Legislature(2013 - 2014)SENATE FINANCE 532

01/27/2014 09:00 AM Senate FINANCE


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09:09:45 AM Start
09:13:17 AM Presentation: Commercial Agreements for Alaska Lng Project; the Heads of Agreement
10:40:17 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Commercial Agreements for Alaska TELECONFERENCED
LNG Project
The Heads of Agreement and the Memorandum of
Understanding
Commissioner Angela Rodell, Dept. of Revenue
Commissioner Joe Balash, Dept. of Natural
Resources
Dan Fauske, President, Alaska Gasline
Development Corporation
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 27, 2014                                                                                           
                         9:09 a.m.                                                                                              
                                                                                                                                
9:09:45 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Meyer  called the Senate Finance  Committee meeting                                                                    
to order at 9:09 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair (via teleconference)                                                                        
Senator Click Bishop (via teleconference)                                                                                       
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson (via teleconference)                                                                                        
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Angela  Rodell,  Commissioner,  Department of  Revenue;  Joe                                                                    
Balash,  Commissioner,  Department   of  Natural  Resources;                                                                    
Michael Pawlowski,  Deputy Commissioner,  Strategic Finance,                                                                    
Department of  Revenue; Senator Hollis French;  Senator Bill                                                                    
Wielechowski; Senator Charlie Huggins.                                                                                          
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Daniel   Fauske,  President,   Alaska  Gasline   Development                                                                    
Corporation.                                                                                                                    
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION: COMMERCIAL AGREEMENTS  FOR ALASKA LNG PROJECT;                                                                    
THE HEADS OF AGREEMENT                                                                                                          
                                                                                                                                
9:13:17 AM                                                                                                                    
                                                                                                                                
^Presentation:   Commercial   Agreements  for   Alaska   LNG                                                                  
Project; the Heads of Agreement                                                                                               
                                                                                                                                
9:13:21 AM                                                                                                                    
                                                                                                                                
ANGELA   RODELL,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
explained  the binder,  "A Roadmap  to  Production of  North                                                                    
Slope  Gas"  (copy  on  file). She  stated  that  the  day's                                                                    
discussion would  highlight the  Heads of Agreement  for the                                                                    
Alaska   Gasline   Development    Corporation   (AGDC)   and                                                                    
TransCanada. She  felt that the  project was  very important                                                                    
and exciting for Alaska.                                                                                                        
                                                                                                                                
9:15:47 AM                                                                                                                    
                                                                                                                                
JOE BALASH,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES,                                                                    
stated that  the bodies  of agreement  were an  alignment of                                                                    
the  parties  to  bring  the  gas  to  market,  and  provide                                                                    
expertise. He stated that there  were key differences in the                                                                    
liquid  natural gas  (LNG) project.  He stressed  that there                                                                    
were some regulatory issues. He  explained that the findings                                                                    
of  the  study  contributed   to  the  decisions  that  were                                                                    
included in the analysis and  agreements. He stated that the                                                                    
main result  of the study  was the relationship  between the                                                                    
state and the producers, and highlighted some differences.                                                                      
                                                                                                                                
Commissioner Balash  continued to discuss the  basic notions                                                                    
of  the "Heads  of Agreement"  document (copy  on file).  He                                                                    
stated  that  the  presentation   would  include  the  broad                                                                    
aspects of  the Heads of  Agreement (HOA). He  remarked that                                                                    
the HOA  demonstrated a fundamental  shift in  approach. The                                                                    
state would assert  an equity interest in  the resource, and                                                                    
take control of the terms  of financing the state's share of                                                                    
the infrastructure.  He felt that  the shift would  pay huge                                                                    
dividends to the  people of Alaska and to  the treasury over                                                                    
time.  He   stated  that  terms  and   conditions  would  be                                                                    
discussed  in a  broad sense,  but  would be  utilized on  a                                                                    
phased approach. He  explained that there would be  a set of                                                                    
broad terms  presented, and would  seek approval  to advance                                                                    
into the  next phase  of development  and commercialization.                                                                    
There  were  many  broad things  that  matter  to  Alaskans,                                                                    
regardless of  approach or projects: getting  liquid natural                                                                    
gas (LNG)  to communities and businesses;  identifying terms                                                                    
that  would ensure  that Alaskans  get jobs  associated with                                                                    
the development  of the project;  and maximizing value  as a                                                                    
resource  owner and  incentivize additional  exploration and                                                                    
development  beyond the  proven resource.  He stressed  that                                                                    
the HOA  would achieve each  of those goals  and objectives.                                                                    
He encouraged  the committee to  focus on the  provisions in                                                                    
Article 6, which  was directed to the  regulatory and access                                                                    
terms for  instate use. He  stated that page 16,  Article 11                                                                    
outlined the  provisions specific to Alaska  Hire, training,                                                                    
and  workforce development.  He  explained  that Appendix  A                                                                    
spoke to the principles for expansion of the project.                                                                           
                                                                                                                                
9:23:16 AM                                                                                                                    
                                                                                                                                
MICHAEL PAWLOWSKI,  DEPUTY COMMISSIONER,  STRATEGIC FINANCE,                                                                    
DEPARTMENT OF  REVENUE, presented the PowerPoint,  "Heads of                                                                    
Agreement, a  Presentation to the Senate  Finance Committee"                                                                    
(copy  on  file).   He  stated  that  the   purpose  of  the                                                                    
presentation  was  an  explained  of how  to  read  the  HOA                                                                    
document, which was a broad  roadmap for the development and                                                                    
commercialization of  North Slope LNG. He  stated that there                                                                    
were  some nuances,  so he  wanted  to methodically  explain                                                                    
each  section   in  order  to  feel   comfortable  with  the                                                                    
document.                                                                                                                       
                                                                                                                                
