shipper and pointed out that
the AGIA applicant must accept a FERC certificate, regardless of
the conditions of the certificate. Further, under AGIA the
project must be sanctioned, even if conditions have changed and
costs have increased. The Denali project does not have either
of these requirements. In addition, AGIA requires that the FERC
certificate be obtained by a "date certain." Ms. King expressed
her preference for a project sponsor that is using "proper front
end loading and good solid project management practices to
deliver the best cost for the project."
MS. KING acknowledged that the Denali project is planning on an
open season by 2010; however, her concern is for timelines that
occur during permitting. She then advised that the pipeline
builder would need to spend $500-600 million for a quality cost
estimate and engineering and opined that the TransCanada cost
estimate is insufficient. Continuing her comparison, she noted
that AGIA discriminates against initial shippers because they
have to pay 115 percent of the initial maximum recourse rate and
future shippers will pay a lesser amount. In addition, the
pipeline is asking for shippers to sign up for 20 to 25 years of
fiscal stability. She remarked:
But in the AGIA framework, you have provided some
financial fiscal terms in there, the resource terms by
which the statute was changed and it does not provide
any stability on taxes. ... So now there's no fiscal
predictability within that framework. So those are
comparisons between these two projects that I see
right now, and from what I can see ... it's really
about seeing a competitive environment by which
projects can go forward ... and I see that there are
some advantages from what I can see right now, to the
alternative Denali is proposing.
2:53:46 PM
MR. ZAGER added that Chevron, when an open season is held, will
be looking at the quality of the terms to see if it has
confidence in the prices given, the execution, and the schedule.
Chevron will make its own assessment at that time. He opined
that some aspects of this project are not controllable and some
are such as, project management, risk sharing, and fiscal terms.
He encouraged all parties to work on issues that are within
control. Mr. Zager concluded that Chevron will be happy to look
at any open season material at some point in the future.
2:56:05 PM
MR. MASSEY related his company's belief that neither project
will "result in a commercial viable project, so what we need to
do is to bring the parties together." He expressed [Exxon's]
commitment to the development of Alaska's gas resources and its
willingness to work with the administration, TransCanada, BP,
and [Conoco/Phillips] to put in place what is necessary for that
to occur.
COMMISSIONER GALVIN, with regard to the point made by Mr. Van
Tuyl, emphasized that the purpose of AGIA is to force the
producers, if they are the owners, to act like a pipeline
company in the sense that they would have to apply to FERC and
ask for the things an independent pipeline company would ask
for. He turned to the subject of rolled-in rates and said,
"Even though they claim that the provisions of AGIA are going
counter to what FERC would provide, they're against going to
FERC and asking for the things that AGIA requires, perhaps
because they expect FERC may come out with a different answer,
if they're asked for. ... There is benefit to asking for the
things that the state wants when going to FERC."
COMMISSIONER GALVIN re-stated that there is nothing that
indicates that gas can not be committed to the project, subject
to negotiation. He sought to clarify that on the issue of having
to accept the FERC certificate, he said that AGIA allows an
appeal if conditions are placed on the certificate. The purpose
of this requirement is to preserve the state's interest and
investment in the certificate. He corrected the statement that
the applicant must sanction the project under any conditions and
noted that the state will take possession of the certificate if
the pipeline company declines. Furthermore, the obligation of a
date certain for the application of the FERC certificate can be
amended at the discretion of the commissioners, without an
amendment to the statute.
COMMISSIONER GALVIN observed that negotiations have begun, both
relating to the shippers and the pipeline, and the shippers and
the state. Clearly, this discussion will deal with the Denali
project, also. He encouraged members to "step back." He
concluded:
I think the only statement that I've heard today that
really gets to heart of the issue that is before you,
is something Mr. Massey said at the end. ... There's
money to be made in this project, otherwise they
wouldn't be proceeding with [the Denali project]. ...
Having the license issued provides the state with a
position from which to have those discussions.
Without the license we've got nothing, and we're back
to having an open book.
3:03:43 PM
The committee took an at-ease from 3:03 p.m. to 3:15 p.m.
3:14:33 PM
CHAIR HUGGINS called the meeting back to order at 3:15 p.m.
