Legislature(2013 - 2014)SENATE FINANCE 532
02/28/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | 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 |