Legislature(2013 - 2014)SENATE FINANCE 532

02/26/2014 09:00 AM FINANCE


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09:14:16 AM Start
09:15:45 AM SB138
09:15:45 AM Presentation: the Business Case Before the Legislature
10:59:10 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
Presentation: Sectional, Long and Short Term
Fiscal Impacts
Dept. of Revenue Deputy Commissioner Michael
Pawlowski
Presentation: 'The Business Case Before the
Legislature' <Continued from 2/25/14 Meeting>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 26, 2014                                                                                          
                          9:14 am                                                                                               
                                                                                                                                
9:14:16 AM                                                                                                                    
RECONVENED: CONTINUATION OF RECESSED MEETING ON 2/25/14                                                                         
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Kelly called the Senate Finance Committee meeting                                                                      
to order at 9:14 am.                                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Bill  McMahon, Senior  Commercial Advisor,  ExxonMobil; Dave                                                                    
Van  Tuyl,  Regional  Manager, BP  Exploration  Alaska;  Pat                                                                    
Flood,    Supervisor,   North    Slope   Gas    Development,                                                                    
ConocoPhillips;   Dan  Fauske,   President  Alaska   Gasline                                                                    
Development   Corporation;   Tony  Palmer,   Vice-President,                                                                    
TransCanada Alaska Interests.                                                                                                   
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 138    GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                               
                                                                                                                                
          SB 138 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
PRESENTATION: THE BUSINESS CASE BEFORE THE LEGISLATURE                                                                          
                                                                                                                                
SENATE BILL NO. 138                                                                                                             
                                                                                                                                
     "An Act relating to the  purposes of the Alaska Gasline                                                                    
     Development Corporation to advance  to develop a large-                                                                    
     diameter  natural   gas  pipeline   project,  including                                                                    
     treatment  and  liquefaction  facilities;  establishing                                                                    
     the large-diameter  natural gas pipeline  project fund;                                                                    
     creating  a  subsidiary  related  to  a  large-diameter                                                                    
     natural gas  pipeline project, including  treatment and                                                                    
     liquefaction facilities;  relating to the  authority of                                                                    
     the  commissioner  of  natural resources  to  negotiate                                                                    
     contracts related to North  Slope natural gas projects,                                                                    
     to enter into confidentiality  agreements in support of                                                                    
     contract negotiations  and implementation, and  to take                                                                    
     custody  of  gas  delivered  to   the  state  under  an                                                                    
     election  to pay  the  oil and  gas  production tax  in                                                                    
     kind; relating  to the sale,  exchange, or  disposal of                                                                    
     gas delivered  to the  state under  an election  to pay                                                                    
     the oil  and gas  production tax  in kind;  relating to                                                                    
     the  duties of  the commissioner  of revenue  to direct                                                                    
     the   disposition  of   revenues   received  from   gas                                                                    
     delivered to the state in  kind and to consult with the                                                                    
     commissioner of  natural resources  on the  custody and                                                                    
     disposition  of gas  delivered to  the  state in  kind;                                                                    
     relating  to  the  authority  of  the  commissioner  of                                                                    
     natural resources to  propose modifications to existing                                                                    
     state oil  and gas  leases; making  certain information                                                                    
     provided  to the  Department of  Natural Resources  and                                                                    
     the Department  of Revenue exempt from  inspection as a                                                                    
     public record;  making certain tax  information related                                                                    
     to an  election to pay  the oil and gas  production tax                                                                    
     in  kind exempt  from  tax confidentiality  provisions;                                                                    
     relating  to   establishing  under  the  oil   and  gas                                                                    
     production tax  a gross  tax rate  for gas  after 2021;                                                                    
     making  the  alternate  minimum  tax  on  oil  and  gas                                                                    
     produced north of 68 degrees  North latitude after 2021                                                                    
     apply only  to oil;  relating to  apportionment factors                                                                    
     of  the  Alaska  Net  Income  Tax  Act;  authorizing  a                                                                    
     producer's election  to pay the oil  and gas production                                                                    
     tax  in  kind  for  certain gas  and  relating  to  the                                                                    
     authorization;   relating    to   monthly   installment                                                                    
     payments of  the oil and  gas production  tax; relating                                                                    
     to  interest payments  on monthly  installment payments                                                                    
     of  the  oil  and   gas  production  tax;  relating  to                                                                    
     settlements  between producers  and royalty  owners for                                                                    
     oil  and   gas  production  tax;  relating   to  annual                                                                    
     statements  by  producers  and explorers;  relating  to                                                                    
     annual  production   tax  values;  relating   to  lease                                                                    
     expenditures;  amending the  definition of  gross value                                                                    
     at the  'point of production'  for gas for  purposes of                                                                    
     the  oil and  gas  production  tax; adding  definitions                                                                    
     related to  natural gas  terms; clarifying  that credit                                                                    
     may not  be taken against  the in-kind levy of  the oil                                                                    
     and  gas production  tax for  gas for  purposes of  the                                                                    
     exploration incentive  credit, the oil or  gas producer                                                                    
     education credit,  and the film production  tax credit;                                                                    
     making  conforming  amendments;  and providing  for  an                                                                    
     effective date."                                                                                                           
                                                                                                                                
