Legislature(2013 - 2014)SENATE FINANCE 532

02/28/2014 09:00 AM FINANCE


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09:09:44 AM Start
09:10:02 AM SB138
09:56:58 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
Questions to Administration
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 28, 2014                                                                                          
                         9:09 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:09:44 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Kelly called the Senate Finance Committee meeting                                                                      
to order at 9:09 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Lyman Hoffman                                                                                                           
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Joe Balash, Commissioner, Department of Natural Resources;                                                                      
Michael Pawlowski, Deputy Commissioner, Strategic Finance,                                                                      
Department of Revenue.                                                                                                          
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
                                                                                                                                
SB 138    GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                               
                                                                                                                                
          SB 138 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
9:10:02 AM                                                                                                                    
                                                                                                                                
Co-Chair Kelly discussed the meeting's agenda.                                                                                  
                                                                                                                                
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."                                                                                                           
                                                                                                                                
9:10:38 AM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough noted that  the chairman had requested                                                                    
the  committee to  prepare questions.  She inquired  at what                                                                    
point did  the Alaska  Gasline Inducement Act  (AGIA) become                                                                    
uneconomical,  as  well as  what  the  process and  timeline                                                                    
would be  regarding completing that process.  She noted that                                                                    
there had  been conversations  about TransCanada's  value to                                                                    
the  project and  what things  would look  like if  AGIA was                                                                    
uneconomical.                                                                                                                   
                                                                                                                                
JOE BALASH,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES,                                                                    
replied that  the AGIA statute  laid out a process  by which                                                                    
the state or the licensee could  say that the project was no                                                                    
longer  economic  and that  they  wanted  it terminated;  he                                                                    
thought that the statute was in  AS 240 or 440, but that the                                                                    
specific  number  was eluding  him.  He  explained that  the                                                                    
other  party could  then  either agree,  in  which case  the                                                                    
license was  terminated and the contractual  relations would                                                                    
be dissolved; if,  however, the second party  did not agree,                                                                    
the statute laid out a  process whereby an arbitration panel                                                                    
was  convened and  evidence was  submitted. He  related that                                                                    
the definition of  "economic" was spoken to  in the statute,                                                                    
but was not  crystal clear. He related that  each side would                                                                    
prepare  their respective  economic  case  and argument  and                                                                    
that the  arbitration panel would ultimately  decide. If the                                                                    
arbitration panel  decided in the initiating  party's favor,                                                                    
the project  was done; if  the arbitration panel  decided in                                                                    
favor   of  the   defending   party,   the  activities   and                                                                    
obligations  under the  AGIA license  remained in  place. He                                                                    
stated that the  timing for the arbitration  was not spelled                                                                    
out  explicitly,  but  thought  that it  would  take  months                                                                    
rather  than  years;  furthermore,   either  party  had  the                                                                    
opportunity to try  to terminate the project  for some time.                                                                    
He opined that the reason  the state and TransCanada had not                                                                    
tried  to  terminate  the project  because  the  partnership                                                                    
between the two entities was  good; the problem for the last                                                                    
several  years, was  there was  not a  good project  for the                                                                    
basis of that partnership.                                                                                                      
                                                                                                                                
Commissioner   Balash   continued  to   address   Vice-Chair                                                                    
Fairclough's question.  He related  that since  the governor                                                                    
had called  on the parties  to work under an  AGIA framework                                                                    
to explore  the opportunity for liquefied  natural gas (LNG)                                                                    
in 2011,  the partnership between TransCanada  and the state                                                                    
had  been  maintained.  He  observed   that  the  state  had                                                                    
maintained  a lot  of the  beneficial  provisions that  were                                                                    
contained in the original arrangement.                                                                                          
                                                                                                                                