Mr.  Pawlowski  discussed  slide  2, "What  is  a  Heads  of                                                                    
Agreement?"                                                                                                                     
                                                                                                                                
     Definition:                                                                                                                
                                                                                                                                
     "A  non-binding  document  outlining  the  main  issues                                                                    
     relevant  to a  tentative partnership  agreement. Heads                                                                    
     of agreement represents  the first step on  the path to                                                                    
     a  full  legally  binding agreement  or  contract,  and                                                                    
     serves   as    a   guideline   for   the    roles   and                                                                    
     responsibilities   of  the   parties   involved  in   a                                                                    
     potential partnership before  any binding documents are                                                                    
     drawn up."                                                                                                                 
                                                                                                                                
9:25:24 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski looked at slide  3, "The Heads of Agreement is                                                                    
for the  Alaska LNG Project."  He stated that the  slide was                                                                    
intended to explain  the large scale of the  project and its                                                                    
components. He stated that previous  efforts by the state to                                                                    
commercialize  North Slope  gas had  focused on  two of  the                                                                    
components:  a treating  plant and  a pipeline.  He stressed                                                                    
that an  LNG project was  more complicated by  the inclusion                                                                    
of  the  liquefaction  plant  and   a  storage  and  loading                                                                    
facility. He  stressed that it  was a world class  and world                                                                    
scale project.                                                                                                                  
                                                                                                                                
Mr. Pawlowski discussed slide 4, "Organization of the Heads                                                                     
of Agreement."                                                                                                                  
                                                                                                                                
     The  Heads  of  Agreement   (HOA)  is  broken  into  16                                                                    
     sections that include:                                                                                                     
                                                                                                                                
     -Recitals of  recent events and  understandings between                                                                    
     the parties.                                                                                                               
                                                                                                                                
     -13  Articles covering  guidelines for  the development                                                                    
     of the  project and  the roles and  responsibilities of                                                                    
     the Parties to the agreement.                                                                                              
                                                                                                                                
     -An   appendix   articulating  access   and   expansion                                                                    
     principles for the project.                                                                                                
                                                                                                                                
     -An exhibit  that provides copies  of the 3  letters to                                                                    
     Governor   Parnell  from   the  Producer   Parties  and                                                                    
     TransCanada.                                                                                                               
                                                                                                                                
Mr. Pawlowski highlighted slide 5, "Guide to who is being                                                                       
referred to the in Heads of Agreement."                                                                                         
                                                                                                                                
     "The Administration"                                                                                                       
                                                                                                                                
          Includes:                                                                                                             
                                                                                                                                
                                                                                                                                
          -Department of Natural Resources (DNR)                                                                                
          -Department of Revenue (DOR)                                                                                          
                                                                                                                                
     References may  also be made to  "Commissioners" or the                                                                    
     "State" in the HOA.                                                                                                        
                                                                                                                                
     "The Parties" or "Party"                                                                                                   
                                                                                                                                
          Includes:                                                                                                             
                                                                                                                                
          -The Administration                                                                                                   
          -The Alaska Gasline Development Corporation                                                                           
          ("AGDC") or an AGDC Subsidiary                                                                                        
          -TransCanada Alaska Development Inc. ("TADI")                                                                         
          -ExxonMobil Alaska Production Inc. ("EMAP")                                                                           
          -ConocoPhillips Alaska, Inc. ("ConocoPhillips")                                                                       
          -BP Exploration (Alaska) Inc. ("BP")                                                                                  
                                                                                                                                
Mr. Pawlowski explained slide 6, "Guide to who is being                                                                         
referred to in the Heads of Agreement."                                                                                         
                                                                                                                                
     "Alaska LNG Parties"                                                                                                       
                                                                                                                                
          Includes:                                                                                                             
                                                                                                                                
          -The Alaska Gasline Development Corporation                                                                           
          ("AGDC") or an AGDC Subsidiary                                                                                        
          -TransCanada Alaska Development Inc. ("TADI")                                                                         
          -ExxonMobil Alaska Production Inc. ("EMAP")                                                                           
          -ConocoPhillips Alaska, Inc. ("ConocoPhillips")                                                                       
          -BP Exploration (Alaska) Inc. ("BP")                                                                                  
                                                                                                                                
     "Producer Parties"                                                                                                         
                                                                                                                                
          Includes:                                                                                                             
                                                                                                                                
          -ExxonMobil Alaska Production Inc. ("EMAP")                                                                           
          -ConocoPhillips Alaska, Inc. ("ConocoPhillips")                                                                       
          -BP Exploration (Alaska) Inc. ("BP")                                                                                  
                                                                                                                                
9:30:31 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski highlighted slide 7, "Key Recitals."                                                                              
                                                                                                                                
     1.  Recognizes changed  circumstances in  the Lower  48                                                                    
     natural gas markets led Governor  Parnell to call for a                                                                    
     change in direction, under AGIA,  in the development of                                                                    
     North Slope Gas to an LNG project.                                                                                         
                                                                                                                                
     2.  Recognizes  funding by  the  State  under AGIA  has                                                                    
     supported key  activities for the LNG  project but that                                                                    
     both the  Administration and TransCanada believe  it is                                                                    
     appropriate  to transition  from  the  AGIA license  to                                                                    
     focus on the Alaska LNG project.                                                                                           
                                                                                                                                
     3. Recognizes  that AGDC is  pursuing the  Alaska Stand                                                                    
     Alone  Pipeline ("ASAP")  project and  that the  Alaska                                                                    
     LNG  project  and ASAP  intend  to  cooperate with  one                                                                    
     another.                                                                                                                   
                                                                                                                                
     4. The Alaska LNG Parties  wish to ramp up the Pre-FEED                                                                    
     phase of the Alaska LNG  project, which is estimated to                                                                    
     cost over $400 million.                                                                                                    
                                                                                                                                