9:15:45 AM                                                                                                                    
                                                                                                                                
^PRESENTATION: THE BUSINESS CASE BEFORE THE LEGISLATURE                                                                       
                                                                                                                                
9:15:45 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy   wondered  who  would  be   building  the                                                                    
pipeline.                                                                                                                       
                                                                                                                                
DAVE  VAN  TUYL,  REGIONAL MANAGER,  BP  EXPLORATION  ALASKA                                                                    
responded  that the  pipeline would  be built  by a  host of                                                                    
contractors and experts that build  projects of the kind. He                                                                    
related that  the project would  be managed by the  Heads of                                                                    
Agreement  (HOA);  the  group   would  direct  the  numerous                                                                    
individuals that  would be active in  the construction phase                                                                    
of the project.                                                                                                                 
                                                                                                                                
9:16:49 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy wondered if there  was an entity that would                                                                    
take sole the lead of the project.                                                                                              
                                                                                                                                
9:17:12 AM                                                                                                                    
                                                                                                                                
Mr.  Van  Tuyl  replied  that the  current  lead  party  was                                                                    
ExxonMobil.  He  said  that the  necessary  agreements  that                                                                    
would  govern the  construction of  the line  had yet  to be                                                                    
determined.                                                                                                                     
                                                                                                                                
9:17:25 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy probed  industry representatives  on their                                                                    
likes and dislikes concerning the HOA.                                                                                          
                                                                                                                                
BILL MCMAHON, SENIOR  COMMERCIAL ADVISOR, EXXONMOBIL replied                                                                    
that  ExxonMobil appreciated  the  breadth of  participation                                                                    
that was currently allowed to the corporation through the                                                                       
HOA.  He  expressed pleasure  in  working  with the  parties                                                                    
involved.                                                                                                                       
                                                                                                                                
9:18:20 AM                                                                                                                    
                                                                                                                                
Mr.  McMahon stated  that the  members of  the HOA  had come                                                                    
together  in  order to  craft  the  agreement and  that  the                                                                    
process  had been  constructive.  He did  not  see that  the                                                                    
group would have trouble problem solving in the future.                                                                         
                                                                                                                                
9:19:03 AM                                                                                                                    
                                                                                                                                
Mr. Van Tuyl announced that  there were many reasons to like                                                                    
the  HOA. He  stressed that  the completion  of the  HOA was                                                                    
proof   that   the   entities   involved   would   negotiate                                                                    
successfully  in  the future.  He  noted  that the  entities                                                                    
involved  represented 98  percent of  the known  gas on  the                                                                    
North  Slope. He  lauded that  the group  contained entities                                                                    
that had built successful  Liquefied Natural Gas (LNG) mega-                                                                    
projects  around  the  world; a  preeminent  North  American                                                                    
pipeline  builder with  whom industry  had done  business in                                                                    
the  past,   and  very   importantly,  the   Alaska  Gasline                                                                    
Development Corporation (AGDC). He  noted that the price tag                                                                    
for  the project  was daunting  and hoped  that the  project                                                                    
would be  delivered at a  competitive cost to supply  in the                                                                    
world market.                                                                                                                   
                                                                                                                                
9:21:49 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy wondered  if it  was anticipated  that the                                                                    
project would be the most expensive LNG project in history.                                                                     
                                                                                                                                
Mr. Van Tuyl replied that he  hoped not. He noted that there                                                                    
were other projects  in the world of  the similar magnitude,                                                                    
but  that  the objective  was  to  be  able to  deliver  the                                                                    
project at the lowest possible cost.                                                                                            
                                                                                                                                
9:22:18 AM                                                                                                                    
                                                                                                                                
PAT   FLOOD,  SUPERVISOR,   NORTH  SLOPE   GAS  DEVELOPMENT,                                                                    
CONOCOPHILLIPS,    announced    that   what    ConocoPhilips                                                                    
appreciated most  about the  HOA was  the alignment  that it                                                                    
created.  He  felt that  the  HOA  could  create a  new  and                                                                    
historic relationship  between the oil and  gas industry and                                                                    
the state.  He said that  by finding  a way to  have aligned                                                                    
interests, reduced disputes and reduced tensions could lead                                                                     
                                                                                                                                
to a  new era.     He echoed the  previous speaker  that the                                                                    
cost of the  project was intimidating. He  believed that the                                                                    
next step in the project was  to determine ways to lower the                                                                    
overall cost.                                                                                                                   
                                                                                                                                
9:23:43 AM                                                                                                                    
                                                                                                                                
TONY PALMER,  VICE-PRESIDENT, TRANSCANADA  ALASKA INTERESTS,                                                                    
reiterated    the    previous   statements    by    industry                                                                    
representatives. He  noted that  the fact  that the  plan to                                                                    
move over  3 billion  cubic feet  (bcf) per  day off  of the                                                                    
North  Slope dictated  that a  significant  amount of  money                                                                    
would need to be spent on the project.                                                                                          
                                                                                                                                