9:15:32 AM                                                                                                                    
                                                                                                                                
MICHAEL PAWLOWSKI,  DEPUTY COMMISSIONER,  STRATEGIC FINANCE,                                                                    
DEPARTMENT  OF REVENUE,  directed the  committee's attention                                                                    
to page 3 of the  memorandum of understanding (MOU) (copy on                                                                    
file) and  noted that it  housed the process to  abandon the                                                                    
AGIA license.  He pointed to  page 3, number 11  and related                                                                    
that  it described  that the  commissioners have  committed,                                                                    
after  enabling  legislation  became effective,  they  would                                                                    
initiate the process  under AS 43.92.40 by  finding that the                                                                    
project was uneconomic.  He stated that number  12 was where                                                                    
the licensee  has committed that  upon an occurrence  of the                                                                    
trigger  event, that  they would  agree  that the  project's                                                                    
license under  AGIA was  uneconomic. He  stated that  it was                                                                    
the   two  provisions   that  committed   both  parties   to                                                                    
initiating and  agreeing on  a process.  He stated  that the                                                                    
trigger events  were defined  on page  5 of  the MOU  as the                                                                    
effective  date  of  the   legislation.  He  explained  that                                                                    
wrapping up  the AGIA license  would be a  process; however,                                                                    
number 11 was  a process that the  commissioners would start                                                                    
and the licensee would agree in number 12.                                                                                      
                                                                                                                                
Vice-Chair   Fairclough  stated   that  the   follow-up  for                                                                    
Alaskans  was that  they wanted  to see  the money  and time                                                                    
penciled   out.   She   clarified  that   she   wanted   the                                                                    
administration to produce a slide  deck that could be posted                                                                    
on a  website and moved  with the  bill that showed  why the                                                                    
new route  was chosen over the  old one. She noted  that she                                                                    
was  convinced   of  the  professionalism  and   value  that                                                                    
TransCanada  brought to  the table,  but  that Alaskans  had                                                                    
questions  regarding  why  the  state  was  not  going  with                                                                    
another partner. She observed that  the state had a positive                                                                    
working relationship  with a professional entity  that could                                                                    
take  on a  mega-project  and had  the  resources to  assist                                                                    
Alaska in that  endeavor. She noted that with  the nature of                                                                    
starting  and  stopping  meetings,  as well  as  meeting  at                                                                    
night,  it was  difficult for  some  people to  be aware  of                                                                    
everything.  She  concluded  that  there should  be  a  link                                                                    
online  that  people  could  access  that  would  walk  them                                                                    
through  the process  to talk  about why  the clause  of the                                                                    
project being uneconomical was not being triggered.                                                                             
                                                                                                                                
Vice-Chair  Fairclough noted  that Alaskans  also wanted  to                                                                    
see  what  it  would  cost  the state  to  severe  the  AGIA                                                                    
contract and the  opportunity cost lost, so  that they could                                                                    
see  why  the  administration  was  choosing  to  point  the                                                                    
project  in the  direction that  it was.  She believed  that                                                                    
TransCanada  was  the  right choice  for  Alaska,  but  that                                                                    
people wanted  to see  the numbers  and why  TransCanada was                                                                    
the better alternative to something else.                                                                                       
                                                                                                                                
9:19:47 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy inquired  how much it would  cost the state                                                                    
to buy  its way  out of  the AGIA  obligations. Commissioner                                                                    
Balash  replied that  upon termination  or abandonment,  the                                                                    
license itself provided the state  with an option to buy out                                                                    
all  of the  data,  information, and  assets  that had  been                                                                    
generated under  the license; that  figure was  somewhere in                                                                    
the neighborhood of $130 million.                                                                                               
                                                                                                                                
Vice-Chair  Fairclough  repeated  that she  would  like  the                                                                    
administration to produce a hard  document that people could                                                                    
access  that   supported  the  decision  of   sticking  with                                                                    
TransCanada.  She noted  that  supporting the  relationships                                                                    
between the state and TransCanada  was woven in to the Heads                                                                    
of Agreement (HOA),  was the body of the MOU,  and was built                                                                    
into the  legislation; however, those were  three very dense                                                                    
documents.                                                                                                                      
                                                                                                                                