     Recitals:                                                                                                                  
                                                                                                                                
     The purpose of  the Recitals section, found  on pages 2                                                                    
     through  4 of  the Heads  of Agreement,  is to  provide                                                                    
     context for  the agreement, describe recent  events and                                                                    
     articulate certain  roles, goals and direction  for the                                                                    
     Alaska  LNG Project  and  Alaska  Stand Alone  Pipeline                                                                    
     ("ASAP")  project  currently   being  advanced  by  the                                                                    
     Alaska Gasline Development Corporation (AGDC).                                                                             
                                                                                                                                
Mr. Pawlowski discussed slide 8, "Key Definitions."                                                                             
                                                                                                                                
     1. "Enabling Legislation"  describes the key components                                                                    
     of legislation (described in more  detail in Article 7)                                                                    
     necessary to advance the project.                                                                                          
                                                                                                                                
     2.  "MOU"  refers  to   the  agreement,  referenced  in                                                                    
     Article    5.4,    between    TransCanada    and    the                                                                    
     Administration to  transition from the AGIA  license to                                                                    
     a commercial relationship.                                                                                                 
                                                                                                                                
     3. "Pre-FEED"  means the pre-front-end  engineering and                                                                    
     design work  and activities for the  Alaska LNG project                                                                    
     that are sufficient to support  filings for the Federal                                                                    
     Energy Regulatory Commission (FERC).                                                                                       
                                                                                                                                
     4. "RIK" means Royalty in  Kind as described in Article                                                                    
     8.1.1,  where in  lieu of  receiving  payments for  the                                                                    
     value of the  State's royalty, the State  takes a share                                                                    
     of the gas produced.                                                                                                       
                                                                                                                                
     5. "TAG"  means "Tax  as Gas"  as described  in Article                                                                    
     8.1.1,  where   in  lieu  of  receiving   payments  for                                                                    
     production tax the  State would receive a  share of the                                                                    
     gas produced.                                                                                                              
                                                                                                                                
     Definitions:                                                                                                               
                                                                                                                                
     Article 1  of the Heads  of Agreement begins on  page 4                                                                    
     and goes through page 7  of the agreement. In Article 1                                                                    
     a  reader  can  find  definitions for  key  terms  used                                                                    
     throughout the agreement.                                                                                                  
                                                                                                                                
     It  is   important  to  note   that  when  a   term  is                                                                    
     capitalized  in  the agreement  it  is  referring to  a                                                                    
     specific term that is defined in Article 1.                                                                                
                                                                                                                                
Mr. Pawlowski displayed slide 9, "Key Provisions."                                                                              
                                                                                                                                
     Article 2: Principles                                                                                                      
                                                                                                                                
          1.  Recognizes  that  if Enabling  Legislation  is                                                                    
          passed that the  Parties would negotiate contracts                                                                    
          that  would  incorporate  the  principles  in  the                                                                    
          agreement.                                                                                                            
                                                                                                                                
     Article 3: Benefits of the Alaska LNG Project                                                                              
                                                                                                                                
          1.   Gas   to   Alaskans:  The   opportunity   for                                                                    
          competitively   priced,   reliable  in-state   gas                                                                    
          supply;                                                                                                               
                                                                                                                                
          2. Jobs  to Alaskans:  Creating jobs  for Alaskans                                                                    
          in  the exploration,  development, production  and                                                                    
          transportation of natural gas.                                                                                        
                                                                                                                                
          3. Revenues  to the State: Additional  revenues to                                                                    
          the State.                                                                                                            
                                                                                                                                
          4. Opportunities  for additional  gas development:                                                                    
          Infrastructure  enhances  opportunities  for  more                                                                    
          gas development.                                                                                                      
                                                                                                                                
     Principles and Benefits:                                                                                                   
                                                                                                                                
     Articles 2  and 3 of  the Heads of Agreement  are found                                                                    
     on page 8 of the agreement.                                                                                                
                                                                                                                                
     Article  2 describes  how the  Heads of  Agreement sets                                                                    
     out the guiding principles  upon which the Parties wish                                                                    
     to  progress  work on  the  Alaska  LNG Project  and  a                                                                    
     roadmap for project.                                                                                                       
                                                                                                                                
     Article 3  describes broadly some  of the  key benefits                                                                    
     of developing the Alaska LNG Project to stakeholders.                                                                      
                                                                                                                                
9:35:32 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski highlighted slide 10, "Key Activities."                                                                           
                                                                                                                                
     1.  The  development   of  sufficient  information  for                                                                    
     evaluating  the technical,  cost, and  schedule aspects                                                                    
     of the Alaska LNG Project.                                                                                                 
                                                                                                                                
     2. The  development of key project  services agreements                                                                    
     for the  State's gas with  TransCanada and AGDC  (or an                                                                    
     AGDC subsidiary).                                                                                                          
                                                                                                                                
     3.  The   Parties  would   work  to   develop  mutually                                                                    
     agreeable gas offtake and balancing agreements.                                                                            
                                                                                                                                
     4. The  State and  each of  the Producer  Parties would                                                                    
     initiate preliminary,  individual LNG  or gas  sales or                                                                    
     shipping efforts.                                                                                                          
                                                                                                                                
          1. This  may also  include the State  (directly or                                                                    
          through AGDC  or an AGDC subsidiary)  working with                                                                    
          each Producer  individually to  develop agreements                                                                    
          for the  disposition of a  portion of  the State's                                                                    
          LNG (Article 8.3.3).                                                                                                  
                                                                                                                                
     Alaska LNG Project Work:                                                                                                   
                                                                                                                                
     Article  4, found  on pages  8 and  9 of  the Heads  of                                                                    
     Agreement,  describes  what   work  will  be  conducted                                                                    
     during the Pre-FEED stage of the project.                                                                                  
                                                                                                                                