3:16:11 PM
MR. PALMER offered his understanding that Ms. King is under the
impression that under AGIA, there is a commitment that the
licensee must receive the FERC certificate by a date certain;
however, no such language is in the statute. Secondly, he
commended Mr. Massey for his comments on compromise and offered
his belief that compromise, collaboration, and commercial
creativity will be required to finalize this project. He
related that he was not in a position to compare his proposal to
the Denali project because he has not seen Denali's commercial
terms, nor could he compare its quality as a pipeline company.
MR. PALMER, in regards to the estimated cost of the project,
emphasized that TransCanada has 50 years of experience in the
gas pipeline business in North America. Within its interstate
and interprovincial system, it moves 20 percent of North
American gas every day; in fact, TransCanada has put forth cost
estimates on multiple projects for years. He assured the
members that TransCanada will exact the same standards as it has
in the past. Furthermore, TransCanada also holds assets and
information in Canada that will assist it in the cost estimation
process. Mr. Palmer concluded that although there are
uncontrollable costs involved in any project, spending extra
money on estimating the costs of steel and labor, years before
their procurement, will not improve the estimate. He cited an
example.
3:21:17 PM
MR. DICKINSON asked for the date on which TransCanada would be
applying for the FERC certificate.
MR. PALMER said that the date is October 2012.
MR. DICKINSON further asked for the process by which the date
can change.
MR. PALMER explained that TransCanada's license application was
submitted in November and assumed that the license would be
approved in April. Now that TransCanada believes that there
will be a decision in August, if the license is granted, it has
committed to the dates under AGIA.
3:24:02 PM
REPRESENTATIVE CRAWFORD said that the benchmark for him is when
he sees a piece of iron going in the ground. He stated that one
of the main criterion [of shippers] is to have the lowest tariff
possible. However, on a pipeline owned by shippers, history
seems to show that there is an advantage if the tariff costs are
higher and [shippers/owners] shift the profit from the upstream
to the midstream. He opined that this is a disadvantage to the
state but an advantage to the producers. Representative
Crawford continued to explain that of the two pipeline
proposals, one will provide a 20-30 percent lower tariff because
of a higher debt to equity ratio and other factors. The other
producer-owned pipeline might have a much lower debt to equity
ratio and other factors that might raise the tariff. According
to information presented on July 10 2008, the "sweet spot" for
the tariff is $4.73. He asked each of the four producers
whether a tariff of $3.73 on the independent pipeline would
"outweigh the advantage of the producer-owned line."
3:27:35 PM
MR. MASSEY said it is a question of a producer-owned pipeline as
opposed to a third party-owned pipeline, and offered his belief
that a producer-owned pipeline can generate a tariff as low as a
third party pipeline company. He surmised that the capital cost
will drive the tariff; in fact, this project is so big that the
producers feel the need to participate in ownership "equal to
our throughput." In addition, the financial strength of the
owners and shippers will enable them to achieve the lowest cost
debt from the financial markets. He also pointed out that the
producers can "go to the market and pour in the maximum amount
of debt to support the project, maybe upwards of 80 percent."
Mr. Massey concluded that there might be a slight advantage to
having a producer-owned pipeline given the strength that comes
with the parties.
REPRESENTATIVE CRAWFORD clarified that his question is, "If
there was a third party pipeline and it was a 20 or 30 percent
lower tariff, would that become more attractive than the
producer-owned pipeline with the other advantages that come from
a producer-owned pipeline?
MR. MASSEY responded that the producer-owned pipeline will
deliver the lower tariff so he can't deal with the hypothetical.
3:30:21 PM
MR. ZAGER said he has not done any analysis in that regard yet,
because it's not an "apples to apples comparison," and using the
example of a 10 cent tariff is not realistic. He disagreed with
the premise that there is a significant advantage to an
independent pipeline in terms of [the cost of the] tariff; in
fact, the case could be made the tariff will be lower for a
producer-owned pipeline.
3:31:24 PM
MS. KING surmised that the strength of the pipeline sponsors and
what the cost of the debt will be are factors in the financing
of the project. However, having a strong project sponsor will
result in a lower toll. She said she doesn't believe that any
party is motivated to waste capital. On the other hand, because
the costs flow back to the shippers, an incentive is created to
keep the costs down. Ms. King referred to the Trans-Alaska
Pipeline System (TAPS) and recalled that there is an agreement
with the state on the calculation of the tolls and the oil
pipeline has delivered a lot of oil to the marketplace. "I don't
consider the history, over the last 40 years, a failure," she
said. She offered her belief that this project is an
opportunity "[to] have that same possibility again." She re-
stated the testimony by the FERC that the protections for access
to the pipeline are there and opined that there is a strong case
for what can be offered by project sponsors that have strong
financial strength.