9:24:52 AM                                                                                                                    
                                                                                                                                
DAN   FAUSKE,    PRESIDENT   ALASKA    GASLINE   DEVELOPMENT                                                                    
CORPORATION, (AGDC) appreciated all  of the different voices                                                                    
involved in  the conversation pertaining to  the project. He                                                                    
felt it was  important that AGDC never forget  that the main                                                                    
objective was  to provide affordable  gas to  Alaskans while                                                                    
cooperating on the  development of a big  gasline. He shared                                                                    
that the HOA  group had been congenial  in understanding the                                                                    
mission of AGDC,  which did not necessarily  equate to their                                                                    
corporate  mission.  He  reiterated that  the  members  were                                                                    
cognizant of  AGDC's desire to  help facilitate  the project                                                                    
and maintain the goal of providing gas to Alaskans.                                                                             
                                                                                                                                
9:26:10 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy asked  for  clarification regarding  take-                                                                    
offs versus  straddle plants. He surmised  that the straddle                                                                    
plant would  provide take-off for propane,  which could then                                                                    
be shipped  throughout the state.  He asked  whether propane                                                                    
could be done without a straddle plant.                                                                                         
                                                                                                                                
9:27:17 AM                                                                                                                    
                                                                                                                                
Mr. Fauske explained  that "straddle plant" was  a term used                                                                    
by industry often when production  was at a pressure of 2500                                                                    
pounds per  square inch (psi)  in a  24 inch pipe,  and were                                                                    
hauling  mostly liquids.  He said  that  the straddle  plant                                                                    
that  the corporation  had envisioned  was an  approximately                                                                    
$250 million  structure; one located  at Dunbar  and another                                                                    
at an end  point. He said that the straddle  plants had been                                                                    
taken out of the plan due to their volatility.                                                                                  
                                                                                                                                
9:29:42 AM                                                                                                                    
                                                                                                                                
Mr. McMahon interjected that the  project would take the gas                                                                    
that  currently  existed  at Prudhoe  Bay,  and  potentially                                                                    
Point Thomson,  and bring  it to a  central location  on the                                                                    
North Slope.  There the carbon dioxide  and other impurities                                                                    
would be removed  and the gas would be  brought down through                                                                    
the  state to  an LNG  plant with  a minimum  of 5  off-take                                                                    
points that  would be  a "T"  in the line  with a  valve. He                                                                    
said that  what would happen  downstream of the  valve would                                                                    
need to be customized to  the customers that would be taking                                                                    
the gas. He stated that the  first thought would be that the                                                                    
pressure would  need to be reduced  to fit the needs  of the                                                                    
customer.                                                                                                                       
                                                                                                                                
9:31:34 AM                                                                                                                    
                                                                                                                                
Mr. Flood agreed with the previous two testifiers.                                                                              
                                                                                                                                
Mr. Van Tuyl also agreed with the previous testimony.                                                                           
                                                                                                                                
9:31:51 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  queried  the  locations  of  the  delivery                                                                    
points. He likened the issue to  the problem 30 years ago of                                                                    
providing sufficient  water services in rural  Alaska; wells                                                                    
were  drilled   and  were  the   delivery  point   for  each                                                                    
community,  which was  better than  what had  been available                                                                    
before, but still inaccessible to  people living far outside                                                                    
well  communities. He  expressed concern  that the  delivery                                                                    
points for the project could  be unusable to a vast majority                                                                    
of Alaskans.  He opined that the  state was one of  the most                                                                    
resource rich in  the world, yet residents  paid the highest                                                                    
energy  costs.  He  stressed  that  the  legislation  should                                                                    
explicitly state  that Alaskans would directly  benefit from                                                                    
the gasline.                                                                                                                    
                                                                                                                                
9:35:24 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy  thought that  the committee had  two goals                                                                    
to  reach; to  provide a  large amount  of gas  in order  to                                                                    
lower the  price at the pump  and to lower energy  costs for                                                                    
Alaskans. He wondered  whether the idea of  propane would be                                                                    
employed or could another dividend  be given to Alaskans. He                                                                    
reiterated the concern that a large pipeline could be built                                                                     
that  could bring  in significant  gas revenue,  but without                                                                    
cheap energy Alaskans  would migrate out of  state. He asked                                                                    
whether there was  a contingency plan in place  in the event                                                                    
that one of the partners dropped  out in the early stages of                                                                    
the project.                                                                                                                    
                                                                                                                                
9:36:05 AM                                                                                                                    
                                                                                                                                
Co-Chair Kelly felt that the  bill did not answer the larger                                                                    
questions concerning the specifics of the take-off points.                                                                      
                                                                                                                                
Mr. Fauske read directly from the HOA document:                                                                                 
                                                                                                                                
     To  assist  in  addressing  in-state  gas  demand,  the                                                                    
     Alaska  LNG Project  would include  at  least five  in-                                                                    
     state  offtake points  ("Offtake  Point(s)"), with  the                                                                    
     specific locations determined  by the Administration in                                                                    
     consultation with  AGDC. Any  Party may deliver  gas to                                                                    
     an  Offtake Point.  Any facilities  taking gas  from an                                                                    
     Offtake  Point,  including facilities  associated  with                                                                    
     odorization, reduction  of gas pressure, or  control of                                                                    
     gas heating value  or gas quality, are not  part of the                                                                    
     Alaska  LNG  Project  and  would  need  to  be  funded,                                                                    
     installed and maintained by third parties.                                                                                 
                                                                                                                                