     The Pre-FEED stage  is expected to take  between 18 and                                                                    
     24 months.                                                                                                                 
                                                                                                                                
     The Pre-FEED  stage would  be followed  by a  review by                                                                    
     each Party, its management  and the decision to proceed                                                                    
     to  the  next  stage  ("FEED")  would  be  up  to  each                                                                    
     individual Party.                                                                                                          
                                                                                                                                
Mr.  Pawlowski  discussed  slide 11,  "Putting  Pre-FEED  in                                                                    
Context." He stated that the  slide came from Exhibit 1-B on                                                                    
page 32 of the HOA. He  stated that the slide put the phases                                                                    
into context.  He noted that the  concept-selection stage of                                                                    
the project  was almost  complete. He  pointed out  that the                                                                    
developments included several moments  where each party made                                                                    
the determination as to whether  the project should proceed.                                                                    
He  stated that  the  Pre-FEED stage  was  expected to  take                                                                    
between  12 and  18  months  and cost  between  $4 and  $500                                                                    
million.  He  remarked  that once  the  Pre-FEED  stage  was                                                                    
complete, the  expectations of billions of  dollars would be                                                                    
utilized.                                                                                                                       
                                                                                                                                
9:42:27 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski highlighted slide 12, "Key Provisions."                                                                           
                                                                                                                                
     1. State participation in the  Alaska LNG Project could                                                                    
    yield significant benefits to the State including:                                                                          
                                                                                                                                
          A. Maximizing the value of the State's resources                                                                      
          for the people of Alaska.                                                                                             
          B. Deliver gas to Alaskans.                                                                                           
          C. Public transparency of State's approval                                                                            
          process.                                                                                                              
          D. An opportunity for additional State revenues.                                                                      
          E. Access and pro-expansion principles for the                                                                        
          Alaska LNG Project.                                                                                                   
          F. Improving alignment of interests between the                                                                       
          State and the Producer Parties.                                                                                       
          G. Reducing valuation and other potential                                                                             
          disputes between the Producer Parties and the                                                                         
          State.                                                                                                                
                                                                                                                                
     2.  State will  participate  in  the infrastructure  by                                                                    
     entering  into   agreements  with  TransCanada   and  a                                                                    
     Subsidiary  of AGDC  to carry  the State's  interest in                                                                    
     the infrastructure.                                                                                                        
                                                                                                                                
     3. The  State's interest should be  consistent with the                                                                    
     State's share of the gas (20 percent-25 percent).                                                                          
                                                                                                                                
     State Participation in the Project                                                                                         
                                                                                                                                
     Article 5  begins on page  9 of the Heads  of Agreement                                                                    
     and concludes on page 11  of the agreement. The Article                                                                    
     describes broadly  the reasons for  State participation                                                                    
     in  the Alaska  LNG  Project, the  Parties support  for                                                                    
     State   participation   and   how   the   State   would                                                                    
     participate in the project.                                                                                                
                                                                                                                                
     Additionally,   Article  5   also  describes   how  the                                                                    
     Administration  would participate  during the  Pre-FEED                                                                    
     stage   and   provides   principles   for   access   to                                                                    
     information during the life of the project.                                                                                
                                                                                                                                
9:46:20 AM                                                                                                                    
                                                                                                                                
Senator Hoffman wondered if the  20 to 25 percent would also                                                                    
include 20 to 25 percent of  the construction cost of $45 to                                                                    
$60  billion.  Mr.  Pawlowski replied  that  the  percentage                                                                    
included   the  construction,   with  the   key  being   the                                                                    
investment in the infrastructure consistent with the share                                                                      
of the gas.                                                                                                                     
                                                                                                                                
Mr. Pawlowski displayed slide 13, "Key Provisions."                                                                             
                                                                                                                                
     1. At  least five  Alaskan offtake points  for Alaskans                                                                    
     to get their gas.                                                                                                          
                                                                                                                                
     2.  Locations of  offtake points  will be  developed in                                                                    
     consultation  with  AGDC.  AGDC's  work  on  ASAP  will                                                                    
     greatly  benefit the  State and  Alaska LNG  Project in                                                                    
     developing these locations.                                                                                                
                                                                                                                                
     3. Each Party's shares in  capacity would be managed on                                                                    
     a  proprietary  basis; essentially  creating  "projects                                                                    
     within a project."                                                                                                         
                                                                                                                                
     4.  AGDC and  TransCanada's shares  of capacity  in the                                                                    
     project  are  committed  to  provide  access  to  third                                                                    
     parties on terms developed with the State.                                                                                 
                                                                                                                                
     Regulatory Framework, Access and Expansion:                                                                                
                                                                                                                                
     Article 6 begins on page  11 and continues through page                                                                    
     12 of the  Heads of Agreement. Article  6 describes the                                                                    
     Parties  commitment,  during  Pre-FEED to  advance  the                                                                    
     Alaska LNG Project  under Section 3 of  the Natural Gas                                                                    
     Act.                                                                                                                       
                                                                                                                                
     The Article  is designed to recognize  the availability                                                                    
     of a tailored regulatory  framework under Section 3 and                                                                    
     that the  access and expansion terms  developed for the                                                                    
     project  would be  consistent with  Appendix  A of  the                                                                    
     Heads of Agreement.                                                                                                        
                                                                                                                                
9:49:40 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski explained slide 14, "Why expansion principles                                                                     
are important."                                                                                                                 
                                                                                                                                
     Alaska  has  significant  gas resources  on  the  North                                                                    
     Slope.                                                                                                                     
                                                                                                                                
     Current  known  reserves  are 35  trillion  cubic  feet                                                                    
     (TCF);  USGS   estimates  of   technically  recoverable                                                                    
     conventional gas resources are more than 240 TCF.                                                                          
                                                                                                                                