3:34:08 PM
MR. VAN TUYL agreed, and added that [the ability to obtain
financing] is key to the project, so being able to have a
backstop of the financial strength of the producers is very
important. With regard to the cost and the value of the FT
commitments, he said that BP currently carries commitments just
under $4 billion; in fact, the FT commitments on this project
might be 10 times that amount, or more. He stressed that the
value of that commitment weighed against a percentage change on
the tariff is not equivalent. Mr. Van Tuyl continued to explain
that keeping capital costs down will get the gas to market at a
reasonable rate. Turning to the subject of the TAPS experience,
he pointed out that gas lines and interstate gas transmission is
regulated by different and more stringent rules; in fact, gas
line regulation is designed on depreciated original cost. He
opined that the success of the project is delivered by those who
can get the project financed and built for a low capital cost.
REPRESENTATIVE CRAWFORD reiterated that he wants to see iron in
the ground or "up." He expressed his frustration at hearing
repeatedly that this project is very big and very difficult. He
advised that the state can assist the project with financing and
other problems
3:38:16 PM
REPRESENTATIVE FAIRCLOUGH sought clarification from Commissioner
Galvin on the point that the administration has the power to
negotiate changes to AGIA without coming back to the
legislature.
COMMISSIONER GALVIN said that the administration can agree to
modification to the project plan submitted by TC Alaska, as long
as it meets the requirement of AGIA which is "it can't diminish
the value of the project to the state or decrease the likelihood
of success."
REPRESENTATIVE FAIRCLOUGH surmised that the 20 must-haves will
still be in compliance; otherwise it would be necessary to
return to the legislature.
COMMISSIONER GALVIN concurred.
REPRESENTATIVE FAIRCLOUGH asked whether the administration could
negotiate and modify terms in TransCanada's application, for
example, termination rights, [the obligation to] the Alberta
Hub, and the return on equity. She pointed out that these terms
are not in the original statute.
COMMISSIONER GALVIN observed that these are things that
TransCanada, not the state, would be negotiating. TransCanada
would then bring the issues back to the state as a modification
to its plan, and the administration could approve them. These
issues would most likely be advantageous to the shippers.
3:40:36 PM
REPRESENTATIVE FAIRCLOUGH referred to testimony provided by
TransCanada in prior meetings, and offered her belief that
upstream competition is what Alaskans fear. She acknowledged
that TAPS has been the "lifeblood of Alaska for decades" and
praised the good business practices of the producers and their
employees. Nonetheless, the fear is that, the situation of open
access on the gas line will be similar that of TAPS, with the
"big three players shipping oil down TAPS and we want to have
more exploration on the North Slope basin." ... She asked, "How,
if you own the line or if you have too much equity interest,
that Alaska isn't in jeopardy of the big three, or now the big
four, sort of pushing out other exploration and competition on
the North Slope basin."
MS. KING explained that there is capacity in TAPS today and new
discoveries would be allowed to flow in the pipeline; in fact,
it is a common carrier pipeline which means that capacity could
be prorated down to insure capacity. So, as much as one might
like to see TAPS full it is a function upon what resources are
available and whether it is financially attractive to develop
those resources.
REPRESENTATIVE FAIRCLOUGH recalled that the owners of TAPS have
repeated that there is open access to the pipeline; however, in
reality the administration maintains that the tariff charges are
making the "smaller puddles" that are being discovered not
economical. She said that the administration has convinced her
that the owners' cost allocation methods are preventing smaller
explorers from monetizing their [oil].
3:45:26 PM
MR. PORTER offered his understanding that the question regarding
TAPS stems from the closing down at Endicott and that
Conoco/Phillips left because it did not have ownership. He
advised members to assume that Endicott's costs were $10, that
the TAPS tariff was $5, and that the sale price of [oil] was
$14.80, resulting in a loss. In this case the TAPS tariff was
very important; but if the price of oil is $130, then the TAPS
tariff is immaterial. Mr. Porter said, "There is not an issue
on TAPS now of a concern for people getting in that pipe. ... I
don't think you will find a serious explorer today who says,
'the reason I don't drill is because of the TAPS tariff.' ...