Mr.  Fauske  stated  that  the  primary  mission,  from  the                                                                    
perspective  of the  AGDC, was  to get  gas to  Alaskans. He                                                                    
said that AGDC  was exploring a variety of  ways with people                                                                    
from Donlin Creek  LLC to get the gasline  closer to Bethel.                                                                    
He felt that until there was  a pipe, with the energy source                                                                    
in it, the discussion concerning  how gas got to more people                                                                    
was limited.  He believed that  getting the pipe  within 100                                                                    
miles of a community was  better than 800 miles. He believed                                                                    
that the project  might not pencil out favorably  due to the                                                                    
small population of  the state. He thought  that the ability                                                                    
did exist to  get the resource closer  so that entrepreneurs                                                                    
could start factoring out ways to get the gas to residents.                                                                     
                                                                                                                                
9:39:21 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy  restated  his  question  concerning  what                                                                    
would happen if a party exited the project prematurely.                                                                         
                                                                                                                                
Mr. Van Tuyl responded that  parties would endeavor to solve                                                                    
the problem before an exit  would be considered. He stressed                                                                    
that maintaining the alignment between parties was crucial.                                                                     
                                                                                                                                
9:41:19 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly  wondered  about the  investment  loss  that                                                                    
would be incurred  if the project imploded. He  said that if                                                                    
the  state wanted  to  do  business then  it  would need  to                                                                    
assume the natural risk associated with doing so.                                                                               
                                                                                                                                
Mr. Fauske interjected  that it would be  unfortunate if the                                                                    
state lost the investment it  made, he highlighted that AGDC                                                                    
would not leave the project hanging.                                                                                            
                                                                                                                                
9:42:30 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly noted  that  any money  spent  by the  state                                                                    
could provide valuable information for AGDC.                                                                                    
                                                                                                                                
9:42:41 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  wondered what  about the  project ExxonMobil                                                                    
considered  different or  exciting  when  compared to  other                                                                    
projects.                                                                                                                       
                                                                                                                                
Mr.  McMahon  responded  that ExxonMobil  was  very  excited                                                                    
about this  project due  to the  strong market  and resource                                                                    
base. He  stressed that the  company's Alaska assets  were a                                                                    
key part of their worldwide  portfolio. It was believed that                                                                    
the project  had good fundamentals,  with a  proven resource                                                                    
base  and a  good  proximity  to the  market.  He noted  the                                                                    
current  investment the  company had  made in  Point Thomson                                                                    
for the  initial production system would  pre-position Point                                                                    
Thomson for major gas sales.  He said that the progress that                                                                    
had  been   recently  made  on  the   project  had  prompted                                                                    
management to  transfer responsibility  of the  project from                                                                    
ExxonMobil  Production  Company  to  ExxonMobil  Development                                                                    
Company, which is a global organization that executed mega-                                                                     
projects around the world.                                                                                                      
                                                                                                                                
9:46:04 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer asked  how cost overruns would  be avoided on                                                                    
the project.                                                                                                                    
                                                                                                                                
Mr. Van Tuyl  pointed out to the committee  that the gasline                                                                    
would  be a  combination  of  mega-projects; several  multi-                                                                    
billion  dollar  projects  combined. He  stated  that  every                                                                    
company  involved would  be very  disciplined about  project                                                                    
management, evaluating  costs and  risk mitigation  at every                                                                    
step. He noted that the  cost override for the corporation's                                                                    
current project  in Australia  was due  to a  combination of                                                                    
the  labor market,  materials, logistics,  and the  exchange                                                                    
rate. He thought  that some of the same  challenges would be                                                                    
found in  the Alaska  project, but steps  could be  taken to                                                                    
ensure the project was a success.                                                                                               
                                                                                                                                
9:49:22 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly  noted  that all  projects  worldwide  faced                                                                    
challenges.                                                                                                                     
                                                                                                                                
9:49:57 AM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer understood  that  Mr.  Fauske believed  that                                                                    
repealing SB 21 would be  detrimental to the gasline project                                                                    
moving forward.                                                                                                                 
                                                                                                                                
Mr. Fauske replied in the  affirmative. He stressed that oil                                                                    
was  the most  important resource  in Alaska.  He felt  that                                                                    
producers would  not participate in a  gas pipeline project,                                                                    
if the oil market was not attractive for the producers.                                                                         
                                                                                                                                
9:51:39 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer agreed.  He noted that there was  more gas to                                                                    
be discovered  up north; if  industry was not  exploring for                                                                    
oil the  gas would not  be discovered. He declared  that oil                                                                    
was king and would be for some time.                                                                                            
                                                                                                                                
9:52:11 AM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough  wondered if there were  five off-take                                                                    
points that were already identified.                                                                                            
                                                                                                                                
Mr. Fauske  responded that he  could not speak to  the large                                                                    
pipe. He said  that one point would be  Fairbanks. He stated                                                                    
that  there had  been conversations  with communities  along                                                                    
the pipeline corridor. He assured  the committee that ADGC's                                                                    
Community Advisory  Council was currently very  engaged with                                                                    
communities.                                                                                                                    
                                                                                                                                
9:53:46 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough requested  that  it  be very  clearly                                                                    
recorded how  the off-take points  would be  determined. She                                                                    
hoped work  was being  done with AEA  on the  development of                                                                    
regional plans,  as well  as the best  source of  energy for                                                                    
the  particular areas  where integration  would take  place.                                                                    
She asserted  that the gas  should be deliverable  to burner                                                                    
tips, rather  than making people  travel in order  to access                                                                    
affordable gas.                                                                                                                 
                                                                                                                                