     Pro-expansion  guarantees Alaskan  land beyond  Prudhoe                                                                    
     and Pt.  Thomson continue  to be  explored for  gas and                                                                    
     that  the  gas  will  get into  the  line  and  benefit                                                                    
     Alaskans.                                                                                                                  
                                                                                                                                
Mr. Pawlowski displayed slide 15, "Appendix A: Pro-                                                                             
Expansion Principles."                                                                                                          
                                                                                                                                
     A key  foundation for Article 6:  Regulatory Framework,                                                                    
     Access and Expansion is found  in Appendix A (pages 21-                                                                    
     23) of the Heads of Agreement.                                                                                             
                                                                                                                                
     These   principles   provide  high   level   principles                                                                    
     governing the expansion of any  component of the Alaska                                                                    
     LNG Project.                                                                                                               
                                                                                                                                
     The Appendix commits the Parties  to the principle that                                                                    
     components  of the  Project (treatment  plant, pipeline                                                                    
     etc.)  can be  expanded  and  a new  LNG  train can  be                                                                    
     installed.                                                                                                                 
                                                                                                                                
9:53:14 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski highlighted slide 16, "Enabling Legislation."                                                                     
                                                                                                                                
     Article 7 begins on page  12 and continues through page                                                                    
     13 of the Heads of  Agreement. The article describes in                                                                    
     broad  terms  the   necessary  component  of  "Enabling                                                                    
     Legislation" that  the Parties believe is  necessary to                                                                    
     advance through Pre-FEED for the AK LNG Project.                                                                           
                                                                                                                                
     The Article describes a two stage process where:                                                                           
                                                                                                                                
          1. General take terms and mechanisms for State                                                                        
          participation are enacted during the 2014                                                                             
          Legislative session.                                                                                                  
                                                                                                                                
          2. Project enabling contracts are returned to the                                                                     
          Legislature for review in a 2015 legislative                                                                          
          session.                                                                                                              
                                                                                                                                
     The Timeline:                                                                                                              
                                                                                                                                
          April    2014:    Legislature   passes    enabling                                                                    
          legislation.                                                                                                          
                                                                                                                                
          2014  -   2015:  Administration  and   Alaska  LNG                                                                    
          Project    Parties   develop    project   enabling                                                                    
          contracts,   including,   but  not   limited   to,                                                                    
          agreements with  TransCanada and AGDC  for project                                                                    
          services for the State Gas  Share, gas offtake and                                                                    
          balancing  agreements with  the Producer  Parties,                                                                    
          and preliminary LNG or gas sales contracts.                                                                           
                                                                                                                                
          2015:   Legislature  considers   project  enabling                                                                    
          contracts.                                                                                                            
                                                                                                                                
          2015-2016:  Parties decide  whether to  advance to                                                                    
          FEED.                                                                                                                 
                                                                                                                                
Mr. Pawlowski explained slide 17, "Key Provisions."                                                                             
                                                                                                                                
     Royalties and Production Taxes:                                                                                            
                                                                                                                                
          Article 8  which begins on  page 13  and continues                                                                    
          through  page   15  of  the  Heads   of  Agreement                                                                    
          describes changes  to the State's royalty  and tax                                                                    
          system  that  will   facilitate  progress  on  the                                                                    
          Alaska  LNG  Project  by  creating  a  predictable                                                                    
          State Gas Share.                                                                                                      
                                                                                                                                
          The State Gas Share  is the combination of royalty                                                                    
          in kind  (RIK) gas and  tax as gas  (TAG) received                                                                    
          by the State for its Production Tax.                                                                                  
                                                                                                                                
          The Article  also provides guidance for  the range                                                                    
          of  Production Tax  (~7  percent-13 percent)  that                                                                    
          the  Parties believe  will enable  the Alaska  LNG                                                                    
          Project to advance.                                                                                                   
                                                                                                                                
9:57:28 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy  wondered  if  there was  a  provision  to                                                                    
prevent  one party  from  backing out  of  the project.  Mr.                                                                    
Pawlowski  replied that  it  was a  part  of the  commercial                                                                    
agreements  that get  developed during  the Pre-FEED  stages                                                                    
resolving  exactly  what  happens  for a  coalition  of  the                                                                    
willing  to proceed  with participation  in the  project. He                                                                    
stressed that the  state would retain rights  to assets that                                                                    
allow the continuation of the  project. He stressed that the                                                                    
HOA  highlighted  why  it  was  so  important  to  keep  the                                                                    
project.  He  stated that  there  was  a group  of  invested                                                                    
parties, but there was no foregone conclusion.                                                                                  
                                                                                                                                
Mr. Pawlowski continued to discuss slide 17:                                                                                    
                                                                                                                                
     1.  Alaska   Statute  AS  38.05.182(a)   provides  that                                                                    
     "royalties  on  oil and  gas  shall  be taken  in  kind                                                                    
     unless  the  commissioner  (DNR)  determines  that  the                                                                    
     taking in  money would be  in the best interest  of the                                                                    
     state."                                                                                                                    
                                                                                                                                
     2.  The  November  2013  "Alaska  North  Slope  Royalty                                                                    
     Study"   performed  by   Black   &  Veatch   identified                                                                    
     potential issues  related to the State  taking in-kind;                                                                    
     primarily those associated with marketing risk.                                                                            
                                                                                                                                
     3.  In Article  8.3.3 the  Producer Parties  commit, if                                                                    
     asked by  the State  to "negotiate separately  with the                                                                    
     state in  good faith  to enter  into an  agreement with                                                                    
     the State  regarding the purchase or  other disposition                                                                    
     of a portion  of the LNG that is made  from the State's                                                                    
     deliveries (RIK  + TAG)  of natural  gas to  the Alaska                                                                    
     LNG project."                                                                                                              
                                                                                                                                
