Legislature(2007 - 2008)BUTROVICH 205
04/14/2007 10:00 AM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
April 14, 2007
10:02 a.m.
MEMBERS PRESENT
Senator Hollis French, Chair
Senator Charlie Huggins, Vice Chair
Senator Bill Wielechowski
Senator Gene Therriault
MEMBERS ABSENT
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Senator Joe Thomas
COMMITTEE CALENDAR
SENATE BILL NO. 104
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
03/14/07 (S) Heard & Held
03/14/07 (S) MINUTE(RES)
03/16/07 (S) RES AT 3:30 PM BUTROVICH 205
03/16/07 (S) Heard & Held
03/16/07 (S) MINUTE(RES)
03/19/07 (S) RES AT 3:30 PM BUTROVICH 205
03/19/07 (S) Heard & Held
03/19/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 3:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 5:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/22/07 (S) RES AT 4:15 PM FAHRENKAMP 203
03/22/07 (S) Heard & Held
03/22/07 (S) MINUTE(RES)
03/23/07 (S) RES AT 1:30 PM BUTROVICH 205
03/23/07 (S) Heard & Held
03/23/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 1:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 3:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/26/07 (S) RES AT 3:30 PM BUTROVICH 205
03/26/07 (S) Heard & Held
03/26/07 (S) MINUTE(RES)
03/27/07 (S) RES AT 3:00 PM BUTROVICH 205
03/27/07 (S) Heard & Held
03/27/07 (S) MINUTE(RES)
03/28/07 (S) RES AT 3:30 PM BUTROVICH 205
03/28/07 (S) Heard & Held
03/28/07 (S) MINUTE(RES)
03/29/07 (S) RES AT 5:00 PM BUTROVICH 205
03/29/07 (S) Heard & Held
03/29/07 (S) MINUTE(RES)
03/30/07 (S) RES AT 1:30 PM BUTROVICH 205
03/30/07 (S) Heard & Held
03/30/07 (S) MINUTE(RES)
03/31/07 (S) RES AT 12:00 AM BUTROVICH 205
03/31/07 (S) Heard & Held
03/31/07 (S) MINUTE(RES)
04/01/07 (S) RES AT 11:00 AM BUTROVICH 205
04/01/07 (S) Moved CSSB 104(RES) Out of Committee
04/01/07 (S) MINUTE(RES)
04/02/07 (S) RES RPT CS 6AM SAME TITLE
04/02/07 (S) AM: HUGGINS, GREEN, STEVENS, STEDMAN,
WIELECHOWSKI, WAGONER
04/02/07 (S) RES AT 3:30 PM BUTROVICH 205
04/02/07 (S) Moved Out of Committee 4/1/07
04/02/07 (S) MINUTE(RES)
04/04/07 (S) JUD AT 2:45 PM BELTZ 211
04/04/07 (S) Heard & Held
04/04/07 (S) MINUTE(JUD)
04/11/07 (S) JUD AT 1:30 PM BUTROVICH 205
04/11/07 (S) Heard & Held
04/11/07 (S) MINUTE(JUD)
04/11/07 (S) JUD AT 5:30 PM BUTROVICH 205
04/11/07 (S) Heard & Held
04/11/07 (S) MINUTE(JUD)
04/12/07 (S) JUD AT 3:30 PM BUTROVICH 205
04/12/07 (S) Public Testimony 5:30 pm to 7:00 pm
04/13/07 (S) JUD AT 1:30 PM BUTROVICH 205
04/13/07 (S) Heard & Held
04/13/07 (S) MINUTE(JUD)
04/13/07 (S) JUD AT 5:30 PM BUTROVICH 205
04/13/07 (S) -- Invited Testimony --
04/14/07 (S) JUD AT 10:00 AM BUTROVICH 205
WITNESS REGISTER
David Van Tuyl, Commercial Manager
Alaska Gas Group
BP Alaska
Anchorage AK
POSITION STATEMENT: Offered perspective on AGIA
Mark Hanley, Public Affairs Manager in Alaska
Anadarko Petroleum
Anchorage AK
POSITION STATEMENT: Offered perspective on AGIA
Bill Walker, General Counsel and Project Manager
Alaska Gasline Port Authority
Fairbanks AK 99701
POSITION STATEMENT: Offered perspective on AGIA
Paul Fuhs, Legislative Director
Alaska Gasline Port Authority
Fairbanks AK 99701
POSITION STATEMENT: Offered perspective on AGIA
S.A. (BILL) McMAHON JR., Commercial Manager
Alaska Gas Development
ExxonMobil Production Company
Houston TX
POSITION STATEMENT: Offered perspective on AGIA
Wendy King, Manager
ANS Gas Development
ConocoPhillips Alaska, Inc.
Anchorage AK 99510
POSITION STATEMENT: Offered perspective on AGIA
ACTION NARRATIVE
CHAIR HOLLIS FRENCH called the Senate Judiciary Standing
Committee meeting to order at 10:02:07 AM. Present at the call
to order were Senators Wielechowski, Huggins, and Chair French.
Senator Therriault joined the meeting soon thereafter.
SB 104-NATURAL GAS PIPELINE PROJECT
10:02:23 AM
CHAIR FRENCH announced the consideration of SB 104.
10:02:27 AM
DAVID VAN TUYL, Gas Commercialization Manager, BP Exploration
(Alaska) Inc., delivered a PowerPoint presentation and
paraphrased from written testimony
10:03:19 AM
MR. VAN TUYL referred to slide 2 - BP's Vision for Alaska - and
outlined BP's long history exploring for, producing, and
developing North Slope energy in Alaska and highlighted the
opportunities for a bright future if the resource is
appropriately developed. The graph characterizes BP's share of
production through time including the current six percent annual
decline. New investment resulting in new production is shown for
viscous oil, heavy oil, and gas, but that's not a given; it's
what is possible with a successful Alaska gas pipeline project,
he said.
10:05:21 AM
MR. VAN TUYL referred to slide 3 - BP Key Messages - and
emphasized that BP wants and needs a successful gas pipeline
project that is built with low capital cost and operated cost
efficiently. Low costs result in lower tariffs and higher
netbacks meaning more revenue for the state and for BP. Also, a
low-cost project will provide exploration incentive, which will
keep the pipeline full into the future. "This is a hugely
important project to BP, to Alaska and to the nation. It
represents the largest, known, undeveloped gas resource in the
United States, and in BP's global portfolio." Although gas is
important in its own right, it will also extend the economic
life of Alaska's oil production for decades. BP stands ready to
work with the administration and the legislature for a balanced
fiscal framework that works for all the parties.
BP views AGIA as the administration's good faith expression to
advance the gas pipeline project in an open transparent way,
which is to be applauded. However, developing the right process
is difficult and BP has identified a number of areas of concern.
"We believe AGIA can be successful if some key issues are
addressed."
10:08:49 AM
MR. VAN TUYL referred to slide 4 - What A Successful Gasline
Means - and highlighted the tremendous scope and scale and risks
and benefits associated with the project. Some of the benefits
include jobs for Alaskans, additional revenue for future
generations, increased economic activity, new businesses, a
long-term gas supply opportunity for Alaskans, and a more
diversified economy for decades to come.
10:10:40 AM
MR. VAN TUYL referred to slides 5, 6, and 7 all of which state
that AGIA can help to deliver a successful gas pipeline if
certain modifications are made. The first suggested modification
is for AGIA to use objectives rather than prescriptive
requirements. BP feels that some of the prescriptions contained
in Section 140 starting on page 4 will not result in the best
project. The administration's intent to let industry do what it
does best is only met if industry is allowed to offer its own
unique solutions.
MR. VAN TUYL highlighted toll subsidization as a particularly
troubling example of prescribing a solution. Referring to
Section 140(7) on pages 7 and 8, he said that language requires
the initial shippers to bear the additional risk of tariff
increases of 15 percent or more by subsidizing expansion
shippers.
10:12:20 AM Senator Therriault joined the committee.
MR. VAN TUYL emphasized that BP believes that subsidization is
contrary to FERC policy. Furthermore, the state should consider
the potential adverse consequences of requiring pipeline owners
to increase rates on their initial customers to subsidize
expansion shippers. Doing so could put the project at risk. The
state could make the policy choice to subsidize others, but it
simply isn't good policy to do so with other peoples' money.
10:14:30 AM
SENATOR WIELECHOWSKI asked if he agrees that rolled-in rates
encourage exploration.
MR. VAN TUYL clarified that the concern he's speaking about
isn't with rolled-in rates it's with subsidization.
SENATOR THERRIAULT suggested that the real issue is what the
FERC will consider to be a subsidy because there's a question
about what that really means. If the tariff begins at one dollar
and drops to 85 cents as a result of cheap expansions, would you
consider it to be a subsidy if a subsequent expansion raised the
tariff to 95 cents? It's still below a dollar, he said.
MR. VAN TUYL pointed out that there's no guarantee that the
initial expansion will be cheap because it depends on things
like the hydraulics of the system, fuel use, the extent of the
expansion, and the volumes. He said he believes that's why the
FERC language in the preamble to Order 2005 says that the issue
needs examination on a case-by-case basis. According to his
reading, the only definitive advice that FERC offers is that if
the expansion results in the initial rate going down, then it's
not a subsidy. Beyond that, FERC would have to look at the facts
and make a determination. As the regulator of interstate gas
pipelines, that's what FERC does, he said.