9:54:41 AM                                                                                                                    
                                                                                                                                
Vice-Chair   Fairclough   queried  the   relationship   that                                                                    
TransCanada  would have  with the  state; specifically,  the                                                                    
value of the debt to  company shareholders and to the people                                                                    
of Alaska.                                                                                                                      
                                                                                                                                
TONY PALMER,  VICE-PRESIDENT, TRANSCANADA  ALASKA INTERESTS,                                                                    
responded that TransCanada would  finance its involvement in                                                                    
the  project either  through its  balance sheet,  or through                                                                    
non-recourse  financing  on  a  project  basis;  the  course                                                                    
TransCanada would  take would be  determined as  the company                                                                    
moved closer to a final  investment decision. He stated that                                                                    
the corporation  carried a debt  ratio of 60  percent, which                                                                    
was lower than what was  being proposed for the project; the                                                                    
company's equity ratio was  approximately 40 percent, rather                                                                    
than the 25 percent proposed  for the project. He noted that                                                                    
the  corporation had  an  A minus  credit  rating and  would                                                                    
protect  that rating  moving forward.  He asserted  that the                                                                    
corporation was  very confident that  they would be  able to                                                                    
meet their  financial obligations  for the  gasline project.                                                                    
He furthered  that the  state should  be allowed  to collect                                                                    
tax revenue from  the project as a sovereign.  He noted that                                                                    
the   proposed  capital   structure  before   the  committee                                                                    
reflected 75 percent  debt and 25 percent  equity, which was                                                                    
more debt  than most traditional pipeline  projects. He said                                                                    
that with a  capital structure of 50 percent,  or more debt,                                                                    
had a  14 percent  return on equity.  TransCanada's proposal                                                                    
of 75 percent debt and  12 percent return on equity resulted                                                                    
in a  weighted average cost  of capital of 6.75  percent. He                                                                    
concluded  that TransCanada  was comfortable  with the  risk                                                                    
that it was bearing, relative to the reward.                                                                                    
                                                                                                                                
10:02:08 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough queried  the  support  of payment  in                                                                    
lieu of  taxes in  the HOA. She  expressed concern  that the                                                                    
legislature  might  not  support the  elimination  of  local                                                                    
property tax collection.                                                                                                        
                                                                                                                                
Mr. Flood  responded that the  HOA outlined two  things that                                                                    
would be  done by  the administration and  local government;                                                                    
impact payment  to off-set project  impacts and  the payment                                                                    
of property taxes  on a unit throughput  basis. He explained                                                                    
that  the project  participants  paid  local property  taxes                                                                    
based on  profit. He stated that  the HOA was a  roadmap for                                                                    
planning. He stressed that there  would be consultation with                                                                    
local  governments.  He  offered   that  there  was  not  an                                                                    
alternate  solution,  but a  plan.  He  stressed that  there                                                                    
would be continual problem solving.                                                                                             
                                                                                                                                
10:06:01 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough  highlighted the concern that  a local                                                                    
community would value the asset differently than producers.                                                                     
                                                                                                                                
Mr. Fauske replied  that for the As Soon  As Possible (ASAP)                                                                    
Project  property  taxes  had been  built  into  the  tariff                                                                    
model. He stated that he was  not opposed to payment in lieu                                                                    
of taxes  (PILT). He said  that the  issue would need  to be                                                                    
discussed in depth with local governments.                                                                                      
                                                                                                                                
10:08:50 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough contended  that consultation alone was                                                                    
not comforting from a sovereign perspective.                                                                                    
                                                                                                                                
Mr. Van  Tuyl interjected that PILT  payments were important                                                                    
because investors do not like  uncertainty. He believed that                                                                    
the more  things could  be defined, the  easier it  would be                                                                    
for industry to make decisions.  He noted that Article 9.3.1                                                                    
of the HOA outlined the proposed property tax PILT:                                                                             
                                                                                                                                
     9.3.1 Subject to consultation by the Administration                                                                        
     with local governments:                                                                                                    
          a.  Payments  in  lieu of  property  tax  ("PILT")                                                                    
          would be  paid by the  Alaska LNG Parties  on each                                                                    
          component  of  the  Alaska LNG  Project.  For  the                                                                    
          Alaska LNG Project,  the PILTs would be  on a unit                                                                    
          rate  per   throughput  basis  (e.g.,   cents  per                                                                    
          thousand cubic  feet, etc.) and could  be level or                                                                    
          escalating  dollar  payments  for the  Alaska  LNG                                                                    
          Project components.                                                                                                   
                                                                                                                                
          b. The Patties would  establish a series of impact                                                                    
          payments to be paid by the                                                                                            
          Alaska  LNG  Patties   to  help  offset  increased                                                                    
          service  and other  costs borne  by the  State and                                                                    
          local  governments  during   construction  of  the                                                                    
          Alaska LNG Project.                                                                                                   
Mr. Van  Tuyl stated  that in  order for  the project  to be                                                                    
successful  it would  need to  work for  all of  the parties                                                                    
involved. He understood that consultations  would need to be                                                                    
meaningful. He explained that the  process that was outlined                                                                    
in the HOA  and in SB138 called fora  negotiations to occur,                                                                    
the  fruits  of  which  would be  brought  back  before  the                                                                    
legislature.                                                                                                                    
                                                                                                                                