Co-Chair Meyer recalled mentioning  that TransCanada had not                                                                    
built  a  similar  pipeline  to   the  one  that  was  being                                                                    
discussed with an Alaska LNG  project; however, he corrected                                                                    
himself and noted that the  $6 billion Keystone Pipeline was                                                                    
similar  to what  would  be  built in  the  LNG project.  He                                                                    
thought that Alaska's LNG pipeline  had an estimated cost of                                                                    
$8 billion  to $10 billion.  Mr. Pawlowski replied  that the                                                                    
figure was  in the  range of the  current estimates  for the                                                                    
line, but that the current  estimate for the overall project                                                                    
was somewhere between $45 billion  and $65 billion. He noted                                                                    
that  liquefaction  represented  about  50  percent  of  the                                                                    
project  and  the  other portions  were  split  between  the                                                                    
treatment plant and the pipeline.  He noted that these types                                                                    
of projects were massive.                                                                                                       
                                                                                                                                
Co-Chair  Meyer inquired  who the  administration envisioned                                                                    
would  build  the  LNG  facilities  and  the  pipeline.  Mr.                                                                    
Pawlowski  responded that  building  would  be conducted  by                                                                    
contractors that were  hired by the project.  He pointed out                                                                    
that  there  had  been discussion  of  TransCanada  being  a                                                                    
valuable partner  to the state,  but asserted that  the same                                                                    
thing  could  be said  of  the  three major  producers;  the                                                                    
ability of these companies to  manage mega projects on scale                                                                    
and on  budget was  what they brought.  He thought  that the                                                                    
question was not who would build,  but who would be the lead                                                                    
in scheduling how the projects integrated together.                                                                             
                                                                                                                                
Mr. Pawlowski pointed  to page 30 of the HOA  and noted that                                                                    
attachments  had been  inserted  in this  section that  were                                                                    
project  schematics  for  how  the  integrated  team  looked                                                                    
currently.                                                                                                                      
                                                                                                                                
9:24:22 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  requested a walkthrough of  process by which                                                                    
a Brooks  Range Petroleum or  a Repsol could sell  their gas                                                                    
in the pipeline even though  they had not contributed to the                                                                    
building  of  the  line;  he   thought  that  maybe  Alaska,                                                                    
TransCanada, and  the three producers  might work  out lease                                                                    
arrangement in this case. Mr.  Pawlowski pointed to appendix                                                                    
A, which was found on page 21 of the HOA.                                                                                       
                                                                                                                                
Commissioner Balash  interjected and referenced  article 6.3                                                                    
(b).  He noted  that it  was contemplated  that the  project                                                                    
would be  jointly owned  by the parties  and that  the three                                                                    
producer parties would operate  their portion of the project                                                                    
on a proprietary basis.                                                                                                         
                                                                                                                                
Vice-Chair Fairclough  inquired if  the reference  was being                                                                    
made to  page 11,  6.3 (b) of  the HOA.  Commissioner Balash                                                                    
responded in the affirmative.                                                                                                   
                                                                                                                                
Commissioner Balash  continued to  address page 11,  6.3 (b)                                                                    
and  stated that  the producer  parties would  operate their                                                                    
3/4  of the  project on  a proprietary  basis, meaning  that                                                                    
they  would serve  themselves as  customers. He  stated that                                                                    
the   combination   of   the  Alaska   Gasline   Development                                                                    
Corporation  (AGDC)  and  TransCanada  would  serve  as  the                                                                    
transporter  for not  only  the state,  but  also for  third                                                                    
parties,  including the  types  of  companies that  Co-Chair                                                                    
Meyer  had just  referenced; furthermore,  it was  from this                                                                    
lens that  Mr. Pawlowski  would speak through  regarding the                                                                    
provisions in appendix A. He  added that the provisions that                                                                    
Mr.  Pawlowski  was  about  to speak  to  would  govern  the                                                                    
process of allowing new entrants into the pipeline.                                                                             
                                                                                                                                