It's such an insignificant amount of their profit today," he
opined.
3:47:16 PM
REPRESENTATIVE FAIRCLOUGH said, "I go back to the original thing
that I said, as far as upstream competition, three versus three
hundred."
MS. KING relayed that Conoco/Phillips has drilled the most wells
in the last decade and continues to be a very active explorer in
Alaska. She asked the members to understand that
Conoco/Phillips usually does not drill exploration wells at 100
percent working interest, but prefers co-venturers. However, it
is not advantageous to have a co-venturer that does not have
access to a pipeline. Conoco believes that there must be a way
to allow co-venturers access to the natural gas pipeline; in
fact, a provision in the Alaska Natural Gas Pipeline Act (ANGPA)
allows for FERC to mandate expansion. This, and the rebuttable
presumption of rolled-in rates, are provisions to facilitate
access to the pipeline. She then cautioned that the initial
shippers would not expect to have to bear the risks of
exploration efforts.
3:50:07 PM
MR. VAN TUYL affirmed that this gas pipeline will be an open
access pipeline regulated by FERC. During open season any party
can obtain access on just and reasonable terms; in fact,
testimony from the representative from FERC was that Congress
and FERC "in promulgating the regulations ... specifically for
this project, had a balancing act to try to manage." One part
was to create terms that were appropriate to get a pipeline
built; the other part recognized the need to stimulate
development and have future expansions. Mr. Van Tuyl further
noted that the Denali project has expressed interest in
soliciting demand for expansion every two years, which is
encouraging. As a shipper, he wants rates to remain low, and
one of the things that will ensure that is a lot of gas flowing
in the pipe and many shippers sharing in the tariff cost.
3:52:49 PM
MR. MASSEY said he agrees with Mr. Porter that the tariff is not
the issue with the development of oil resources on the North
Slope. Also, it is [Exxon's] belief that it is not the driver
historically; instead, it has been "the assessment of the
quality of the resource remaining to be explored for." When one
considers the gas pipeline, there will be significant incentive
for exploration; in fact, there are 15 tcf of yet to find [gas]
just to fill the base pipeline. Furthermore, expansion is
possible with basically the same tariff. He predicted that
exploration will occur as soon as companies realize that the
pipeline is going.
MR. ZAGER said that for Chevron the problem with exploring on
the North Slope has not been access to the pipeline, but with
dry holes. Furthermore, there is no concern about getting
Chevron's oil into TAPS. He opined that the structure, and the
protections from FERC, will ensure that people who have gas to
commit will be able to do that.
SENATOR HUGGINS asked whether Pioneer Oil has TAPS access.
3:56:08 PM
MS. KING relayed that Conoco/Phillips had success with Pioneer
in a facilities sharing agreement at Kuparuk last year.
3:56:40 PM
COMMISSIONER GALVIN, with regard to the ratio between the tariff
and the price, agreed that at one point there was a very low
margin with oil but now, the margin is tremendous and is no
longer a significant driver to that issue. However, at this
time the margin with gas is low and the rate of the tariff is
very important to the economics of the fields that may be
developed. He then addressed the shippers' advice to "trust
FERC to protect your interest as a state, when it comes to
expansion." He pointed out that the shippers have also said
that, on the issue of rolled-in rates, they can not trust FERC
to protect their interests. Finally, there is the juxtaposition
by the shippers of FERC's authority under ANGPA to require
expansions, with the rebuttable presumption of rolled-in rates.
He stressed that if FERC mandates the expansion, then the
rebuttable presumption is off; additionally, the rebuttable
presumption is cut off with the concept of subsidy. He
remarked:
Rates go down, of course, they use rolled-in rates as
the price goes down, and the rates go down. ... When
the rates start going up, in order to protect the
interest of the new shippers, suddenly you're dealing
with fighting the whole system in order to try to get
that interest met.
COMMISSIONER GALVIN then referred to a statement made during the
hearing on July 10 2008, about whether the Denali pipeline has
committed to solicit demand every two years for additional gas
to the pipeline. He recalled that the commitment was unclear
and asked, "Who's making that decision, and for what purpose?"