SENATOR THERRIAULT said that in the past FERC commissioners have
indicated that going out to 105 percent was not considered to be
a subsidy. Clearly, under that old rule you could see an
increase beyond what you signed for initially and it still
wouldn't be considered a subsidy, he stated.
MR. VAN TUYL said he too has that understanding and he imagines
that's why FERC looks at it on a case-by-case basis.
SENATOR THERRIAULT observed that the language about the
rebuttable presumption for rolled-in methodology is somewhat
unusual. In his view that's because Congress directed that the
line is to be constructed in a way that fosters competition and
exploration. He asked if he believes that that's why the
rebuttable presumption is there.
MR. VAN TUYL said it would be speculative for him to answer
that. He understands that the language in ANGPA required setting
rules to encourage exploration. He reiterated that BP has no
problem with rolled-in rates. The issue is that AGIA could
result in a rate increase of significantly higher than 15
percent and that could raise the subsidy specter.
10:19:31 AM
SENATOR THERRIAULT noted that the producers continue to talk
about a line running to Chicago, which would mean that about
two-thirds of the line would run through Canada where rolled-in
rates are the norm. He asked why it isn't a problem there.
MR. VAN TUYL said the regulatory body in the U.S. is the FERC
and the regulatory body in Canada is the NEB and BP is happy to
abide by the regulations that are provided.
SENATOR THERRIAULT asked why it's a problem to live with rolled-
in rates on one-third of the line if it's not a problem on the
two-thirds that runs through Canada.
MR. VAN TUYL again stated that BP does not take issue with FERC
saying that for this project there will be a rebuttable
presumption of rolled-in rates. The concern is that the FERC
language highlights that the methodology should not result in a
subsidy. "The issue we have is with the subsidization, not with
the rolled-in rate."
SENATOR HUGGINS recommended that the state have an upfront
conversation with FERC and ask for answers to the subsidy
question. This is a provision that needs to be examined from the
pipeline company's perspective, he stated.
CHAIR FRENCH stated agreement.
SENATOR WIELECHOWSKI asked what Canada's position is on
subsidization and if it has a presumption of rolled-in rates.
MR. VAN TUYL said he would do some research and get back with a
complete answer.
SENATOR WIELECHOWSKI commented that it doesn't make a lot of
sense if two-thirds of the line has rolled-in rates and the rest
of it doesn't. He also asked how it's possible to have an
increase of greater than 15 percent.
MR. VAN TUYL explained that BP has four concerns with this
portion of the bill. Three are technical and one is the
overriding policy issue of subsidization. He explained the
following:
The technical concerns result in the statement that we
think that it could be more than 15 percent. The
language of the bill relates to - this 15 percent is
related to the initial, maximum, recourse rate to the
downstream terminus. Those are three terms in the
bill. Each one of those could result in that number
being higher than 15 percent.
Initial because typically for rate-making purposes, a
toll is levelized for a period and it depends on
what's ultimately negotiated between the shipper and
the customers. It could be 10 years, it could be
longer, it could be shorter. But after that period of
levelization, as the pipeline depreciates, the toll
drops. And so if you're in the period where the toll
is dropping, but you're still relating back to the
initial rate, then the 15 percent is going to 16, to
20, to a larger number. That's one manner in which the
magnitude could be more than 15 percent.
The second relates to the maximum recourse rate. And
typically rates between customers and pipeline
companies are negotiated rates. And those negotiated
rates are typically less than the maximum recourse
rate-10 or 15 percent, as much as 30 percent less in
some cases. There's another if you're relating to the
maximum recourse rate and you have a negotiated rate
that's 15 percent under the maximum recourse rate,
then you're actually talking about a gap there of 30
percent-not 15 percent.
The third issue relates to the downstream terminus. If
the downstream terminus…is Chicago-don't know if we
need to build new pipe to Chicago or a portion of new
pipe and I don't know how the downstream terminus is
defined. But if the expansion is only for a portion of
the pipe, upstream let's say it's all the way from
Alaska to Alberta. But the rate that you're measuring
the increase against goes all the way to Chicago. That
could add 50 cents, 75 cents to the amount that you're
measuring 15 percent against.
MR. VAN TUYL said those three elements could result in an
increase that's significantly higher than 15 percent.
10:26:18 AM
SENATOR THERRIAULT said the committee should consider modifying
the language to address all or a portion of those concerns and
he believes the administration is in agreement.
CHAIR FRENCH referenced Senator Therriault's previous tariff
example and asked if BP would consider that to be a subsidy.
MR. VAN TUYL said he couldn't answer the question because he
doesn't know what FERC would use to make the determination.
CHAIR FRENCH restated his question. "When BP…appears before FERC
to have its say on that tariff adjustment, would BP be arguing
that going from 85 cents to 95 cents is a subsidy or would it
not?"
MR. VAN TUYL replied he would need more information because it
would depend on a number of factors such as fuel usage. That's
why FERC didn't give a definitive answer to that question, he
said.
10:28:24 AM
CHAIR FRENCH said "Fair enough."
MR. VAN TUYL said the federal law made it clear that for
mandatory expansions, FERC shall ensure that the rates do not
require existing shippers to subsidize expansion shippers. In
Order 2005, FERC put in place a rebuttable presumption of
rolled-in rates for expansions provided it did not require
subsidization by initial shippers. He read the following from
Order 2005:
125. In conclusion, to provide guidance to
potential shippers in advance of the initial open
season that is the subject of this rule, the
Commission intends to harmonize both objectives
(rate predictability for initial shippers and
reduction of barriers to future exploration and
production) in designing rates for future
expansions of any Alaska natural gas
transportation project. It is consistent with our
guiding principle that competition favors all of
the Commission's customers, as well as with the
objectives of the Act, to adopt rolled-in rate
treatment up to the point that would cause there
to be a subsidy of expansion shippers by initial
shippers, if any subsidy were to be found.
MR. VAN TUYL said that a provision requiring a subsidy for not-
yet-ready shippers at the expense of initial shippers would be a
disincentive for potential shippers participating in an open
season.
10:30:47 AM
MR. VAN TUYL referred to slide 6 and said a second
recommendation for a successful gas pipeline is to avoid
exclusivity. Sections 410 and 540 of AGIA would result in an
exclusive winner before work is done and state funds would be
awarded based on promises rather than results. This may preclude
a successful project from moving forward, he said. BP
understands that expedited regulatory handling is only offered
to the licensed project and that the state could be penalized
for assisting a competing project, but that approach could
conflict with federal law and regulation, which favors
competition and market involvement in the choice. Although the
selection criteria under Section 180 is as transparent as
possible, it leaves the fundamental question of whether the
state should pick an exclusive winner based only on a proposal.
BP is concerned with that approach. Instead it supports open
competition in the marketplace. FERC requires that the market
demonstrate the desire for an application before awarding a
certificate to an applicant and that's what happens in a
successful open season, he said.
MR. VAN TUYL said that the Alaska Natural Gas Pipeline Act
(ANGPA) is a good model in which expedited regulatory handling
is provided to any project. BP understands that from the state's
perspective a number of specific things that are desired from
any project. That includes things such as jobs, training for
Alaskans, gas access for Alaskans, and pipeline expansions. BP
supports all those objectives, he said.
10:33:46 AM
SENATOR WIELECHOWSKI asked if ANGPA is the federal model.
MR. VAN TUYL replied that's the federal legislation that passed
in October 2004.
SENATOR WIELECHOWSKI asked if he sees any conflict between AGIA
and ANGPA.
MR. VAN TUYL said the areas of conflict are complicated, but BP
thinks that the ANGPA model provides expedited regulatory
handling to any project. AGIA says expedited handling will be
provided only to the project that's selected. Those concepts are
different, he said.
SENATOR WIELECHOWSKI asked if his understanding is that any
group that is not selected as the winner could still get federal
expedited regulatory assistance under ANGPA.
MR. VAN TUYL said he isn't sure how that would work.
10:35:56 AM
SENATOR WIELECHOWSKI asked if an unsuccessful applicant under
AGIA could still go ahead with the project. The difference being
that there would be no forthcoming benefits under AGIA.
MR. VAN TUYL said the concern is that BP isn't sure how the
regulatory support that's required to advance any project would
work for an entity other than the successful licensee. Also,
there's potential for the state being penalized for providing
certain kinds of assistance. It's different than the federal
model that expedites any project so that a successful project
emerges. That's the fundamental nexus of the concern, he said.
SENATOR WIELECHOWSKI pointed out that the state would still have
the obligation to process materials from an unsuccessful
licensee. The difference is that there wouldn't be an AGIA
coordinator present to expedite the process.
MR. VAN TUYL said his understanding is that the benefits of the
AGIA coordinator are exclusive to the licensee. BP's concern is
what the breadth of the inducement that's offered under AGIA
entails. If the state could be penalized for providing expedited
regulatory handling to another project he questioned whether
that other project could advance.
10:37:49 AM
SENATOR HUGGINS referenced the statement that AGIA may conflict
with federal law and regulation and suggested the committee get
an answer to that and put the issue to bed.