9:27:09 AM                                                                                                                    
                                                                                                                                
Mr. Pawlowski continued to discuss  appendix A on page 21 of                                                                    
the HOA. He stated that it  was important for the public and                                                                    
members of  the committee to  recognize that at  the current                                                                    
stage, just like  the rest of the HOA,  appendix A contained                                                                    
principals that all  the parties had agreed  to; the section                                                                    
did  not contain  the  detailed  commercial agreements  that                                                                    
would  implement   the  principals.  He  related   that  the                                                                    
detailed  commercial agreements  would  be developed  during                                                                    
the pre-FEED and FEED stages,  which were prior to the final                                                                    
investment decision  (FID); the  concepts would  get written                                                                    
into  commercial  operation  terms   as  the  project  moved                                                                    
forward.  He   stated  that   broadly  speaking,   the  core                                                                    
principles that the project had  agreed to could be found on                                                                    
beginning on A 1.1.                                                                                                             
                                                                                                                                
Mr.  Pawlowski  related  that as  the  HOA  envisioned,  the                                                                    
Alaska LNG parties were  British Petroleum (BP), ExxonMobil,                                                                    
ConocoPhillips,  and TransCanada  and that  anyone of  those                                                                    
parties could  initiate a  process for  an expansion  of any                                                                    
component of  the Alaska  LNG project in  which they  had an                                                                    
interest;  there were  a few  exceptions  to that  expansion                                                                    
going forward. He noted that  the exceptions included if the                                                                    
expansion  materially  or  adversely  affected  the  project                                                                    
itself,  caused  the  project  to be  in  violation  of  any                                                                    
applicable  environmental  or  safely laws,  or  caused  the                                                                    
project  to be  violation of  a right-of-way  or contractual                                                                    
obligation.  He stated  that in  the  paragraph following  A                                                                    
1.1, subsection  (d), it was  specified that all  Alaska LNG                                                                    
parties  with an  interest in  that project  component would                                                                    
have  an  opportunity to  participate  in  an expansion.  He                                                                    
stated  that  the  key  was that  any  expansion  party  may                                                                    
request additional volumes,  thereby increasing the capacity                                                                    
of the proposed  expansion; he thought that  this made sense                                                                    
to make  expansions all at  once for efficiency.  He related                                                                    
that  the  next  section  covered  if  the  boundary  of  an                                                                    
efficient  expansion was  crossed  by making  it bigger.  He                                                                    
explained  that  if  all parties  could  mutually  agree  to                                                                    
reduce  the expansion  and make  it efficient,  it could  be                                                                    
done.                                                                                                                           
                                                                                                                                
Co-Chair  Meyer  inquired  what  would  happen  if  all  the                                                                    
parties did  not agree to  allow another company to  use the                                                                    
line  and if  an  arbitrator, the  Regulatory Commission  of                                                                    
Alaska,  or the  courts  would get  involved. Mr.  Pawlowski                                                                    
replied in the  negative at the current  state and explained                                                                    
that it would  be a commercial arrangement.  He directed the                                                                    
committee's attention to the final sentence in A 1.1 (d):                                                                       
                                                                                                                                
     Expansions can proceed if they meet the criteria in A                                                                      
     1.1 above.                                                                                                                 
                                                                                                                                
Mr.  Pawlowski explained  that  the parties  did  not get  a                                                                    
veto, but could  join the expansion by making  it bigger. He                                                                    
stated  that  parties  had  a right  to  participate  in  an                                                                    
expansion, but if they chose  not to, it could still proceed                                                                    
as long  as it  did not  violate A 1.1's  (a), (b),  (c), or                                                                    
(d).                                                                                                                            
                                                                                                                                
Co-Chair  Meyer  did  not  want to  pursue  the  issue  much                                                                    
further,  but noted  that  some  of subsections'  conditions                                                                    
were   fairly  subjective.   He  directed   the  committee's                                                                    
attention to A 1.1 (a):                                                                                                         
                                                                                                                                
     Materially or adversely affect or  alter the Alaska LNG                                                                    
     project facilities  or operations,  including technical                                                                    
     aspects, or  scheduling or  quality of  deliveries from                                                                    
     the Alaska LNG project facilities.                                                                                         
                                                                                                                                