10:12:28 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough referred the questions to ExxonMobil.                                                                     
                                                                                                                                
Mr. McMahon stated  that given the value of  property tax on                                                                    
a  project  of  this  magnitude,  the  company  expected  to                                                                    
discuss property tax in the  project enabling agreements. He                                                                    
furthered  that  when agreements  were  made  on the  impact                                                                    
payments that needed to be  made during construction, and if                                                                    
a predictable  and durable property tax  could be formulated                                                                    
that  all parties  supported, the  contract would  come back                                                                    
before the  legislature for ratification. He  stated that he                                                                    
looked forward  to having meaningful consultations  with the                                                                    
administration.                                                                                                                 
                                                                                                                                
10:14:04 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough  stressed that the  administration and                                                                    
the  legislature  had  an obligation  to  protect  the  best                                                                    
interests of the residents of Alaska.                                                                                           
                                                                                                                                
10:14:42 AM                                                                                                                   
                                                                                                                                
Senator Bishop  appreciated the industry concern  for fiscal                                                                    
certainty;  however, it  should be  understood that  Alaskan                                                                    
residents want the  same thing. He noted that  this was only                                                                    
the  beginning  of  the  process to  bring  the  project  to                                                                    
fruition;  more time  would give  all  parties involved  the                                                                    
opportunity to  understand further the  project's economics.                                                                    
He asked  TransCanada to  provide a 10  year history  of the                                                                    
company's completed  pipeline construction projects,  and to                                                                    
specify whether  they were on  budget, under budget  or over                                                                    
budget.                                                                                                                         
                                                                                                                                
Mr.  Palmer agreed  to provide  the information  at a  later                                                                    
date.                                                                                                                           
                                                                                                                                
10:17:32 AM                                                                                                                   
                                                                                                                                
Senator  Olson probed  for any  backup plan  to ensure  that                                                                    
investments into  the project were protected.  He noted that                                                                    
the state was not in a  financial position to assume a large                                                                    
amount of risk.                                                                                                                 
                                                                                                                                
Mr. Flood responded that the  project was in its infancy. He                                                                    
remarked LNG  projects were generally  backed by  firm sales                                                                    
and purchase agreements  with buyers in Asia,  who tended to                                                                    
share  some of  the risk.  He stated  that the  risk of  LNG                                                                    
projects tended  to be in  the level of return  provided and                                                                    
not in  terms of  an absolute  cash loss.  He said  that the                                                                    
project did not come with  a guarantee. He stated that there                                                                    
were ways to  recognize and manage risk, but  that there was                                                                    
not guarantee.                                                                                                                  
                                                                                                                                
10:20:15 AM                                                                                                                   
                                                                                                                                
Senator Olson  surmised that  there was  no back-up  plan to                                                                    
recover Alaska's investment.                                                                                                    
                                                                                                                                
Co-Chair Kelly understood  that the project was  going to be                                                                    
entered into in stages and  that every stage would bring the                                                                    
possibility  of  contracts,  or  not,  and  that  ultimately                                                                    
before a significant investment was  made by the state there                                                                    
would be  contracts in place.  He said  that the Plan  B was                                                                    
that the state should not get  into a situation where a Plan                                                                    
B would be necessary.                                                                                                           
                                                                                                                                
10:20:49 AM                                                                                                                   
                                                                                                                                
Mr. Palmer  commented that having long  term sales contracts                                                                    
where the  buyer was taking  on significant volume  or price                                                                    
risk was a Plan B. He  pointed out to the committee that gas                                                                    
pipelines generally went to a  single location and that this                                                                    
line was expected to ship overseas.                                                                                             
                                                                                                                                
10:22:06 AM                                                                                                                   
                                                                                                                                
Mr. Fauske explained that AGDC  could be considered a Plan B                                                                    
if a larger project failed to  be built. Not in terms of the                                                                    
amount of  revenue that  could be  generated to  the state's                                                                    
treasury, but in  terms of getting gas to  Alaskans. He said                                                                    
that time should be taken in the preliminary planning.                                                                          
                                                                                                                                
10:23:49 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:25:58 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
10:26:13 AM                                                                                                                   
                                                                                                                                
Senator  Dunleavy  wondered  how  a smaller  line  could  be                                                                    
economical for the state.                                                                                                       
                                                                                                                                
Mr.  Fauske  replied  that AGDC's  interests  were  slightly                                                                    
different than  the other corporations involved  in the HOA.                                                                    
He explained  that the interests  of the  other corporations                                                                    
were based on  commercial activity and the  best interest of                                                                    
their   shareholders.   The   Alaska   Gasline   Development                                                                    
Corporation was to beat the  price of imported LNG and bring                                                                    
gas to Alaskans at the lowest possible cost.                                                                                    
                                                                                                                                
10:28:33 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough pointed out  that a partner could take                                                                    
an off-ramp  not solely  based on  economics. She  said that                                                                    
there could be a number of  reasons that a partner might not                                                                    
want to participate in the project anymore.                                                                                     
                                                                                                                                