CHAIR FRENCH said he would forward the question to legislative
legal.
10:38:31 AM
CHAIR FRENCH opined that the topic of exclusivity will be hotly
contested, but from the perspective of many Alaskans BP,
ConocoPhillips, and Exxon have had a sort of exclusivity for 30
years and a pipeline hasn't been built. Last year the process
wasn't successful and most Alaskans want ground work on the
project to start next year. The only way that's going to happen
is for the state to say it's about to pick a winner. If you're
not ready then we'll get on a different pony and try to ride
that one. If you are ready then bring us something this summer.
10:40:06 AM
MR. VAN TUYL said that once the resource terms are defined, the
pipeline will follow. "To ensure that the pipeline gets built,
that's going to be the single key enabler."
10:40:59 AM
MR. VAN TUYL continued the presentation and said that AGIA
doesn't sufficiently address the resource framework for getting
the project moving even though it is encouraging that it
recognizes some important resource issues. He said that Section
310, page 16, seeks to address the royalty valuation issue, but
the terms don't provide sufficient clarity to justify making the
required firm transportation commitments. He explained that the
royalty valuation provisions depend on future regulations and
neither the shippers nor the legislature knows what they might
say. Evaluation regulations would allow for retroactive
adjustments and the regulations associated with royalty-in-value
to royalty-in-kind switching imply that reasonable
disproportionate costs and reasonable interference with
marketing is okay. I don't know how to evaluate that when I run
project economics, he said.
Section 310(a)(3), page 17, seeks to address royalty issues
associated with RIV to RIK switching. This is incompatible with
the long-term arrangements required to make a gas pipeline
project happen, he stated. It is problematic because if the
state chooses to switch from RIV to RIK the shipper would need
to come up with additional gas to satisfy its customers in the
marketplace. Another problem is associated with obtaining
capacity on the pipeline if the state chooses to switch. For
example, if the state originally elected to takes gas in value,
the shipper would have obtained capacity to be able to ship the
state's share of the gas. If the state then switched to value in
kind it could result in stranding downstream capacity that the
shipper had obtained on behalf of the state to transport that
gas. That raises the question as to who would pay for cost of
that unused downstream capacity. AGIA leaves the solution to
future regulation, which would allow the lessee to bear
disproportionate costs and potentially interfere with long-term
marketing.
Section 320, page 19, includes a provision related to gas
production tax, but that tax rate will not be known until after
the open season is concluded so a shipper wouldn't know what the
production tax would be until after having made the firm
transportation commitment. Also, the gas production rate is only
established for ten years. That is a fraction of the period that
shippers will probably be required to make their firm
transportation commitments. Furthermore, AGIA silent on the many
other payments made to the state, which constitute the majority
of industry payments.
CHAIR FRENCH said in all fairness the gas production tax should
be fixed sometime before the open season begins so an entity
could make its last final calculation on what its bid should be
for the gas. Referencing Mr. Scott's presentation about net
present value of the flow of gas through the pipeline, he asked
Mr. Van Tuyl his opinion on the basic point that the maximum
risk to the company is during the first ten years. After that
time the effect of a tax rate is fairly negligible on the net
present value of the gas at the beginning of the term.
MR. VAN TUYL said he would address the concerns that that
presentation raised in due course. "There are many things that I
would take issue with and hope to discuss in more detail," he
added.
CHAIR FRENCH asked if he would specifically address the question
of net present value or if it would be addressed in a different
format.
MR. VAN TUYL agreed to address the topic now. First, he said,
when evaluating a project there are many different indicators,
but the ability to generate long-term cash distinguishes gas
projects around the world. That's why midstream mega gas
pipeline projects are commonly built on the back of fiscal
stability agreements. The project payout may be measured in
decades so certainty over a long period is required and is
consistent with the firm transportation commitments that are
typically required to underpin these projects. For a project of
this magnitude we would reasonably expect it to be up to 30
years out, he stated.
10:48:06 AM
SENATOR WIELECHOWSKI asked if he agrees that giving that kind of
fiscal certainty would require change to the state constitution.
MR. VAN TUYL said he does not agree. BP believes it's
constitutional for the state to enter a contractual arrangement
to define the rules of take. "We believe that the arrangement
that was proposed before was constitutional." We were confident
enough in that assessment that we committed to spend $125
million to continue advancing the project. If the issue were to
be challenged it would be decided by the courts, he added.
CHAIR FRENCH said he doesn't know how the court will decide, but
the real question is how to get a gas pipeline built regardless
of how the decision comes down. If your company is wrong are you
still willing to build a pipeline basing your tax stability on
the fair and even-handed tax treatment you've gotten from this
legislature for the last forty years?
MR. VAN TUYL said he believes BP is right, but if the court were
to make a decision counter to that BP would need to make an
evaluation at that time.
10:51:03 AM
SENATOR WIELECHOWSKI pointed out that BP is doing business in
places such as Chad and Angola that are nowhere as stable as
Alaska. How do you get fiscal certainty in a country where there
could be a military coup at any moment, he asked.
MR. VAN TUYL explained that political risk relates to the
jurisdiction in which a company does business while the fiscal
risk is more a function of the project that a company is looking
to invest in. Any project that requires a financial commitment
that spans decades requires sufficient fiscal certainty to
warrant the project.
SENATOR WIELECHOWSKI said it all comes down to politics. "I'm
sure you had fiscal certainty in Venezuela when you went in
there and now you have a 90 percent tax rate and you've had the
oilfields nationalized." I don't see how you could get better
fiscal certainty in those countries than in Alaska, he said.
MR. VAN TUYL said in evaluating the forward economics of the
project it's necessary to know what the payments to government
will be for decades. Once the investment is made it would be
very rational for a government to take another look at what the
government take should be. "That's a huge risk for an investor
looking to make firm transportation commitments of tens of
billions of dollars."
10:53:51 AM
MR. VAN TUYL said it's understood that the resource owners will
bear the cost and risk of building the pipeline either directly
or indirectly. It's the resource that drives the construction of
the pipeline so solving the resource issues with clarity is key
to advancing the project. "Just like Wall Street needs to know
the rules before lending money, resource owners need to know the
fiscal rules that will govern the project before making
commitments that will enable the project to advance." The
details of an upstream framework are complex and BP is concerned
that the provisions of Sections 310 and 320 don't adequately
address those upstream issues. Thus far there have been robust
discussions between senior management and the governor and her
staff, but the level of interaction with the commissioners and
their staff has been a disappointment. Ultimately that's where
the problem will be solved so additional discussion is welcome.
10:55:52 AM
MR. VAN TUYL said he's concluded that the nature of firm
transportation commitments isn't fully understood. He explained
that FTs are typically obligations that the resource owners or
shippers make to ship or pay and they're needed by the pipeline
company to get financing. "Validating just how important they
are, we've heard some very simple and straightforward comments
from pipeline companies who've testified in the past couple of
weeks. TransCanada has said, 'No customers, no credit, no
pipeline.' In this context customers means shippers. Enbridge
put it even more simply by saying, 'No producers, no pipeline.'"
Those statements are not political, they're about financial
truths of gas pipeline projects. FTs are a binding financial
obligation in which the shipper commits to pay the pipeline
company for use of its service regardless of whether the shipper
delivers gas to the pipeline. Another important point is that a
company doesn't need any gas resource to enter into the
commitment. Any company that meets the standards of credit
worthiness that the pipeline company sets is free to bid for
capacity. Gas pipelines are open access so anyone is free to
obtain capacity if the required commitments are made.
MR. VAN TUYL continued to explain that because FT commitments
are financial obligations, they must be disclosed in FCC
filings. "Clearly a firm transportation commitment of this
magnitude…will be taken into consideration by financial entities
like banks when evaluating our company." Once the commitments
are made, the pipeline company uses them to obtain financing
from the financial markets, provide coverage for the financing
and get a return for the pipeline.
MR. VAN TUYL posed an example where a successful open season was
held and the pipeline was financed built and in operation. Then
for some unforeseen reason the pipeline goes bankrupt. At that
point the lenders would turn to the FT commitments made by the
shippers to get repayment. The lenders would receive those FT
payments because they are a real financial commitment. Mr. Van
Tuyl explained that the reason BP takes exception to some of the
numbers that were shown previously, and Senator Wielechowski
pointed it out, is that for an independent pipeline the
economics were shown to be high double-digit returns whereas
with a producer ownership they were lower. That's because FTs
weren't taken into consideration. To properly evaluate project
economics they simply must be taken into account, he stated.
MR. VAN TUYL emphasized that the scale of the commitments is
often over simplified. It's not just the capital cost of the
project.
10:59:42 AM
SENATOR WIELECHOWSKI asked if he agrees that BP's leases require
it to put gas into the pipeline if it's reasonably profitable.
MR. VAN TUYL replied he isn't familiar with specific language
but he does know that BP has and will continue to abide by its
lease requirements.
SENATOR WIELECHOWSKI said this is a critical question because if
the lease agreement requires a company to put gas into the
pipeline if it's reasonably profitable, then he doesn't see how
a company could refuse.