3:59:56 PM
MS. KING, on the issue of rolled-in rates, noted that the FERC
has provided a process in its Order 2005 A that said that there
is a rebuttable presumption of rolled-in rates up to the point
of the subsidy. But unique to AGIA is a requirement that the
pipeline company and the shippers agree to the 115 percent
regardless of whether that is a subsidy. She opined that this
requirement takes away the shipper's right to argue that point
before the FERC, and in fact, ties the hands of the shippers
before all the facts are known. She remarked:
You could see yourself in a place by which you might
be paying more to move state gas into the marketplace,
but yet, it's for federal lands moving through that
gas. ... That's the fact based case that FERC laid
out. ... We want to preserve that right, too; [to] be
able to look at the facts at the time and understand,
[whether] this a subsidy or not.
4:02:20 PM
MR. PALMER said that TransCanada's record of expansion stands on
its own. He advised that the rules state that if there is a
voluntary expansion by the pipeline company under FERC there's a
rebuttable presumption of rolled-in tolls, and AGIA requires the
pipeline company to voluntarily expand. However, if there is a
mandatory expansion, the subsidization test is there. He
expressed his understanding that initial shippers are always
concerned about tolls in the future. This is a matter of public
policy; in fact, this is one of the principal must-haves in
AGIA, he opined. He noted that this is public policy in Canada
and there is no 115 percent limit. Thus, customers in Canada
know that, genetically, they will face rolled-in tolls on the
Canadian section of this pipe, or on other pipes. Furthermore,
the ANGPA special provision about mandatory expansions has been
the law in Canada for over 20 years. The National Energy Board
is in the position to require pipelines to expand and generally,
do so on a rolled-in basis. He concluded that the public policy
decision was made by the legislature last year; however, it is
clear that potential initial shippers are opposed to this
policy.
4:04:44 PM
MR. PORTER sought clarification from Commissioner Galvin
regarding "when the producers had ever asked not to trust FERC."
He first offered his understanding that FERC defined a subsidy
as "if the cost is basically the initial shipping cost or less,
there is no subsidy." TransCanada's expansion elements show
that getting above the basic cost will not happen until
transportation passes 6.5 bcf per day, which is a 2 bcf per day
expansion over a "very optimistic" 4.5 [bcf per day pipeline].
He stated that that is a lot of gas to find, even though
everyone is very optimistic about the reserves. Mr. Porter
explained that the oil pipeline is half full, and if half full,
it provides incentive for the explorers to explore for [oil].
In fact, the report that said there is 137 trillion cubic feet
of yet to find gas also reported 28 billion barrels of yet to
find oil; on an equal basis, the state should be building a
second oil pipeline. He opined that this is a very optimistic
report. Mr. Porter further advised that by the time [the
pipeline company] gets to looping, the gas will be coming from
Chukchi federal lands, where the state does not get any revenue
or taxes; in fact, the state may be shipping their gas for free
and may be on the wrong side of rolled-in rates. He concluded
that the state is in a good position for rolled-in rates up to
about 6.5 [bcf per day].
4:08:27 PM
MR. PORTER continued to explain that if a producer-owned
pipeline and a third party-owned pipeline have similar
construction costs there are three factors that result in the
differential between the two: the return on equity, the cost of
the debt, and the equity ratio. Looking at the return on
equity, TransCanada proposed a 14 percent return with a floating
rate. He noted that FERC has never approved a floating rate,
although it has approved rates in the 14 percent range. In
Canada though, the 14 percent rate is fairly high and probably a
rate of return that TransCanada won't get. Looking at the cost
of debt between the two [pipelines], TransCanada hopefully will
have shippers, but if it has to go to the market on its own
balance sheet, its cost of debt will be higher by several basis
points than that of the producer's pipeline.
4:11:35 PM
MR. PORTER, on the debt equity ratio, opined that the Denali
project is focused on a low tariff and TransCanada would like a
reasonable tariff. TransCanada's proposed debt equity ratio is
70:30, 75:25, and 60:40. However, Mr. Massey said that [Exxon]
is willing to discuss 80:20 [ratio] and the other producers are
looking at the same. He suggested that the producers would be
interested in an 80:20 ratio if it reduced the cost of the
tariff, thus "they win both ways." Mr. Porter concluded:
The highest chance factor, just on a tariff straight
up standpoint, is that the producer's tariff would
probably be lower, could be lower, I should say ...
based on the statistics, than the TransCanada
proposal.