10:29:34 AM                                                                                                                   
                                                                                                                                
Senator  Olson  reminded  the  committee  of  the  financial                                                                    
failure  of  the  Goose   Creek  Correctional  Facility.  He                                                                    
wondered whether  this very expensive  project was  going to                                                                    
pencil out.                                                                                                                     
                                                                                                                                
Mr. Fauske  responded that  he was  recently asked  to focus                                                                    
completely on  the current  project. He  said that  AGDC had                                                                    
very clear goals for the project.                                                                                               
                                                                                                                                
10:32:00 AM                                                                                                                   
                                                                                                                                
Senator  Olson   remarked  the   perspective  of   AGDC  was                                                                    
credible. He  felt that without  a definitive plan  to bring                                                                    
the gas to the burner tip,  rural Alaskans would not see any                                                                    
benefit from the project. He  requested a definitive plan to                                                                    
bring the gas to the burner tip.                                                                                                
                                                                                                                                
Mr.  Fauske  responded  that  the   cost  of  doing  nothing                                                                    
exceeded  the cost  of the  project. He  clarified that  the                                                                    
costs in  rural Alaska would  only continue to  increase and                                                                    
that  the opportunities  to develop  resources would  become                                                                    
limited. He  felt that the  costs to rural Alaska  would not                                                                    
be helped without this project.  He stressed that, until the                                                                    
source of energy  was available, there would  continue to be                                                                    
difficulties. Once  the source  of energy was  created, many                                                                    
of those concerns of rural Alaskans would be resolved.                                                                          
                                                                                                                                
10:35:07 AM                                                                                                                   
                                                                                                                                
Co-Chair Kelly  felt that the anticipated  revenues from the                                                                    
project should be considered over  getting gas to the burner                                                                    
tip.                                                                                                                            
                                                                                                                                
10:37:45 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough  noted   that  for  the  Trans-Alaska                                                                    
Pipeline  System   (TAPS)  a  fund  had   been  created  for                                                                    
dismantlement  and  restoration,   which  had  been  carried                                                                    
solely on  the producers  books. She asked  if the  fund was                                                                    
housed  on the  producer's  balance sheets.  She asked  what                                                                    
TransCanada did  typically in the area  of dismantlement and                                                                    
restoration;  was there  a designated  fund,  where was  the                                                                    
fund housed, and how big was the fund.                                                                                          
                                                                                                                                
10:39:06 AM                                                                                                                   
                                                                                                                                
Co-Chair  Kelly felt  that Vice-Chair  Fairclough's question                                                                    
did not speak to the legislation.                                                                                               
                                                                                                                                
Vice-Chair Fairclough  believed that her question  should be                                                                    
included in the conversation.                                                                                                   
                                                                                                                                
Co-Chair Kelly  responded that reclamation  was not  a piece                                                                    
of the MOA, or if it was, only in broad terms.                                                                                  
                                                                                                                                
10:39:16 AM                                                                                                                   
                                                                                                                                
Mr. Flood replied that it was not specifically addressed.                                                                       
                                                                                                                                
10:39:35 AM                                                                                                                   
                                                                                                                                
Senator Hoffman remarked that getting  gas to Alaskans was a                                                                    
very high priority.  He felt that the  state's investment of                                                                    
$9 billion  to $17 billion  in the project  deserved greater                                                                    
assurances that  Alaska would benefit  from the  project. He                                                                    
wanted more  than only  an opportunity  for delivery  to all                                                                    
Alaskans. He asserted that Alaskans  were not first hire for                                                                    
the  construction of  TAPS,  and hoped  that  they would  be                                                                    
treated better  under this project and  requested assurances                                                                    
in  writing. He  asked how  the  project would  fare if  the                                                                    
state decided not to be a partner.                                                                                              
                                                                                                                                
10:43:04 AM                                                                                                                   
                                                                                                                                
Mr.  Van Tuyl  responded that  one of  the critical  bedrock                                                                    
elements of the HOA was  the idea of aligned interest across                                                                    
the value  chain for  all parties  involved. He  stated that                                                                    
the host government  owned the gas resource  and its royalty                                                                    
share.  The  producers ability  to  pay  the production  tax                                                                    
obligation  as  gas  created  the  20-25  percent  ownership                                                                    
outlined in  the HOA. Taking  a corresponding equity  in the                                                                    
project, the state had the  resource ownership, aligned with                                                                    
equity  across  the board.  He  said  that this  created  an                                                                    
advantage  for  the  efficient   execution  of  the  project                                                                    
because  the parties  would  envision  similar solutions  to                                                                    
potential problems.  He said  that not  having that  sort of                                                                    
alignment  could create  a situation  where  parties are  on                                                                    
opposite sides  of the table  on every issue along  the way,                                                                    
which  created  inherent  risk.   He  said  that  the  total                                                                    
cumulative  revenues for  the state  could be  $100 billion,                                                                    
but  a 1  percent dispute  in valuation  could be  a billion                                                                    
dollar  or more  value dispute.  Alignment across  the value                                                                    
chain  in the  manner described  in the  HOA dispels  future                                                                    
issues  and   assists  in   the  likelihood   that  mutually                                                                    
agreeable commercial solutions would be found.                                                                                  
                                                                                                                                