MR. VAN TUYL replied he didn't believe the language of the lease
actually contains that phrase, but he would verify that. "But
clearly if we saw the opportunity for the project that was
depicted here of high double-digit rates of return we would
absolutely be pursuing that project." The project doesn't appear
to be that robust and it appears to have tremendous risks, he
said.
SENATOR WIELECHOWSKI asked if BP has developed spreadsheets that
show rates of return and net present value.
MR. VAN TUYL replied they have made estimates of the project
economics, but they haven't done a bottoms up cost estimate.
SENATOR WIELECHOWSKI asked if it's a profitable project.
MR. VAN TUYL replied it has the potential to be profitable if
the resource terms are established such that the investment can
take place. Right now it's too uncertain because the capital
cost is unknown. We don't know if it's profitable now, he
stated.
SENATOR WIELECHOWSKI expressed amazement.
MR. VAN TUYL said BP believes there's a reasonable prospect, but
before that question can be answered with certainty BP would
need to know the capital cost of the project, the resource
terms, and the nature of the firm transportation commitments.
Until those are defined the answer is "unknowable," he stated.
11:03:31 AM
SENATOR HUGGINS posed a scenario where a pipeline company
conducted an unsuccessful open season, but because of the terms
in AGIA it was compelled to continue on to pursue a FERC
certificate. He asked how such a scenario would impact a
producer like BP.
MR. VAN TUYL said a successful open season has three essential
elements: 1) knowing the cost of project; 2) knowing the
resource terms; 3) the nature of the FT. If those three elements
are in place he'd be fairly confident that it would be a
successful open season. He added that he doesn't understand why
a company would commit to a project if doing so would expose it
to massive loss. That's one scenario where the open season would
fail, he said.
11:07:05 AM
CHAIR FRENCH posed a situation in which BP did not win the
license, but was still interested in making a FT commitment.
"Wouldn't you compare your internal estimate of what you think
the cost is going to be to what the pipeline is saying it's
going to be just so that you can make the best educated guess
that you can when you nominate your gas?"
MR. VAN TUYL said absolutely. He added that it's common for the
pipeline company to consult with its customers before an open
season to ensure that its customers are interested in the
service that the pipeline company envisions.
CHAIR FRENCH asked if he agrees that under AGIA an open season
would take place within 24 months.
MR. VAN TUYL said his understanding, depending on the draft, is
that it would be either 24 or 36 months.
SENATOR THERRIAULT said if a company proposes to be a major
shipper it's not uncommon for it to enter into an agreement with
the proposed builder to have significant oversight and perhaps
outright control of the construction project even though it is
not that company's construction project.
MR. VAN TUYL replied that any range of commercial agreements can
be negotiated. What will be important is that the pipeline
company deliver the project that's being negotiated. Perhaps
that would be a term of negotiation, he added.
SENATOR THERRIAULT asked Mr. Van Tuyl if he had additional
slides on the FT issue.
MR. VAN TUYL said no.
SENATOR THERRIAULT said he asked because he believes that this
is a major point of disagreement. He said he appreciates that
today he didn't use the term debt because even though the $144
billion commitment to pay for transportation may be a drag on
the corporate balance sheet, the fact is that you may be able to
book a $200 billion or $300 billion asset.
11:10:36 AM
MR. VAN TUYL said that's not quite correct. He explained that BP
would make the FT commitments at the open season and typically
that event would not result in the reserves being moved from
known resource to proven reserves. That usually takes place some
years later after the project is actually sanctioned, he said.
SENATOR THERRIAULT asked if it's footnoted initially as a
possible obligation and after certification it becomes a sure
thing.
MR. VAN TUYL said it's a binding obligation in the period when
the binding agreements are signed. The fact that the obligation
has been entered into is reflected to the FCC.
SENATOR THERRIAULT asked when the value of the reserves is
actually booked.
MR. VAN TUYL said booking of the reserves occurs at project
sanction. That typically occurs once the FERC certificate is
issued and the record of decision has been reviewed and
finalized. Once the company has committed its portion of the
capital, the auditors make sure there is the requisite corporate
authority to release funds to go forward with the project.
Typically, at that point the auditors would allow a company to
move the reserves from known to proven.
SENATOR THERRIAULT said but even after project certification you
don't actually start making payment on the obligation until the
first gas flows. You're able to book that value and maybe four
years later you start making the payments. Even then you don't
transfer $144 billion in capital. It's just the transportation
obligation for that first year.
MR. VAN TUYL said the obligation is in the total amount and for
the entire term. Also, another obligation that has to be taken
on and reflected is the completion guarantee. That would be a
term of negotiation between the builder and the shippers, he
said.
11:13:24 AM
MR. VAN TUYL continued the presentation and said the conclusion
is that FT commitments do represent real risk to the resource
owners.
MR. VAN TUYL said that slide 9 depicts that in a project like
this, all the risk reside with the resource owners. Those
include: price risk, fiscal risk, production risk, toll risk,
fiscal/schedule risk, cost risk, and finance risk. BP believes
that those that bear the risk are commercially motivated to
manage it downwards and thus should be in a place to manage that
risk, he said.
11:14:49 AM
MR. VAN TUYL said in summary BP wants and needs a successful gas
pipeline. It supports an open and transparent process leading to
a mutually agreed to framework that allows the project to
advance. Furthermore, BP believes that an open and transparent
review should involve the legislature supporting the framework
that the governor has already committed to. The judicial branch
should review the framework to ensure that it is constitutional
and the people of Alaska should be consulted. The midstream
details should be addressed such that they encourage the best
solution by allowing industry to offer objectives rather than
having them presupposed up front. The issue of subsidization
should not be required. Actual marketplace performance should
determine the winner rather than selecting a winner before
performance is started. Finally, agreeing on the upstream
framework is critical because resource issues must be resolved
for the project to proceed.
11:16:30 AM
SENATOR THERRIAULT referenced antitrust issues and asked if he
agrees that if the producers were to propose purchasing an
existing oil pipeline, the federal government would likely place
stipulations on the purchase
MR. VAN TUYL said he doesn't know what the federal government
might do.
Recess from 11:17:36 AM to 11:28:19 AM.
CHAIR FRENCH reconvened the meeting and asked Mr. Hanley to
present Anadarko's perspective.
MARK HANLEY, Public Affairs Manager in Alaska, Anadarko
Petroleum, relayed that as an explorer Anadarko is generally
aligned with the producers, but it does have some differences.
MR. HANLEY showed a map reflecting Anadarko's investment on the
North Slope and said that the partnership with ConocoPhillips
has been beneficial. In response to a question he explained that
the green areas depict operating fields. Anadarko continues to
be keenly interested in access to a pipeline and has been
consistent in its effort to get fair access at a reasonable
rate, he stated.
MR. HANLEY answered a recurring question and explained that
Anadarko will continue to drill so it can maintain current
leases and so it is ready for either the initial open season or
the first expansion. Because of the incentives Anadarko would
prefer to be in the initial open season, but under the timelines
it's unlikely, he added.
11:34:56 AM
MR. HANLEY stated general support for the AGIA process, which
provides opportunity for input on the initial legislation,
during the public comment on the submitted applications, and
during the legislative review. Arguably it also provides a bit
of competition. However a long-standing concern relates to
letting the marketplace decide in when there really is no
competition. Before the recent change at Pt. Thomson, three
companies controlled over 90 percent of the gas. When the
pipeline was debated in the 1970s a lot of concerns were voiced
because of the likelihood that the producers would control the
resource and own the pipeline. Those things cause additional
concern, he said. It shouldn't be prohibited, but extra scrutiny
and extra stipulations are warranted. That's part of what AGIA
provides, he said.
MR. HANLEY said the process lays out "must haves" that will be
required of any applicant and as an explorer we like them and
believe they ought to be in the bill.
11:37:16 AM
SENATOR WIELECHOWSKI asked if he agrees with BP that the
exclusivity of AGIA raises concerns.
MR. HANLEY replied Anadarko has not been opposed to exclusivity.
11:39:11 AM
MR. HANLEY stated that Anadarko supports the mandatory
provisions on access and rates. It's appropriate that the
pipeline company is required to assess the market demand for
expansion every two years. After that, it's critically important
that the pipeline company is willing to commit to expand in
reasonable increments on reasonable terms. Anadarko also
supports rolled-in rates up to 15 percent above the initial rate
and the agreement not to enter into negotiated rate agreements
that would preclude those rolled-in rates. These provisions are
reasonable, they fit together, and they are critical to ensure
more exploration.
MR. HANLEY said Anadarko is motivated as an explorer without
identified gas, but he might be arguing a different side if his
company had a large gas reserve and didn't want to explore. He
suggested it would be interesting to ask which hat the producers
are wearing when they're testifying because they certainly have
different motivations than pipeline companies. For example, when
a pipeline company acts as a consolidator it might argue to FERC
that it should get a 20 percent rate of return because the pipe
is risky. The normal tension is set up because the shippers
would argue that from their perspective they are really taking
all the risk.
11:42:07 AM
CHAIR FRENCH asked where in the process that decision gets made.