Co-Chair  Meyer  thought that  there  could  certainly be  a                                                                    
difference  of opinion  regarding the  above conditions.  He                                                                    
noted that A  1.1 (b) was also fairly  subjective and wanted                                                                    
to be  sure that people  could access the line.  He observed                                                                    
that other companies  besides the three majors  were able to                                                                    
use  the Trans-Alaska  Pipeline System  and that  the system                                                                    
did seem to work.                                                                                                               
                                                                                                                                
9:32:47 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly  interjected  and  inquired  if  "that"  was                                                                    
further reason why the state  was sticking with TransCanada.                                                                    
Mr.  Pawlowski  stated  that   the  development  of  "these"                                                                    
principles  was  one of  the  areas  that  the state  saw  a                                                                    
material  benefit of  having TransCanada  at  the table.  He                                                                    
explained  that the  conditions were  normal for  expansions                                                                    
and that some of them were  also there to protect the state.                                                                    
He  noted that  interrupting  the  state's deliveries  would                                                                    
cause  damage to  the state.  He furthered  that TransCanada                                                                    
had  worked  closely on  the  development  of the  expansion                                                                    
principals and pointed  out that the its  business model was                                                                    
to achieve the  highest volumes of gas through  the line. He                                                                    
stated that  having a technical pipeline  company working on                                                                    
an agreement  that it would  have to  live with, as  well as                                                                    
having  the  state's  consultants  and  the  Federal  Energy                                                                    
Regulatory Commission's legal teams  all present in the same                                                                    
room was helpful.                                                                                                               
                                                                                                                                
Senator Bishop  noted that both  parties had to agree  to an                                                                    
expansion.   He  wondered,   however,  if   there  was   not                                                                    
agreement, if  an interested party  could gain access  if it                                                                    
could  pay  for  the whole  expansion.  Commissioner  Balash                                                                    
replied  that A  1.2 of  the  HOA addressed  that issue  and                                                                    
replied  in the  affirmative. Senator  Bishop verified  that                                                                    
without  the consent  of the  other  parties, an  interested                                                                    
shipper could  still form an  expansion if it could  pay for                                                                    
it. Commissioner Balash responded in the affirmative.                                                                           
                                                                                                                                
Co-Chair Kelly noted  that there were a few  things that had                                                                    
been   discussed   over   the    last   week   that   needed                                                                    
clarification. He  pointed out  that the  administration was                                                                    
in  discussions  with  members   of  the  House  and  Senate                                                                    
regarding creating a  subsidiary out of AGDC.  He noted that                                                                    
the  subsidiary issue  seemed to  be the  most controversial                                                                    
issue and wondered when a  resolution could be expected. Mr.                                                                    
Pawlowski replied  that the dialogue  in the  Senate Finance                                                                    
Committee  had   helped  with   addressing  the   issue  and                                                                    
discussed  worked  that  had  been done  on  the  topic;  he                                                                    
thought  that  the  administration would  have  a  suggested                                                                    
course of action within the next 24 to 48 hours.                                                                                
                                                                                                                                
9:36:15 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly noted  that everyone  had  a different  idea                                                                    
with  how to  proceed, but  felt  that the  question of  the                                                                    
subsidiary corporation needed to be answered.                                                                                   
                                                                                                                                
Co-Chair  Kelly requested  a walk-through  of what  it would                                                                    
mean for  the state to find  a new partner at  this point in                                                                    
the  process. He  recalled that  Ms.  Poduval had  testified                                                                    
that  every year  the  project was  delayed  would cost  the                                                                    
state   about  $800   million   and  requested   information                                                                    
regarding how  long and  where delays  could be  expected in                                                                    
the project. Commissioner Balash  thought there were several                                                                    
ways  to consider  the likely  causes of  delays that  could                                                                    
occur;  part of  this  could be  due  to the  organizational                                                                    
structure.  He  explained that  if  you  pulled one  of  the                                                                    
parties out of the equation,  the question was what happened                                                                    
next. He  mused whether the  other three parties  would work                                                                    
to fill  that void or if  the state would return  with a new                                                                    
partner; this by itself could  potentially cause a delay. He                                                                    
explained that  there were questions regarding  what kind of                                                                    
process  the   state  would  employ  when   finding  another                                                                    
partner; if  the process was something  that the legislature                                                                    
would prescribe,  there would probably be  delays associated                                                                    
with the agreement of the  process and criteria. He recalled                                                                    
that the  administration's experience with the  AGIA process                                                                    
was  that there  was about  17 to  18 months  from when  the                                                                    
legislation was  introduced until the effective  date of the                                                                    
act;  this was  another way  to  look at  the potential  for                                                                    
delay.                                                                                                                          
                                                                                                                                