10:01:20 AM                                                                                                                   
                                                                                                                                
Mr. Pawlowski looked at slide 18, "Key Provisions."                                                                             
                                                                                                                                
     1.  The  Administration,  in  consultation  with  local                                                                    
     governments, will develop payments  in lieu of property                                                                    
     tax  and impact  payments during  construction for  the                                                                    
     project.                                                                                                                   
                                                                                                                                
     2.  Project enabling  contracts negotiated  between the                                                                    
     Parties  will  need to  be  of  sufficient duration  to                                                                    
     support investment  decisions, permit realization  of a                                                                    
     competitive  economic   return,  to   enable  necessary                                                                    
     financing,   and  to   support   gas   and  LNG   sales                                                                    
     agreements; all  of which  are needed  by the  State as                                                                    
     well as the  Alaska LNG Project Parties  to advance the                                                                    
     project.                                                                                                                   
                                                                                                                                
     3.  General support  for the  development of  necessary                                                                    
     infrastructure  and  other  local,  State  and  federal                                                                    
     permitting requirements.                                                                                                   
                                                                                                                                
     4. A healthy, long-term oil business.                                                                                      
                                                                                                                                
     Other Project Enabling Terms and Additional State                                                                          
     Support for the Alaska LNG Project                                                                                         
                                                                                                                                
          Articles 9 and  10, found on page 15  of the Heads                                                                    
          of  Agreement  detail  other  terms  necessary  to                                                                    
          advance  the Alaska  LNG Project  through Pre-FEED                                                                    
          and into FEED.                                                                                                        
                                                                                                                                
          Those  terms include  a broad  range of  continued                                                                    
          State and stakeholder support  at the local, state                                                                    
          and federal level for the project.                                                                                    
                                                                                                                                
10:04:28 AM                                                                                                                   
                                                                                                                                
Mr. Pawlowski highlighted slide 19, "Alaska Hire and                                                                            
Content; Key Estimates."                                                                                                        
                                                                                                                                
     Article 11 is found on page 16 of the Heads of                                                                             
     Agreement and provides key direction for the Alaska                                                                        
     LNG Parties in developing the project.                                                                                     
                                                                                                                                
     These include guidance to:                                                                                                 
                                                                                                                                
          -Hire Alaska residents,                                                                                               
          -Contract with Alaska businesses,                                                                                     
          -Participate  with the  State Department  of Labor                                                                    
          and  Workforce  Development   to  update  training                                                                    
          plans and provide training, and                                                                                       
          -Commit to  negotiate in good faith  project labor                                                                    
          agreements for the Alaska LNG Project.                                                                                
                                                                                                                                
     Estimated Total Cost: $45 - $65 billion                                                                                    
                                                                                                                                
          Jobs:                                                                                                                 
                                                                                                                                
          Producing Fields: 500 - 1,500                                                                                         
          Gas Treatment Plant: 500 - 2,000                                                                                      
          Pipeline: 3,500 - 5,000                                                                                               
          Liquefaction Plant: 3,500 - 5,000                                                                                     
          Storage/Loading: 1,000 - 1,500                                                                                        
          Peak Construction: 9,000 - 15,000                                                                                     
          Operations: ~1,000 jobs in Alaska                                                                                     
                                                                                                                                
Mr. Pawlowski  looked at  slide 20,  "While North  Slope gas                                                                    
commercialization is  challenging, working together,  we can                                                                    
maintain the momentum toward our  shared vision for Alaska."                                                                    
He stated that  the photo on the slide was  of Pt. Thompson.                                                                    
He remarked that the development  of the gas resource at Pt.                                                                    
Thompson was a  key foundational element for  the Alaska LNG                                                                    
project development.                                                                                                            
                                                                                                                                
Co-Chair  Meyer wondered  if  there was  a  timeline in  the                                                                    
presentation. He specifically  asked when construction would                                                                    
occur.   Commissioner  Balash   replied   that  there   were                                                                    
different phases of the project.  He stated that the soonest                                                                    
phase would occur  in 2017 and the longest would  be 2018 or                                                                    
2019.                                                                                                                           
                                                                                                                                
10:09:42 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  stated that there  was no discussion  of the                                                                    
actual bill,  because the bill  was in the  Senate Resources                                                                    
Committee. He expressed concern,  because the discussion was                                                                    
redundant.  He felt  that the  issue  was positive,  because                                                                    
there  was   a  partnership   between  the  state   and  the                                                                    
producers.  He remarked  that there  was some  leverage with                                                                    
the state's  "bullet line."  He wondered  if there  were any                                                                    
other  differences that  could be  added to  the discussion.                                                                    
Commissioner  Balash  replied  that   there  were  some  key                                                                    
distinctions with regard to why  this project was different.                                                                    
He  specifically   pointed  out  that  the   producers  were                                                                    
behaving  differently.  He   remarked  that  the  settlement                                                                    
agreement for ending the dispute  at Pt. Thompson called for                                                                    
a couple of very key  decision points. He explained that the                                                                    
structure of  the Pt. Thompson  was an  acknowledgement that                                                                    
the acreage belonged to the  State of Alaska, and if nothing                                                                    
occurred the property  was returned to the  state. There was                                                                    
a certain  amount of time  that the working  interest owners                                                                    
at  Pt.  Thompson  had  to get  the  field  into  production                                                                    
initially  and more  fully develop  the  field. The  initial                                                                    
undertaking  in the  settlement agreement  was to  bring the                                                                    
initial   production   system   (IPS)  online   to   produce                                                                    
condensate  through a  cycling  program, which  must be  put                                                                    
into production  to deliver  hydrocarbons into  the pipeline                                                                    
by 2016.  He stated  that there  would be  a period  of time                                                                    
under  which  the working  interest  owners  must commit  to                                                                    
develop and then  commit to more fully invest  in the field.                                                                    
He stated that "fully invested  field" was outlined in three                                                                    
options: 1.  expand the cycling  program; 2. blow  the field                                                                    
down,  and take  the gas  to Prudhoe  Bay for  increased oil                                                                    
recovery;  and 3.  sanction  a major  gas  sale project.  He                                                                    
stated that  of those  three options,  the third  option was                                                                    
the greatest economic driver. He  felt that because of third                                                                    
option, the  working interest  owners were  highly motivated                                                                    
to keep the  property at Pt. Thompson. He  stressed that the                                                                    
commitment must  be made by  2019, which lined up  well with                                                                    
the timelines that had been presented.                                                                                          
                                                                                                                                