MR. HANLEY said he doesn't know, but he could get the answer. He
continued to explain that the tension that he described is
normal, but the concern that Anadarko has relates to a company
that wears both hats. If you have a producer owned pipe, they
absolutely want the lowest cost, but what is their incentive on
the rate? He said he suspects that the overall incentive in an
integrated company would be to have the lowest cost and the
highest rate of return. You could sort of pay yourself and
reduce the wellhead value, which means that severance taxes and
royalties to the state would be less. Anadarko would be affected
because it isn't a pipeline owner. Obviously we would get the
lower severance taxes, but we would get that because we would be
paying the higher rate. The difference is that we wouldn't be
putting it into our own pocket, he said.
11:43:57 AM
SENATOR HUGGINS asked if he is saying he doesn't want a producer
owned line
MR. HANLEY said his company has testified previously that it
would be more comfortable with a third-party owned pipe, but
it's all relative because the producers bring some benefits as
well. Additional stipulations are justified, he said. "You saw
some of that in the FERC regulations and I think that's why we
support some of these provisions here."
SENATOR HUGGINS asked what he thinks about having a divestiture
requirement if the producers become a majority holder of initial
ownership.
MR. HANLEY said he'd need to think about that, but what's really
important is to make sure that the appropriate terms and
conditions are established from the beginning. Acknowledging
that the companies have differences of opinions about what those
are, he reiterated that that's why Anadarko supports the
provisions in this particular bill.
SENATOR HUGGINS stated that he would be 100 percent against any
concept that caused the producers to have some control factor
that worked to Anadarko and the state's detriment for expansion
and greater exploration.
SENATOR THERRIAULT asked if a lot of Anadarko's concern springs
from oil production issues and the current TAPS tariff struggle
with the producers.
MR. HANLEY said he isn't sure that's what it stems from, but the
producers are looking out for their corporate interest. They're
getting a rate of return and Anadarko is challenging it before
FERC arguing that the rates are $3 a barrel too high at today's
rates on the TAPS. He noted that the RCA decision suggested
over-collections of $10 billion up to about 1997. Obviously
that's a matter of concern because the producers will push the
envelope to the extent that they can. Returning to the original
point about ownership, he said that if the producers didn't own
the pipe, the pipe might be proposing some of these things to
get those rates of return.
11:47:35 AM
MR. HANLEY referenced the statement that AGIA could result in
one party subsidizing another and said AGIA doesn't require a
subsidy; it requires the pipeline to request rolled-in rates up
to a certain level. It's up to FERC to decide whether or not
it's a subsidy. The distinction is that the producers may never
propose a rolled-in rate if they own the pipe. Even in Senator
Therriault's scenario, they might not ask for the increase to be
rolled-in. "Would you want your rates to go up at all even if
it's not a subsidy?" He emphasized that the key for Anadarko
would be to ask for rolled-in rates. The shippers are free to
argue against it, whether the companies are affiliated or not,
and FERC will decide under its rules.
11:49:57 AM
SENATOR WIELECHOWSKI asked if he would object to tightening the
language in the bill to address the suggestion that the increase
could be more than 15 percent.
MR. HANLEY said he believes there are legitimate issues to
support tightening the language, but he doesn't have any
specific suggestions.
11:51:08 AM
SENATOR THERRIAULT asked if he agrees that the "must haves" in
AGIA would force the pipe to operate somewhat like an
independent pipe even if the major producers were the owners.
MR. HANLEY said yes, which is why it's appropriate to get the
producers to ask for rolled-in rates.
11:52:10 AM
SENATOR HUGGINS said if FERC isn't bound by the language in the
bill, then whatever is written will have minor impact.
MR. HANLEY said the tension is whether the pipe will ever ask
for a rolled-in rate.
CHAIR FRENCH asked if the presumption for rolled-in rates would
be overcome if the pipe were to ask FERC for an incremental
rate.
MR. HANLEY said not necessarily because you wouldn't know what
they might advocate for.
SENATOR HUGGINS added that the presumption is a special
provision and he assumes it's more than a minor statement
written on a piece of paper.
SENATOR THERRIAULT explained that it stems from the special
language that Congress gave for developing this particular
package of regulations. At that time the state, Anadarko, and
the Department of Interior testified before FERC in favor of
having rolled-in rates, but FERC was only willing to go as far
as a presumption. The state's position was that it wanted
rolled-in rates so it is a concern to suggest changing the
language to say it's just a presumption and that the state won't
require companies that want to nominate for capacity to support
rolled-in rates. "I'm not sure why we would back off at this
point from what we've been asking for for the last-probably-
three years," he stated.
11:54:59 AM
SENATOR HUGGINS noted that the administration indicated it has
the data to shed light on this. We need to see what the
parameters are because it's an unanswered question, he said.
CHAIR FRENCH asked when the information would be forthcoming.
SENATOR HUGGINS said it's outstanding and he assumes it's being
worked on. "The administration agreed--to leave the language in
until the question was answered." He said that the
administration isn't at odds with the resources committee or the
Senate; it was an agreement.
11:55:59 AM
MR. HANLEY read paragraph 124 from Order 2005 to address the
question of whether or not a $1 tariff that went to 85 cents and
then 95 cents would be a subsidy.
We cannot at this point, without a specific project
proposal or the facts surrounding a proposed expansion
before us, define exactly what will be required to
overcome the presumption. As a general matter, we have
historically not favored requiring existing shippers
to subsidize the rates of new shippers. We do not
intend to discard this principle, but rather to
indicate that we will not lightly authorize expansion
rates that would have an unduly negative impact on the
exploration and development of Alaska reserves.
Witnesses at the technical conference acknowledged
that defining subsidization is difficult without
specific facts to review, and that fact was restated
in several of the comments filed. We agree. But a
basic observation may be useful here. For example, a
rolled-in expansion rate that is less than or equal to
the rate paid by the initial shippers would not be
considered a subsidy. Whether a rolled-in expansion
rate that is higher than original rates is a "subsidy"
is a question that necessarily would have to be
reviewed in the context of a future NGA section 7
filing. At that time, Pacific Star's arguments
relating to whether the federal government's loan
guarantees and accelerated depreciation amount to a
"subsidy" of initial shippers' rates may be raised.
MR. HANLEY said it gets complicated because some are arguing
that an initial shipper's rates are already subsidized through
federal loan guarantees and accelerated depreciation. He opined
that that shouldn't be considered.
CHAIR FRENCH said it seems relatively black and white that you
can't get a subsidy when you're under the initial rate.
MR. HANLEY agreed and said he mentioned it because it does seem
to directly answer that particular question.
SENATOR THERRIAULT highlighted a conversation he had with the
administration about where the 15 percent figure came from. He
learned that the administration looked at whether the faster
depreciation and access to the federal loan guarantee is an
actual subsidy that the initial shippers take. Perhaps that
initial $1 rate really would have been $1.15 if there were no
federal incentives. FERC will need to take those things into
consideration in the future, he said.
MR. HANLEY said the provision that requires asking for rolled-in
rates is important and the provision requiring expansion in
reasonable increments is also valuable. He explained that the
FERC process provides for two avenues for expansion-voluntary
and mandatory. The voluntary process seems to be where everyone
is relying on the presumption of rolled-in rates, but the
pipeline could say no and force the mandatory process.
Obviously, we're not absolutely comfortable that we'll end up
with a voluntary expansion and a presumption of rolled-in rates,
he stated.
12:01:44 PM
MR. HANLEY showed a graph of expansion tariffs to demonstrate
how 4.5 bcf/day might be expanded and what indicative rates
might be. At 4.5 bcf/day the tariff is $1.62. After the first
compression expansion the capacity increases by 1 bcf/day and
there's a an incremental tariff of $1.07 and a rolled-in tariff
of $1.47. Everybody's rates go down. That's the way FERC would
do it in the Lower 48 and presumably it would be the same in
Alaska, he said.
CHAIR FRENCH asked if the incremental approach would result in
the new shippers paying the $1.07 tariff since all they are
adding is the compression.
MR. HANLEY said yes, but FERC's general policy in the Lower 48
is to roll in the rates when the expansion reduces the rates and
go to an incremental policy it increases the existing rates.
CHAIR FRENCH asked if the net result of the expansion would be
to bring everybody's rate to $1.47.
MR. HANLEY said yes.
12:03:50 PM
SENATOR WIELECHOWSKI observed that the expanders are essentially
subsidizing the initial producers' decreases.
MR. HANLEY acknowledged that there is debate about what
constitutes a subsidy. He was simply explaining how FERC policy
typically works.
SENATOR THERRIAULT said it seems that whether it's rolled-in or
incremental, the way the system works is that it's rolled-in as
the price goes down and everybody benefits.
MR. HANLEY said yes, and Anadarko believes it would work the
same way under current FERC policy for Alaska.
Returning to the graph, he explained that it shows that the
second compression expansion is more expensive. At 6.5 bcf/day
the incremental tariff is $1.73 and when it's rolled-in with the
$1.47 tariff the combined rate rises to $1.51, which is still
lower than the initial rate.
After looping, the capacity is 7.5 bcf/day and the incremental
tariff is an expensive $3.25, but if the rates are rolled-in,
the tariff is $1.71. The example demonstrates the potential
magnitude of a looping expansion and the tension that occurs in
the system if the rates aren't rolled-in.