Commissioner Balash continued to  address possible delays in                                                                    
the  project. He  stated that  if the  state wanted  to keep                                                                    
things going, it could ask  the producer parties to continue                                                                    
work while  it identified a  new partner. He  explained that                                                                    
there would  be certain  agreements that would  be developed                                                                    
during that  18-month period during  pre-FEED that  would be                                                                    
central  to   project  enabling   contracts  and   that  the                                                                    
administration  hoped to  bring back  to the  legislature in                                                                    
2015;  he felt  that the  state would  really be  "hobbling"                                                                    
itself  if  it  was  engaged  in  that  process  without  an                                                                    
experienced partner.  He added  that the  state had  a great                                                                    
team of  not only  its own  employees, but  also contractors                                                                    
and  counsel that  could help  get to  the right  answer. He                                                                    
thought that  the right  answer would  be arrived  at faster                                                                    
and  might  potentially  be  better   if  the  state  had  a                                                                    
qualified partner at its side.                                                                                                  
                                                                                                                                
Commissioner Balash  addressed the potential costs  of delay                                                                    
on the  project and pointed  out that the analysis  that Ms.                                                                    
Poduval had  presented was a  "present value"  analysis that                                                                    
examined  the  cost  of  delaying the  project  a  year;  he                                                                    
recalled that  $800 million was  about the right  number. He                                                                    
observed that  there were costs  to the state that  could be                                                                    
identified,  but thought  that  there may  potentially be  a                                                                    
cost to all of the  project sponsors with regard to momentum                                                                    
and opportunity in the marketplace.  He stated that a number                                                                    
of other projects  and places that could source  gas and LNG                                                                    
would be  talking to same  people that Alaska hoped  to sell                                                                    
its  gas  to;  he did  not  want  to  see  a delay  in  that                                                                    
conversation.                                                                                                                   
                                                                                                                                
9:41:29 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly interjected  that in  that context,  a delay                                                                    
was actually  a missed opportunity  and not a delay  at all.                                                                    
Commissioner  Balash thought  that the  characterization was                                                                    
fair.                                                                                                                           
                                                                                                                                
Co-Chair  Kelly inquired  if the  timeframe for  a potential                                                                    
delay was roughly  two years. Mr. Pawlowski  replied that he                                                                    
was  hesitant to  identify a  specific time  in a  delay. He                                                                    
thought  that the  committee's consultants  had done  a good                                                                    
job of  putting delays  in the context  of the  unknown; the                                                                    
level of  uncertainty, who  would show up,  and how  long it                                                                    
would take was  very difficult to narrow to  a specific time                                                                    
frame  like  three  months,  six   months,  or  a  year.  He                                                                    
concluded that he was  uncomfortable identifying exactly how                                                                    
long a delay could be on the record at the current stage.                                                                       
                                                                                                                                
Co-Chair Kelly observed that three  months, six months, or a                                                                    
year would  be the time  involved with identifying  the next                                                                    
partner;  a relationship  then needed  to be  formed between                                                                    
the state  and its new partner.  He thought that it  was not                                                                    
unreasonable  to  assume  a  two year  delay  if  the  state                                                                    
switched partners  in the project  and inquired if  that was                                                                    
correct. Mr. Pawlowski agreed with the assertion.                                                                               
                                                                                                                                
Co-Chair  Kelly noted  that according  to  Ms. Poduval,  two                                                                    
years in  delay would represent  a cost of $1.6  billion and                                                                    
observed  that   there  would   also  be   potential  missed                                                                    
opportunities.                                                                                                                  
                                                                                                                                