Commissioner Balash furthered that  Prudhoe Bay was a unique                                                                    
hydrocarbon system that had produced  billions of barrels of                                                                    
oil, and had the promise  to produce trillions of cubic feet                                                                    
of gas. He  explained that the gas had  been re-injected for                                                                    
the recent  20 years  to recover more  oil. He  stated that,                                                                    
historically,  when  the  companies  had  evaluated  various                                                                    
opportunities to commercialize North  Slope gas, they had to                                                                    
take into  account the oil  that would not get  produced, if                                                                    
the  gas  was   blown  down  and  sold.   When  the  company                                                                    
calculated  that particular  loss of  opportunity, it  would                                                                    
negatively   affect  the   overall   economics.  The   field                                                                    
economics were  currently approaching  the turning  point in                                                                    
the field's  economics; specifically in the  recovery of gas                                                                    
versus oil.  The continued re-injection  of Prudhoe  Bay gas                                                                    
would  stop   returning  the  same   benefit  that   it  had                                                                    
previously.  Therefore, the  negative hit  on the  economics                                                                    
from the loss of the economics of the oil was disappearing.                                                                     
                                                                                                                                
Vice-Chair  Fairclough  stated  that  she was  going  to  go                                                                    
offline, because she was boarding a plane.                                                                                      
                                                                                                                                
Commissioner  Balash   stated  that  the  profiles   of  oil                                                                    
production in Prudhoe  Bay and a gas  blow down circumstance                                                                    
resulted in  the oil losses  decreasing. This  profile would                                                                    
result in the desire to produce and sell the gas.                                                                               
                                                                                                                                
10:17:47 AM                                                                                                                   
                                                                                                                                
Co-Chair  Meyer stressed  that the  industry  did not  often                                                                    
explore  for  oil,  because  typically  the  found  gas  was                                                                    
stranded. He felt that the  addition of a gas pipeline would                                                                    
encourage more oil production.                                                                                                  
                                                                                                                                
Mr. Pawlowski  remarked that  the issue  was not  about what                                                                    
might happen,  but rather what  was currently  occurring. He                                                                    
explained that the previous summer  had a significant summer                                                                    
field season  conducted. He stated  that the  companies were                                                                    
quietly perusing  land acquisition for the  LNG terminal. He                                                                    
felt that  there were present-day activities  that gave more                                                                    
promise than past activities.                                                                                                   
                                                                                                                                
10:19:00 AM                                                                                                                   
                                                                                                                                
Senator Hoffman  looked at  slide 11,  and noted  that there                                                                    
would be  at most 17,000 jobs.  He then looked at  slide 19,                                                                    
and noted  that the number  of jobs was 30,000.  He wondered                                                                    
where  the discrepancy  was in  those numbers  and how  they                                                                    
could  be  reconciled.  He  also  looked  at  page  19,  and                                                                    
wondered  if  the  Pre-FEED  could be  put  into  a  concept                                                                    
section. He  wondered what  the state  was doing  to prepare                                                                    
Alaskans   for   the   new  jobs   within   the   timeframe.                                                                    
Commissioner  Balash stated  that  there  had been  previous                                                                    
efforts that  prepared Alaska for  the jobs. He  stated that                                                                    
there was a strategic  workforce training plan that examined                                                                    
the  occupations  that  would  be included  in  the  various                                                                    
stages of the project.                                                                                                          
                                                                                                                                
Senator Dunleavy remarked  that there was new  idea that gas                                                                    
would become  more valuable  than using it  as a  vehicle to                                                                    
get the oil  out of the ground. He wondered  how the efforts                                                                    
to produce more oil would  affect the long-use system of re-                                                                    
injecting  gas.  Commissioner   Balash  responded  that  the                                                                    
specifics for  any investment decisions  would vary  case by                                                                    
case.   He  stated   that  the   legislature  had   recently                                                                    
accomplished was  to take  what was a  moving tax  rate with                                                                    
corresponding moving deductions  and stabilized the horizons                                                                    
so investments could  be made with an eye to  a longer term.                                                                    
He  stated that  some of  those  decisions would  go to  the                                                                    
infield  activities at  Prudhoe  Bay to  allow the  decision                                                                    
making to proceed in a more straight forward manner.                                                                            
                                                                                                                                
10:25:22 AM                                                                                                                   
                                                                                                                                
Mr.   Pawlowski  furthered   that   it   was  important   to                                                                    
distinguish between the Prudhoe  Bay initial producing area,                                                                    
and the  Prudhoe Bay unit.  British Petroleum  had discussed                                                                    
the  pilot project  at the  Sag River  Formation, which  was                                                                    
another stratum  of oil  that was  within the  Prudhoe unit,                                                                    
but not  a part of  where the  gas was located.  He stressed                                                                    
that  there   were  developments  in  the   unit  that  were                                                                    
different  than the  gas relationships,  that he  felt would                                                                    
result in gas and oil production occurring simultaneously.                                                                      
                                                                                                                                