10:46:45 AM                                                                                                                   
                                                                                                                                
Mr.  McMahon   furthered  that  reports  from   the  state's                                                                    
consultants  had highlighted  the advantage  of the  state's                                                                    
participation  in  the  project.  He said  that  with  state                                                                    
participation, taking royalty in-kind  and gas as tax, would                                                                    
underpin the alignment under discussion.                                                                                        
                                                                                                                                
10:47:30 AM                                                                                                                   
                                                                                                                                
Co-Chair Kelly stated that Alaska's  workforce was not ready                                                                    
to contribute  to the  project. He felt  that the  state was                                                                    
not ready for a project of this scale.                                                                                          
                                                                                                                                
10:49:15 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough  felt that there were  still important                                                                    
questions   to  be   asked  about   the  dismantlement   and                                                                    
restoration fund.  She requested a response  in writing from                                                                    
the testifiers.                                                                                                                 
                                                                                                                                
10:49:45 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough  asked  how producers  would  benefit                                                                    
from the federal tax benefit  that accompanied having Alaska                                                                    
involved as a sovereign.                                                                                                        
                                                                                                                                
Mr. Flood  did not  understand that there  would be  any tax                                                                    
benefit to the producers.                                                                                                       
                                                                                                                                
10:50:40 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough  asked   whether  producer's  federal                                                                    
income tax would  be reduced by having 20-25  percent of the                                                                    
value of  the project  off the  table in  another government                                                                    
entity.                                                                                                                         
                                                                                                                                
Mr. McMahon stated  that the way the  project was envisioned                                                                    
to  be structured  all of  the  benefits would  flow to  the                                                                    
state. ExxonMobil would pay its  federal income tax based on                                                                    
its income from the project.                                                                                                    
                                                                                                                                
10:51:23 AM                                                                                                                   
                                                                                                                                
Vice-Chair   Fairclough  wondered   if   the  federal   loan                                                                    
guarantee to help support the project had expired.                                                                              
                                                                                                                                
Mr. Van  Tuyl understood that  under the Alaska  Natural Gas                                                                    
Pipeline  Act of  2004, there  were certain  provisions made                                                                    
available in  loan guarantees for the  project envisioned at                                                                    
the time, which  was a pipeline to the Lower  48. He was not                                                                    
aware that  the provision  would be  made available  for the                                                                    
ASAP project.                                                                                                                   
                                                                                                                                
10:52:38 AM                                                                                                                   
                                                                                                                                
Mr.  Fauske  offered  to  research   the  issue  further  to                                                                    
determine whether the provision had reached a sunset date.                                                                      
                                                                                                                                
10:53:29 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough  wondered  at what  point  would  HOA                                                                    
members  apply  for  an  export   permit  license,  and  the                                                                    
anticipated  wait  time  for a  response  from  the  federal                                                                    
government.                                                                                                                     
                                                                                                                                
Mr.  McMahon  responded  that   the  project  was  currently                                                                    
working on the components of the application.                                                                                   
                                                                                                                                
10:55:11 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough explained  that the permit application                                                                    
typically lasted  18 months for  processing. She  noted that                                                                    
Larry  Persily,  Federal  Coordinator,  Alaska  Natural  Gas                                                                    
Transportation Projects had stated  that there were multiple                                                                    
projects  in line  for evaluation.  She queried  a timeframe                                                                    
for  approval of  the  permit by  the  Department of  Energy                                                                    
(DOE).                                                                                                                          
                                                                                                                                
Mr. Flood  pointed out to the  committee that ConocoPhillips                                                                    
currently had  an export application  in progress,  which he                                                                    
expected would happen in an  expedited fashion. He said that                                                                    
the project would  be a unique proposition in  front of DOE,                                                                    
which he  believed would  be favorable.  He relayed  that if                                                                    
the  state was  prepared  and had  "done  its homework"  the                                                                    
export license would be secured in plenty of time.                                                                              
                                                                                                                                
10:56:40 AM                                                                                                                   
                                                                                                                                
Co-Chair Kelly  asked if the federal  loan guarantee program                                                                    
had been available solely for the pipeline to the Lower 48.                                                                     
                                                                                                                                
Mr. Fauske  replied that he  would research the  amount, and                                                                    
any restrictions that applied to the loan.                                                                                      
                                                                                                                                
10:57:17 AM                                                                                                                   
                                                                                                                                
Vice-Chair Fairclough felt  that if it was  found that there                                                                    
were  limitations  inside  the federal  guarantee  a  letter                                                                    
should be  written by the  Senate to the  federal delegation                                                                    
to  request the  expansion. She  believed that  there was  a                                                                    
national  interest  in  the revenue  stream  that  would  be                                                                    
produced by the gasline.                                                                                                        
                                                                                                                                
SB  138  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:59:10 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:59 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
CSSB138(RES) Sectional Analysis Version O.pdf SFIN 2/26/2014 9:00:00 AM
SB 138
CSSB138(RES) Summary of Changes.pdf SFIN 2/26/2014 9:00:00 AM
SB 138
SB 138 Introduction.pdf SFIN 2/26/2014 9:00:00 AM
SB 138
022614 SB138 Persily Response to Questions.doc SFIN 2/26/2014 9:00:00 AM
SB 138