9:43:15 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  was  unsure  if  doubling  the  $800                                                                    
million would  be exact because  there was a  different cost                                                                    
to  the  time-value  of money  that  depended  on  different                                                                    
assumptions; however,  the sum was "huge."  She thought that                                                                    
if  the  administration  was modifying  its  position  on  a                                                                    
subsidiary of AGDC,  there should be a slide deck  on why it                                                                    
was continuing  to support  that line  of thinking;  if this                                                                    
assumption  was being  modified,  she  wanted the  attorneys                                                                    
back  before the  committee to  explain  how the  subsidiary                                                                    
inside  a subsidiary  would work  and  why it  was the  best                                                                    
choice  for Alaskans  commercially. She  furthered that  she                                                                    
wanted  an explanation  of how  the state  could break  down                                                                    
those  barriers to  change the  mission  of AGDC  to add  an                                                                    
additional  component  while  still  securing  the  separate                                                                    
funding that  was put forward  under the Alaska  Stand Alone                                                                    
Project  versus  the  Alaska   LNG  project.  Mr.  Pawlowski                                                                    
replied that  the comments gave  the administration  a clear                                                                    
idea of what  the committee wanted it to come  back with and                                                                    
explained that the tension that  the administration had been                                                                    
struggling with  was that the  "bright line" was  very clear                                                                    
for the  protection of both  missions. He observed  that the                                                                    
prior year,  the legislature had equipped  AGDC with driving                                                                    
forward the  smaller diameter line  and that in  the current                                                                    
year, the  administration was asking the  legislature for an                                                                    
expanded  authority for  AGDC. He  explained that  it was  a                                                                    
challenge and that the administration  wanted to protect the                                                                    
divided  missions   of  the  smaller  and   larger  diameter                                                                    
projects. He noted that the  dialogue at the committee table                                                                    
had  helped  the  administration understand  what  level  of                                                                    
efficiency would be  lost with a complete  separation of the                                                                    
two missions; as a result,  the administration had gone back                                                                    
to  the  drawing  board  to ascertain  to  what  degree  the                                                                    
missions  could be  brought close,  while still  maintaining                                                                    
the  appropriate  separations  and firewalls.  He  concluded                                                                    
that Vice-Chair  Fairclough had provided clear  direction on                                                                    
what the administration should bring back to the committee.                                                                     
                                                                                                                                