4:13:35 PM
The committee took an at-ease from 4:13 p.m. to 4:27 p.m.
4:27:39 PM
CHAIR HUGGINS called the meeting back to order at 4:27 p.m.
4:28:53 PM
MR. PALMER noted that Mr. Porter had prefaced his statement by
saying "assume that both parties would have the same capital
cost for the project." He recalled that Senator Hoffman had
asked to compare TransCanada's capital cost performance to its
competitor's performance in the North American interstate and
interprovincial gas pipeline business. An internal study by
TransCanada revealed that its capital costs for 43-48 inch
pipeline projects, from 1990 through 2003, were 19 percent lower
than its competitors in Canada and 38 percent lower than its
competitors in the United States. Unfortunately, there is no
data to compare cost performance with the Denali project
sponsors on a similar project.
MR. PALMER further addressed the issue of TransCanada's rate of
return on equity and compared its proposed return, multiplied by
the equity ratio, relative to other projects and to
TransCanada's mainline in Canada. He reiterated that there are
other FERC pipelines, such as Rockies Express, that at 55
percent equity multiplied by 13 percent, results in a figure of
7 percent on a weighted average basis. TransCanada's proposal
of 14 percent times 25 percent equals 3.50 percent.
Furthermore, if one were to take TransCanada's return on its
mainline today as approved by the National Energy Board, it has
a 40 percent equity and an 8.71 percent allowed return. When
multiplied out, the result is 3.48 percent, which is .02 percent
lower than the proposal for this project.
MR. PALMER continued to address the statement that TransCanada's
cost of debt would be higher [than the Denali project.] He
opined that the cost of debt would depend on whether the Denali
sponsors are going to provide funding and the financial
"backstopping," or if Denali would rely on transportation
contracts as the support for its financing. Currently, that
information is not available; however, he cited the Mackenzie
project where producers proposed a cost of debt of 6.5 percent
based on a proxy for an "A" rated pipeline rather than their
credit ratings. In addition, this project proposed a 70:30
ratio with a rate of return 221 basis points above the National
Energy Board rate of return.
4:34:51 PM
COMMISSIONER GALVIN responded to Mr. Porter's request for
information about trusting FERC. He explained that the
administration feels that there is an advantage to going to the
FERC with an applicant who is proposing terms acceptable to the
state. On the other hand, other entities argue that ultimately
FERC will decide and there is no advantage. However, the
producers have expressed concern about going before FERC on the
rolled-in rate issue. He observed that having an applicant go
forward "has a likely impact on the outcome from FERC."
Commissioner Galvin turned to the issue of the rate of return on
equity, equity ratio, and cost of debt and said it is important
to understand that the return on equity is what has been
included in TransCanada's application. This issue will be
negotiated and determined by FERC for the recourse rates; in
fact, AGIA does not obligate the state to the rate in the
application or preclude TransCanada from changing the rate in
the course of negotiations.
4:37:42 PM
COMMISSIONER GALVIN, with regard to the description of what is
the likely outcome of the Denali project's tariff issues, said
that the bottom line is that no one knows. Therefore, one must
instead look at the various pieces of information available,
such as TAPS tariff issues and motivation issues. The
administration believes that the state has a better outcome if
it has a hand in the terms proposed by the pipeline company, as
opposed to simply relying on the negotiations between the
producer/shippers and a producer pipeline. He remarked:
It is an uncertainty, and that's what AGIA is trying
to accomplish, is to limit those uncertainties as it
relates to the state's interest, the state's outcome.
Producers are going to protect their interests. AGIA
is intended to protect ours.
REPRESENTATIVE FAIRCLOUGH asked whether there will be increased
value for the propane that would be stripped for the Alaska
communities that will not have access to the pipeline.
MR. PALMER agreed that is generally the case, adding that there
are occasions where the value of the liquids falls below the
value of the natural gas methane, but normally propane would
have a higher unit basis value than the natural gas.
REPRESENTATIVE FAIRCLOUGH asked whether the volume of the
propane to be stripped in Alaska would affect the value of the
gas moving to the Alberta Hub.
4:41:28 PM
MR. PALMER said that although no specific study has been
conducted by TransCanada with regard to that issue, he has seen
a study produced by the Alaska Natural Gas Development Authority
(ANGDA) that illustrates the potential volumes would be small
and would not have a significant impact on the total heating
content of the gas moving to Alberta.