12:06:41 PM
CHAIR FRENCH stated for the record that he's always found the
word "looping" to be misleading because the pipe is not being
looped. Rather, new sections of pipe are built around
bottlenecks.
MR. HANLEY described looping in terms of passing lanes on a
highway.
CHAIR FRENCH asked if the folks that were already in the pipe
would pay an incremental tariff of $1.71 or $1.51 after the
looping expansion.
MR. HANLEY said they'd pay the $1.51 tariff.
SENATOR HUGGINS asked for a timeline for seeing the $1.47
tariff.
MR. HANLEY said the first assumption is that a pipeline is going
forward, but it might be 2014.
SENATOR HUGGINS asked about a scenario where there's an
unsuccessful open season. "You have the gas and the state tells
the licensee to go to a FERC certificate." Would you commit your
gas?
MR. HANLEY said if he has gas available at the open season and
the terms were right he might have been there and committed his
gas.
SENATOR HUGGINS mentioned the 5-year window and an unsuccessful
open season and asked, "What would you see in that 5 year window
assuming you came across some volume of gas-still having an
unsuccessful season as a backdrop to the scenario."
MR. HANLEY said they'd make a judgment at the time because it's
a decision-tree process.
SENATOR HUGGINS said, "Your reaction is much like some of the
others and rightfully so."
SENATOR THERRIAULT said, but if you did find a sizeable reserve,
you may be begging for another open season and your success may
be what prompts opening the question again.
MR. HANLEY said it could be, but it's all theoretical.
SENATOR THERRIAULT referenced the chart and asked what
guarantees two relatively cheap expansions after the initial
pipe. He asked if it isn't true that the pipe could be sized
initially at the step three compression so there wouldn't be a
cheap expansion.
MR. HANLEY said his last slide addresses that question.
12:13:11 PM
SENATOR WIELECHOWSKI asked if it's fair to say that if
incremental tariffs were allowed, we'd essentially cost
ourselves out of an expansion between 6.5 bcf/day and 7.5
bcf/day.
MR. HANLEY said yes; under this scenario with incremental
tariffs the expansion would not be economic.
SENATOR WIELECHOWSKI reviewed the chart and asked if it's fair
to say that the state could potentially lose hundreds of
millions if not billions of dollars if incremental tariffs are
allowed.
MR. HANLEY said there is that potential, but it depends on where
the gas comes from. The numbers, which came from the
administration, are illustrative and highlight the concepts. He
noted that TransCanada suggested that with 48 inch pipe, it
could expand from 4.5 bcf/day to 7 bcf/day and as long as the
rate is rolled-in, it would be lower than the initial rate. We'd
be happy with that kind of scenario, he said, because there's
lots of opportunity to compete for that expansion capacity. He
said that leads into Senator Therriault's question about the
possibility of building a pipe that's fully compressed from day
one. It could probably be designed that way and it would likely
be the lowest cost pipe that you'd have. However, the first
expansion would start on the looping and that would be risky.
MR. HANLEY said his last point relates to the current federal
court challenge of FERC authority. The producers want to
eliminate Sections 157.36 and 157.37 relating to open seasons
for expansions and project design. We believe that the
protections provided in those sections are appropriate. We're
aligned with the state and FERC on maintaining those rules, he
stated.
SENATOR HUGGINS said one of his major concerns is getting into
the scenario where the pipe is under designed.
SENATOR THERRIAULT opined that Congress gave FERC the unusual
authority to mandate design changes because of that final $3.25
bar. Congress owns a lot of land up on the North Slope on behalf
of the U.S. citizens and doesn't want to see its undiscovered
resource priced out of the market. It's unlike the Lower 48
where you might have competing pipelines that can deliver from a
basin; this might be the one and only pipeline. Congress knew
that and gave that specific direction to FERC. FERC understood
and came out with the particular package of rules, he stated.
12:20:25 PM
MR. HANLEY said that's why we think this package with its
critical components fits nicely. In summary he said we like the
AGIA process and the opportunity to submit concerns. We like the
specifics, which makes us more comfortable in going forward with
exploration.
SENATOR HUGGINS commented he found the testimony refreshing and
balanced. He said thank you on behalf of my constituents; I
appreciate your approach and believe Alaskans do too.
CHAIR FRENCH agreed and thanked Senator Huggins for saying so.
SENATOR THERRIAULT asked if he had any comment on the discussion
regarding potential antitrust issues related to a producer owned
pipeline.
MR. HANLEY said he doesn't have a comment.
SENATOR THERRIAULT asked if Anadarko would likely partner with
another company to spread risk if it found something that looked
promising in the Foothills acreage.
MR. HANLEY said Petro-Canada and BG are already partners in the
Foothills. Generally, each partner has a one-third interest and
Anadarko is the operator. It's a high risk frontier-type
exploration play so you want to share the risk.
12:23:14 PM
SENATOR THERRIAULT asked if he has any idea why the producers
wouldn't want to share the risk of building the pipeline just as
they do for exploration and development.
MR. HANLEY said he didn't want to speak for the producers, but
he imagines they consider the three-way partnership as sharing
the risk. He's heard and would probably agree that the risk is
in the construction so controlling the cost is critical.
SENATOR THERRIAULT asked about the issue of needing long-term
fiscal stability on gas and oil.
MR. HANLEY said "We'd like as much long-term fiscal stability as
we can get." The initial open season provides benefits that we
believe should apply for expansions because the same risks
apply, he added. That's a change we would suggest even though we
understand the motivation to provide incentive to show up at the
initial open season. From our perspective that creates a
competitive advantage, he said.
SENATOR THERRIAULT said even though your company might not
participate in the initial open season, you don't appear to be
folding your tent and exiting the state so you must see a
workable scenario going forward.
MR. HANLEY said the company has a decision-tree process and it's
too early to speculate on what it might need. We'll go forward
and do what's necessary to hold our leases and prove up some
concepts. But, he reiterated, we're interested in fiscal
stability for as long as we can get.
12:27:39 PM
SENATOR HUGGINS asked what exploration tax incentives Anadarko
might benefit from.
MR. HANLEY said the PPT language slightly improved exploration
economics.
SENATOR HUGGINS asked him to think about what the state might do
to incent Anadarko and others to participate in future
expansions.
MR. HANLEY suggested having a debate around tax rate levels and
tax credits for gas.
SENATOR THERRIAULT highlighted a 30 page memo and two page
introduction from Mr. Shepler at Greenburg Traurig, evaluating
antitrust issues and what the producers might need to do to
obtain Department of Justice clearance.
CHAIR FRENCH said that sounds helpful and he'd make sure that
copies are distributed.
Recess from 12:33:16 PM to 1:45:39 PM
CHAIR FRENCH reconvened the meeting and announced the next item
on the agenda is a presentation from the Alaska Gasline Port
Authority.
BILL WALKER, General Counsel and Project Manager, Alaska
Gasline Port Authority (AGPA) and Paul Fuhs, Legislative
Director, AGPA, introduced themselves.
MR. WALKER stated that AGPA likes AGIA's open and transparent
process because it guarantees a level playing field. Hopefully
it will continue to be open to all participants, he said.
MR. WALKER explained that the Port Authority exists in part
because the Stranded Gas Development Act was not initially
effective. The idea was to provide a tax exempt structure to
better the economics of a gas pipeline project in Alaska.
1:49:33 PM
MR. FUHS added that the testimony about going to more general
objectives and staying away from specific applications is simply
code for returning to the Stranded Gas Development Act.
Furthermore, the comments about exclusivity are hard to take
seriously because under the last administration those parties
were happy with total exclusivity. The calls to return to a
negotiated agreement with the administration is a call to return
to a non competitive back room process.
MR. WALKER said another reason not to go back to a negotiated
contract is that the contract had 30-45 years of concessions
calculated to be in excess of $10 billion and it didn't result
in a project. We're pleased to see a new and promising way
forward, he said.
MR. WALKER explained that the Port Authority was formed to:
1. build a gas pipeline
2. provide a stable source of energy in Alaska that isn't
necessarily tied to a Lower 48 price index
3. keep pipeline and liquefaction associated jobs in the state
4. direct net-project revenue sharing: 60 percent to the
state, 30 percent to municipalities, and 10 percent in
energy related benefits to rural Alaska
5. make gas available in state at the earliest opportunity
6. supply gas liquids to in state markets to the greatest
extent possible
7. provide market optionality for Alaska's gas
1:57:50 PM
MR. FUHS explained that port authorities are used worldwide to
facilitate and manage huge projects. All the operations are done
by the private sector so it's not a government operation other
than the board of directors that ensures that operation is in
the state's interest.
MR. WALKER emphasized that AGPA is the facilitator that will
cause the gas pipeline project to happen. He displayed a slide
indicating how and where industry leaders will be involved in
the components of an AGPA project. The goal is to have a world
class team available for the project, he said.
MR. FUHS added that the AGIA process creates an atmosphere that
brings people together. Although you've heard that all the risk
goes to the resource owner, typically these projects are based
on a long-term contract to supply a certain facility. Somebody
does have to make a firm transportation commitment, but it does
not have to be the resource owner. The producers have testified
that they would be willing to sell their gas to a third party
and that is another possibility, but whoever buys the gas will
have to make the commitment to move it in the project. It
doesn't have to be the people that hold the leases on the North
Slope, he said.