9:48:03 AM                                                                                                                    
                                                                                                                                
Senator Bishop  discussed cash calls  and noted that  he did                                                                    
not want to be on the  wrong side of history by writing IOUs                                                                    
for the length  of the project. He  requested an explanation                                                                    
of what a cash  call was and how long the  state would be on                                                                    
the hook  for them. He wondered  if the state would  only be                                                                    
on the hook  for cash calls during the  construction part of                                                                    
the project or if it would  be liable until 2040 or 2050. He                                                                    
stated that  the idea  of the state  writing checks  that it                                                                    
could  not cash  bothered him.  Commissioner Balash  replied                                                                    
that  the   line  of  questioning  was   very  important  in                                                                    
understanding the  nature of the  risks that the  state took                                                                    
on  as an  equity participant,  as well  as the  benefits of                                                                    
having  partners. He  stated that  the in  any project,  the                                                                    
need  to  meet  cash  calls  as  a  direct  participant  was                                                                    
something that continued for the  life of whatever agreement                                                                    
was  entered  into.  He  explained   that  for  the  state's                                                                    
purposes currently,  the administration  was seeking  was an                                                                    
authority  for short-term  agreements that  would cover  the                                                                    
pre-FEED  period;  the  longer-term  agreements  that  would                                                                    
cover FEED  and beyond would  come later. He  explained that                                                                    
the  state's potential  exposure  was being  bounded in  the                                                                    
next several years.  He reported that the  big questions and                                                                    
largest variability from the initial  budget would come from                                                                    
construction   after  the   FID.  He   stated  that   during                                                                    
construction, any  partner that failed  to meet a  cash call                                                                    
would  likely  suffer  some  commercial  damage  within  the                                                                    
construct  of the  agreement; this  was something  the state                                                                    
needed  to  be "extremely"  cognizant  of  because it  could                                                                    
potentially   lose   certain    provisions,   benefits,   or                                                                    
advantages  in agreements  as a  result of  being unable  to                                                                    
meet  a  cash  call.  He  thought that  it  might  be  worth                                                                    
describing what those  cash calls looked like  and how often                                                                    
they came  up; he  thought that the  committee could  have a                                                                    
conversation about  this, but that  it was dependent  on the                                                                    
agreement  in  question  and  whether   the  cash  call  was                                                                    
quarterly or  annual. He  noted that terms  like how  long a                                                                    
period of time  the parties had to provide  a requested cash                                                                    
call and  how long  in particular the  state had  to provide                                                                    
it,  given  its  appropriations  process.  He  thought  that                                                                    
future  legislatures  might be  faced  with  a conundrum  of                                                                    
whether it would over-appropriate  to its entity(s) in order                                                                    
to ensure that the reserves  to meet cash calls were present                                                                    
or if  would trim  the funding really  close to  provide for                                                                    
other   public  services   and   simply   meet  quickly   to                                                                    
appropriate  further funds;  this,  in  turn, would  produce                                                                    
many  questions,  that  while   appropriate,  might  not  be                                                                    
answered in a timely way.  He noted that the legislature was                                                                    
a deliberative  body and, appropriately  so, took  its time.                                                                    
He thought  that the above  kinds of questions drove  at the                                                                    
root of the  question of whether the state can  or should be                                                                    
in this kind  of role and position; this  was where partners                                                                    
could  play  a meaningful  role  and  step  in to  meet  the                                                                    
immediate  need   of  providing   capital  in   a  real-time                                                                    
commercial way.                                                                                                                 
                                                                                                                                
9:53:22 AM                                                                                                                    
                                                                                                                                
Co-Chair Kelly  inquired if the  calls would be  issued from                                                                    
debt  or out  of  the treasury;  furthermore,  if they  were                                                                    
issued from  debt, what timing  was involved.  Mr. Pawlowski                                                                    
replied  that the  initial stages  of the  project would  be                                                                    
cash  financed and  that concepts  around those  cash levels                                                                    
were on  page 5  of presentation that  Black and  Veatch had                                                                    
presented in  committee on  February 21  (copy on  file). He                                                                    
reported that in the initial  stage, the cost was looking at                                                                    
somewhere  between $43  million  $108  million. He  reported                                                                    
that the  administration had a  reasonable idea of  the FEED                                                                    
costs, but that they would evolve.                                                                                              
                                                                                                                                
Co-Chair  Kelly interjected  and inquired  if the  mechanics                                                                    
would  use debt  or  cash. Mr.  Pawlowski  replied that  the                                                                    
mechanics used  cash until the  project was ready to  go; at                                                                    
this point,  it would  consist of  a mix  of debt  and other                                                                    
instruments.                                                                                                                    
                                                                                                                                
Senator  Dunleavy inquired  if the  administration would  be                                                                    
back before  the committee  to answer  additional questions.                                                                    
Co-Chair  Kelly noted  that it  would be  and requested  the                                                                    
administration  to  return  on   the  following  Monday  for                                                                    
discussions.                                                                                                                    
                                                                                                                                
9:55:50 AM                                                                                                                    
                                                                                                                                
Senator Olson noted most of  the questions that he had heard                                                                    
from constituents  were how the  project interacted  with or                                                                    
was related  to the  Permanent Fund, but  that he  would ask                                                                    
them in the following meeting.                                                                                                  
                                                                                                                                
SB  138  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Kelly discussed the  following meeting's agenda and                                                                    
requested  the administration  to provide  an answer  on the                                                                    
AGDC subsidiary issue at that time.                                                                                             
                                                                                                                                
ADJOURNMENT                                                                                                                   
9:56:58 AM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 9:57 a.m.                                                                                          

Document Name Date/Time Subjects
022814 DOR Executive Summary.pdf SFIN 2/28/2014 9:00:00 AM
SB 138