REPRESENTATIVE FAIRCLOUGH, referring to the treble damages in
certain circumstances, asked whether Alaska could offtake
propane to serve its smaller communities without reaching
quantity restrictions.
MR. PALMER indicated yes.
4:42:44 PM
REPRESENTATIVE FAIRCLOUGH asked for clarification regarding
"Nova" and "paid receipt tolls" and whether they are the same,
whether they are "inside of the tariff or outside" and if so,
whether they are an additional cost to shippers based on volume.
MR. PALMER said that Nova Corporation was a predecessor company
to TransCanada and merged with TransCanada ten years ago. The
numbers "receipt toll" is the number to get to the hub based on
volume and has some relevance to mileage and zonal rates. He
affirmed that the numbers are included in the application; in
fact, the $2.41 in the application includes the cost to get to
the Alberta Hub which is the receipt toll for TransCanada's
Alberta system.
4:44:32 PM
REPRESENTATIVE FAIRCLOUGH questioned whether in order to sell at
the Alberta Hub, there is an additional fee outside of the
tariff for exchanging at the Alberta Hub and moving the gas to
market.
MR. PALMER said that there is no cost to trade at the hub.
Further, there are "Nova inventory transfers {NIT)" so, once on
the Alberta system and the receipt toll is paid, one can trade
one's gas to other parties for free. If, however, one wants to
deliver downstream of the hub and off of the Nova system, there
is a delivery charge. He offered his understanding that the
Legislative Budget and Audit Committee purchased a study that
indicated that [the Alberta system] provides Alaska with the
best net-back, and most liquidity, and the lowest capital cost
risk.
4:47:08 PM
REPRESENTATIVE RAMRAS asked who will be the president of
TCAlaska, and what the company's structure will be.
MR. PALMER explained that he is the President and Chief
Executive Officer of TransCanada Alaska and Foothills Pipe Lines
Ltd. TransCanada has not established the specific structure for
operations after the license is granted; however, "we have a
structure that we will go forward immediately on, but the
permanent structure has not been established." He described
some of the actions that have been taken.
REPRESENTATIVE RAMRAS asked whether Mr. Palmer would live here.
MR. PALMER said he has not made such a decision yet.
REPRESENTATIVE RAMRAS recalled his meeting with FERC officials
where they discussed a pipeline project in Oregon that had three
pipelines and two LNG facilities permitted. He stated his
interest in "first gas," and who could provide first gas to
Fairbanks and Alaska. He asked who would be first to provide
gas with the likelihood of a failed open season in 2010 for
TransCanada and a successful open season for the Denali project
in 2011.
4:51:18 PM
MR. PALMER said that rather than the hypothetical example,
TransCanada is instead intending to invest $100 million of its
shareholders money with the expectation of its success in the
open season. The target is to complete the project by 2018 with
commitments to dates for an open season and FERC filing.
4:53:01 PM
MR. PORTER observed that usually there are a couple of years of
summer field work to compile data for cost estimates. He asked
if TransCanada has chosen to have an open season before the
summer data is incorporated.
MR. PALMER said that TransCanada believes that it can compile
the necessary field data through 2009 and is proposing to
conclude, not initiate, the open season by July 2010; therefore
the initiation of the open season would occur early in 2010,
based on the information collected this summer and throughout
2009.
4:54:51 PM
COMMISSIONER GALVIN, on the question of first gas, opined that
it is also important to consider the state's interest. The
administration's contention is that having the license issued
will result in gas "sooner" regardless of who may have the first
final investment decision (FID) because the licensed project
will be operating under established timeline commitments to the
state rather than a project subject to delays.
4:56:16 PM
MR. VAN TUYL acknowledged that BP wants to get its gas to
market, but that is weighed against a schedule-driven project
that can result in massive cost overruns. He recalled that the
Denali project has timed its open season within 36 months and
initiated in 2010, scheduled the FID about 2013, and first gas
around 2018. He opined that the key is having confidence in the
pipeline builder to deliver the offer made at open season and to
deliver the project at a low capital cost and with a high
netback, which is in BP's interest and in the best interest of
the state.
[HB 3001 and SB 3001 were heard and held.]
ADJOURNMENT
There being no further business, the joint meeting of the House
Rules Standing Committee and the Senate Special Committee on
Energy was adjourned at 4:58 p.m.
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