2:02:15 PM
SENATOR WIELECHOWSKI asked about the market for natural gas in
the U. S and on the West Coast for the life of the project.
MR. WALKER said AGPA research indicates that there's a long-term
need for natural gas in North America. Fields in Canada and the
Lower 48 are in significant decline while there's an increase in
demand. Large industrial users of LNG are very eager to have LNG
from Alaska because the state has a good reputation, he stated.
SENATOR WIELECHOWSKI asked if he agrees with the ConocoPhillips
economist who indicated that the U.S. is headed toward using
coal and nuclear energy rather than natural gas.
MR. WALKER said what we hear and see doesn't match with what
those companies are doing elsewhere around the world.
MR. FUHS added that the West Coast uses about 10.5 bcf/day. The
new project there had one contract at 1 bcf/day and now they're
going out for another 1.5 bcf/day. For a project like this, it
doesn't really matter if general demand goes up or down because
you're supplying a certain amount to a certain facility under
contract.
2:06:50 PM
MR. WALKER displayed a map of the AGPA project and described the
48 inch line from Prudhoe Bay to the gas conditioning plant in
Valdez. The economics are sufficient to pre-build to Delta
Junction for a line through Canada if that takes place, but it
could also be used for expansion. The LNG facility in Valdez has
a fractionation facility that strips the propanes. Currently
there's a premium market for that in Asia, he said.
CHAIR FRENCH asked how much gas the base case project proposes
to move.
MR. WALKER said the base case is 1.2 with a maximum of .5 for in
state so the total would be 1.7.
2:07:59 PM
MR. WALKER described the project status as follows:
1. The project route is permitted
2. The 12 senior permits have been acquired. AGPA purchased
exclusive right to the Yukon Pacific Corporation several
years ago and spent in excess of $100 million to permit
the route. State and federal rights-of-way, the federal
environmental impact statement, and the LNG terminal
permit in Valdez have all been received.
3. Bechtel Corporation supplied cost estimates and AGPA is in
the process of updating the numbers for 2007.
4. The marine transportation/Jones Act - They received a MOU
with the largest LNG shipping company in the world -
Mitsui OSK Lines. They have 8 U.S. built LNG tankers for
use as the initial shipping. Re-flagging may be required,
but that shouldn't be an issue.
5. Access to Multiple Markets - The West Coast is the most
obvious, but there are markets in Hawaii and the Pacific
Rim. There are about eight West Coast projects that are in
different phases of development. They're located in
Mexico, California, Oregon, Washington and BC Canada. The
most enticing is the Sempra facility in Baja California,
Mexico because it's currently under construction.
6. Anticipated financing is for 100 percent debt financing
taking advantage of the federal loan guarantee. It's a
benefit to the project and to Alaska.
SENATOR HUGGINS recalled someone saying they didn't anticipate
LNG permitting anyplace other than the Gulf Coast in the future.
MR. WALKER said the Gulf Coast has been the most successful at
getting permits for LNG receiving terminals, but FERC is more
involved with permitting receiving terminals so that might
change. The technology is also changing to address concerns that
have been raised. Although only a fraction of the 45
applications for receiving terminals will receive permits, he's
confident there will be at least one more permit on the West
Coast. Even if there isn't, the volume of the terminal that's
under construction in Baja is sufficiently sized for this
project.
2:14:06 PM
MR. WALKER said AGPA has been advised that with the right kind
of robust economics and the right kind of structure, a project
of this nature can be done on a project financed basis. We
believe that's available and we plan to take advantage of that,
he stated.
SENATOR THERRIAULT noted that other testimony indicated that the
firm transportation commitment underpins the financing for the
project. It was suggested that if the pipeline company were to
go bankrupt, the financier would look to the companies that made
the FT commitments for payoff on the loans. You don't see that
happening?
MR. WALKER said his understanding is that it would depend on how
the contract is structured. Also, there's a federal loan
guarantee for 80 percent of the cost of the project up to $18
billion. A detailed response will be forthcoming, he said.
CHAIR FRENCH asked him to send a written response to his office
and he would see that it's distributed to the committee members.
2:17:18 PM
MR. WALKER articulated the advantages of the AGPA project:
· It's an 800 mile pipeline that's 100 percent adjacent to
TAPS and entirely within Alaska.
· The infrastructure that's already in place is a significant
step in mitigating risk.
· LNG projects have lower overall cost overrun risk.
· Each new liquefaction facility gets more efficient and
we're comfortable with the cost estimates we've
received. Also, contractors are willing to stand
behind the numbers related to building a liquefaction
facility.
· The level of cost uncertainty for LNG marine
transportation and re-gasification is low. We're
dealing with ships that are already built and we know
the transportation cost for shipping LNG from Valdez
to Baja so there's no speculation on that.
· The pipeline component has the highest degree of
uncertainty with regard to cost overruns but the AGPA
line is the shortest line at 800 miles.
· A pipeline that is one-third the length of another line has
significantly less risk.
MR FUHS said the project is estimated to be $10 billion.
MR. WALKER discussed Alaska's risk.
· Alaska could lose the U.S. markets to LNG projects that are
beyond the study phase. If we miss the market, Alaska's gas
could become stranded.
· The $18 billion federal loan guarantee could be taken away.
The AGPA project isn't 100 percent dependent on that but it
certainly does help.
· The cost of construction rises over time.
2:21:16 PM
SENATOR THERRIAULT asked when the $10 billion project cost
estimate was last updated.
MR. WALKER replied it was in May, 2005. The estimate was $8
billion for the pipeline and $2 billion for the liquefaction.
MR. WALKER discussed the project economics.
· The LNG economics are robust. Econ One Research, Inc. shows
an internal rate of return in excess of 30 percent to the
upstream without tax concessions. It's a status quo
project.
· This project brings the greatest benefits to the state.
· The economics are sufficient to pre-build to Delta
Junction, which is a strong indicator of the robust
economics of the LNG project.
· To have the LNG project go now is an absolute win-win
scenario for Alaska.
· It allows multiple markets. It would be a West Coast
market initially, but in the future it could be on a
world market. Also, when issues are resolved a later
line could go through Canada.
MR. WALKER discussed the advantages of LNG from Alaska.
· The Alaska LNG project will benefit from an efficient, low-
cost liquefaction operation.
· The 40 degree ambient temperature will make the
facility 30 to 40 percent more efficient than
facilities in warmer regions because the gas is
basically pre-cooled.
· Other LNG projects that have gas at tidewater typically
have longer shipping times - some as long as 28 days. The
Alaska LNG market is 5-6 days away, which is a significant
cost savings. Also, not having the gas at tidewater is
beneficial for distribution of gas along the way.
· Many other LNG projects have higher upstream costs due to
complex, expensive field development. In Alaska 8.4 bcf/day
is reinjected so there isn't the expensive upstream
development.
· There are associated costs, but it's not the same as a
green field development on the upstream. Alaska
benefits from substantial existing North Slope
infrastructure and developed fields.
· It's important to evaluate the entire project. ASPA
has significant advantages that the other projects
don't have.
2:25:32 PM
MR. WALKER described a right sized project.
· Gas requirements:
· The proven North Slope gas reserve is 35 tcf.
· The gas requirement for the initial phase of the
Alaska LNG project is 15 to 25 tcf or 1.5 to 2.5
bcf/day.
· The maximum offtake for Prudhoe Bay under AOGCC Rule 9 is
2.7 bcf/day. That hasn't changed since 1977.
· LNG has about 2 bcf/day offtake. It decreases the cost
of operation from reinjection and makes more oil
available for thruput through TAPS.
· The Alaska LNG project will enable Alaska's gas to reach
Alaskan's and other markets sooner than larger pipeline
projects. This project fits within the market for LNG on
the West Coast and it fits within the size of the permitted
pipeline route. Also, it fits with the availability of the
gas on the North Slope in volume and the offtake at Prudhoe
Bay.
· AGPA provides market optionality as the project grows.
2:28:19 PM
MR. FUHS said AGPA supports Senator Huggins' request to AOGCC to
address the issue of maximum allowable offtake.
CHAIR FRENCH stated for the record that he asked Mr. Norman
about that recently. He indicated that some preliminary data has
been published and they're continuing to work on the question.
SENATOR THERRIAULT asked if he's saying that gas offtake now may
enhance oil recovery.
MR. FUHS explained that as a field gets older, more gas comes up
compared to the volume of oil so oil production becomes limited
by the gas handling capacity of the facility. Increasing gas
handling capacity by 2 bcf/day would result in an immediate
increase in oil production.
SENATOR THERRIAULT advised that last year he asked Department of
Natural Resources personnel if anything could be inferred if the
producers didn't propose additional investment for gas handling
capability. He suggested that it's a good question for AOGCC to
answer and then it should be put to the producers.
2:31:13 PM
MR. WALKER discussed suggested amendments to AGIA. He noted that
some of the following have been addressed in the latest bill
version.
· The same level of detail should be required for all
projects. The latest version seems to address that.
· If the proposed offtake exceeds the maximum allowed under
AOGCC Rule 9, someone should file an application to start
the process to increase the limit.
· If the volume of gas that's needed is in excess of 35 tcf,
the applicant should say what the exploration costs and the
timeframe would be.