Co-Chair Kelly  wondered if the construction  of the project                                                                    
would  qualify for  production  tax  credits. Mr.  Pawlowski                                                                    
replied that  there were  concerns regarding  the definition                                                                    
of "point of production" for  the purposes of the production                                                                    
tax.  He stated  that activities  upstream of  the point  of                                                                    
production were eligible for capital credits.                                                                                   
                                                                                                                                
Commissioner   Balash   furthered    that   the   way   that                                                                    
progressivity was  calculated was related to  Alaska's Clear                                                                    
and  Equitable Share  (ACES). He  stated that  the tax  rate                                                                    
that changed under  ACES was increased as a  function of the                                                                    
profitability of the oil on a per-barrel basis.                                                                                 
                                                                                                                                
10:29:09 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer surmised  that most of the gas  would be from                                                                    
Pt.  Thompson and  blended  with gas  from  Prudhoe Bay.  He                                                                    
wondered   what   the   blended  gas   royalty   would   be.                                                                    
Commissioner Balash  replied that  the royalties  at Prudhoe                                                                    
Bay were  generally and mostly one-eighth  royalties or 12.5                                                                    
percent.  At Pt.  Thompson the  royalties  were mostly  one-                                                                    
eighth leases at  16 and two-thirds. He  furthered that some                                                                    
were one-seventh at 14 and  six-sevenths. He stated that the                                                                    
exact ratio for  the project that depended  on the decisions                                                                    
made  by  the Alaska  Oil  and  Gas Conservation  Commission                                                                    
(AOGCC). The  operators of the  fields would need  to secure                                                                    
off-take allowances from the  commission, and those off-take                                                                    
allowances would  potentially be approved in  different time                                                                    
sequences. He  stressed that Pt.  Thompson had  a tremendous                                                                    
amount  of gas  at high  pressure  and would  be capable  of                                                                    
rapid production.                                                                                                               
                                                                                                                                
Co-Chair  Meyer  queried  the  regulatory  body  that  would                                                                    
oversee  the pipeline.  Commissioner  Balash responded  that                                                                    
the  regulatory   jurisdiction  would  be   either  entirely                                                                    
Federal Energy Regulatory Commission  (FERC) Section 3; some                                                                    
combination  of  FERC  Section  3 and  Section  7;  or  FERC                                                                    
Section  3 and  Regulatory  Commission of  Alaska (RCA).  He                                                                    
stated  that the  jurisdiction  of  the respective  agencies                                                                    
would dictate that decision. He  stated that the state would                                                                    
see how  FERC Section 3 could  fit over the entirety  of the                                                                    
project and allow all of the goals of the state.                                                                                
                                                                                                                                
Co-Chair   Meyer   assumed   that   the   partnership   with                                                                    
TransCanada would  eliminate the AGIA  license. Commissioner                                                                    
Balash replied  that the state  had agreed  with TransCanada                                                                    
to  terminate  the  license upon  passage  of  the  enabling                                                                    
legislation.                                                                                                                    
                                                                                                                                
Senator  Dunleavy  wondered  what   would  happen  with  the                                                                    
remaining  money  for  that agreement.  Commissioner  Balash                                                                    
replied  that  there  was no  obligation  to  reimburse  the                                                                    
remaining  $170 to  $200 million  that was  authorized under                                                                    
the  AGIA license.  The information  under the  license that                                                                    
had been developed under the  license that was pertinent and                                                                    
relevant to  AK LNG would  be contributed  to AK LNG  by the                                                                    
licensee.                                                                                                                       
                                                                                                                                
Senator Bishop  stated that  he would  ask his  questions in                                                                    
person.                                                                                                                         
                                                                                                                                
10:34:32 AM                                                                                                                   
                                                                                                                                
Senator Olson  wondered how far  into the project  the state                                                                    
had  to  participate, before  the  state  did not  have  the                                                                    
ability  to  step  away  from  the  project.  Mr.  Pawlowski                                                                    
replied  that one  of the  defining  characteristics of  the                                                                    
process was that  there were multiple points  along the path                                                                    
where  the state  had the  opportunity to  take a  step away                                                                    
from the project.  The state always had the  ability to step                                                                    
away, but the  cost of stepping away would be  higher as the                                                                    
project  develops, because  the  state had  invested in  the                                                                    
project.                                                                                                                        
                                                                                                                                
Senator Dunleavy looked at the  AGIA agreement, and wondered                                                                    
at what  stage of the  process that current  agreement would                                                                    
cease  to exist  and merge  into this  project. Commissioner                                                                    
Balash responded that he and  Commissioner Rodell had signed                                                                    
an  MOU with  TransCanada. Under  the AGIA  statute, he  and                                                                    
Commissioner  Rodell  were  vested  with  the  authority  to                                                                    
abandon the AGIA  license. He stated that  they outline with                                                                    
TransCanada  stated that  the process  itself would  involve                                                                    
the passage of the  enabling legislation, abandonment of the                                                                    
license,  and   execution  of  a  precedent   agreement  for                                                                    
transportation service.                                                                                                         
                                                                                                                                
Senator Dunleavy surmised that it  was a three step process.                                                                    
Commissioner  Balash  disagreed,   and  furthered  that  the                                                                    
agreement to terminate the license  was triggered by passage                                                                    
of the enabling legislation.                                                                                                    
                                                                                                                                
DANIEL   FAUSKE,  PRESIDENT,   ALASKA  GASLINE   DEVELOPMENT                                                                    
CORPORATION  (via teleconference),  stated  that  he had  no                                                                    
comments to contribute to the discussion.                                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:40:17 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:40 a.m.                                                                                         

Document Name Date/Time Subjects
headsofagreement senate finance.pdf SFIN 1/27/2014 9:00:00 AM
Alaska LNG Project
012714 Heads of Agreement Presentation Senate Finance revised.pdf SFIN 1/27/2014 9:00:00 AM
Alaska LNG Project