· There should be an analysis of the anticipated oil loss
from Prudhoe Bay if the volume exceeds the AOGCC limit of
2.7 bcf/day.
· A timeframe for the project start up and completion should
be established for all applicants.
· A current project cost estimate should be included with the
application.
SENATOR THERRIAULT asked if the project start up wouldn't be
reflected in net present value.
MR. WALKER said yes, which is why it should be included. A net
present value analysis of the various proposals is necessary to
see the true value of the project to the state.
SENATOR THERRIAULT recalled that the state agencies indicated
that net present value would be the primary measure of the
different factors.
MR. WALKER said that's good as long as there's a net present
value calculation that considers timeframes. Also, there should
be provision for an expedited judicial process in the event
there's a challenge to the process or to the contract that's
awarded.
CHAIR FRENCH agreed and said the committee is looking at ways to
ensure that a case would leapfrog any other pending matter in
front of the court.
2:35:59 PM
MR. FUHS highlighted a suggested amendment related to value
added processing. If the project description includes an
agreement to provide gas liquids within the state for value
added processing, you should get credit for that because that
will build an economy beyond the construction phase, he stated.
CHAIR FRENCH said he'd be happy to review proposed language on
that point.
MR. FUHS said he also has proposed language to address project
modifications as outlined on page 14, line 20. The way the bill
is currently written it's not possible to modify a project to
provide improved benefit to the state and you should be able to
do that. The administration doesn't object to the proposed
language, he added.
CHAIR FRENCH asked him to give the proposed language to his
staff.
2:38:26 PM
CHAIR FRENCH noted that Representative Olson joined the meeting.
SENATOR THERRIAULT said he would certainly like to see value
added industry get started in the state, but it's difficult to
award points to something that might or might not happen.
MR. WALKER suggested building a process into the contract so
that when there is industry, it could bank on offtaking some of
the liquids within the state.
SENATOR THERRIAULT asked if it's a question of a physical
offtake.
2:40:03 PM
MR. FUHS explained that the gas on the North Slope is rich. In
Cook Inlet it's 99.9 percent methane and on the North Slope
there's methane, ethane, propane, and butane. The gas handling
there makes it possible to actually customize what the gas
offtake will be so it links up to the intended uses. He
suggested you'd go at least as far down as propane. It receives
a premium in the Asian market and it's the most likely petroleum
product to be exported to coastal Alaska. He noted that ANGA has
done a financial analysis on moving propane into rural Alaska to
replace diesel. Ethane provides a feedstock for the plastics
industry and butane provides a feedstock for butyl rubber, which
is what most automobile tires are made of. We ought to at least
be able to create those basic feedstocks whether you produce
them to the final product or not, he said.
2:41:39 PM
SENATOR HUGGINS asked, on behalf of a knowledgeable constituent,
if the terminus should be closer to MatSu, Kenai, or Anchorage.
MR. WALKER explained that the location of the LNG facility is
the result of work the Yukon Pacific Corporation did. Going into
Cook Inlet was studied, but the permitting agencies wouldn't
allow it. Any effort to change the terminus would require
proving wrong those 23 state and federal agencies. Doing that
would remove the time advantages of having a location that's
permitted right now.
SENATOR HUGGINS said his constituent would argue in support of
making the spur line to Southcentral larger and just bringing it
down. Because of the terrain and available workforce it's
readily expandable.
MR. FUHS said it doesn't need to be an either or question. In
fact, AGPA has a MOU with the Alaska Natural Gas Development
Authority on bringing the spur line in. That proposal is a 24
inch line tying into the existing 24 inch line. There's no
reason you couldn't also bring rich gas in for industry if it
makes sense, he said. If ConocoPhillips wanted to modernize its
LNG plant there'd be no problem; it'd bring the unit cost down
for everyone in the system. The trick is to get production as
high as possible and still have a project that's not too big to
move forward within the available gas supply. That's what we
mean by right sizing, he said. If someone wants to make the
commitment to expand that's not a problem.
2:46:22 PM
MR. WALKER highlighted AGIA benefits toward advancing a gas
pipeline.
· The rolled-in rates are good for Alaska's future. In Canada
rolled-in rates are the norm and it would be unusual to
have an adjacent project that's incremental.
· The $500 million sends a very positive message about a
project going forward.
2:46:52 PM
SENATOR WIELECHOWSKI said the testimony was refreshing and he's
pleased that this alternative exists. The project is less risky,
it's all Alaskan, it's quicker, and according to various studies
it's as profitable. Expanding through Canada later is always an
option. He said he hopes the administration looks at this
project seriously.
SENATOR THERRIAULT asked what makes AGPA believe it can get
approval to deliver gas liquids to overseas markets beyond the
current export.
MR. WALKER replied we're not aware of any prohibition against
gas liquids going to a foreign market and we're not aware of any
shortage of propane in the North American market. The loan
guarantee requires getting the natural gas into the continental
U.S. but we haven't seen that requirement on the liquids, he
said.
At ease from 2:49:09 PM to 2:52:57 PM.
CHAIR FRENCH reconvened the meeting and announced the next item
on the agenda is a presentation from ExxonMobil.
BILL McMAHON, Commercial Manager, ExxonMobil Alaska Gas
Development Group, Anchorage, AK, described ExxonMobil's 50 year
history working to develop the oil industry in Alaska. He said
this has been a mutually beneficial relationship and
commercializing gas on the North Slope will allow the
relationship to continue for another 50 years. ExxonMobil holds
the largest working interest at Prudhoe Bay and its current net
production in Alaska is 150,000 barrels/day. Adding 1 bcf/day in
natural gas sales-which would be ExxonMobil's share-would
increase its worldwide daily gas production by more than 10
percent. Given the significant impact that this project could
have, he said his company is ready to work with Governor Palin,
her cabinet, and the legislature to move the project forward.
2:54:47 PM
MR. McMAHON said that as an illustration of commitment,
ExxonMobil has spent more than $180 million studying ways to
commercialize Alaska gas. Since the 1970s we have evaluated LNG,
gas to liquids, and gas pipeline alternatives. Based on these
studies, we've determined that a producer gas pipeline would
result in the best value for the state, the producers, and the
nation. ExxonMobil is aligned with the governor, the
legislature, and the people of Alaska regarding the overall
objective. We are committed in moving the Alaska gas pipeline
project forward.
ExxonMobil is ready to participate in a fair market-based
competition. We understand the overarching goal of AGIA is to
create open competition, but due to the prescribed conditions
included in AGIA, it will not achieve that goal. A prescriptive
bidding process will not allow the flexibility needed for
individual applicants to weigh the risks associated with this
basin-opening mega project and propose what is necessary to
manage these risks. It's important that AGIA allow applicants to
define how they would achieve the state's objectives rather than
prescribing specific requirements.
To ensure the best results, AGIA should establish broad key
objectives and allow the applicants the flexibility to meet
those objectives and the flexibility in defining the
requirements they deem necessary to make the project
commercially viable.
MR. McMAHON suggested amending AGIA to make it is an objective
driven process. Doing so would result in an open competition
with the maximum number of applicants proposing innovative
solutions. He recommended that the state define broad objectives
and request proposals for how the applicants intend to meet or
not meet those objectives. Evaluate the proposals and select the
one that best serves Alaska's needs and if none meet the state's
overall objectives, they can be rejected or the state could
negotiate with the party that most closely meets those needs.
2:58:03 PM
MR. McMAHON said to understand the importance of using broad
objectives it's helpful to review the project risk and issues
surrounding the development that any applicant will need to
address. Describing the project as a "world scale" undertaking
with significant risk, he said the recent increases in
construction costs have made the 2001 $20 billion cost estimate
too low. Furthermore, natural gas prices remain highly volatile
and are now slightly less than in 2001. Other risk factors
include cost overruns, schedule delays, construction conditions,
regulatory uncertainties, and state fiscal uncertainties. The
huge size of the project increases the complexity and, he
cautioned, the size amplifies the consequences of poor
execution.
3:00:54 PM
MR. McMAHON explained that large, commercially sound oil, gas
and pipeline projects traditionally have obtained financing if
they have strong sponsors, proven track records, and sufficient
financial strength to provide sponsor equity and to backstop key
project commitments. He opined that the key commitments for this
project will take the form of firm, long-term gas transportation
commitments. Those firm transportation (FT) commitments are
binding obligations made by shippers to pay for the cost of
reserving a quantity of gas capacity on a pipeline over a
specified period of time.
MR. McMAHON said that FT commitments are needed to finance the
gas pipeline project and must be provided by creditworthy
shippers. In this case, the shippers will be the producers and
the state's shipper. These substantial FT commitments, which may
be for tens of billions of dollars, must be paid whether or not
the gas is actually shipped and regardless of the price of gas
in the marketplace. Through these commitments, the development
costs and associated overrun risks are ultimately borne by the
shipper.
3:03:46 PM
MR. McMAHON emphasized that the parties taking the risk need to
be able to manage the risk. He expressed the view that the
producers as shippers cannot make FT commitments during an open
season unless they have confidence that the gas pipeline project
can be built cost effectively and operated on a long-term
commercially viable basis. He warned that the current
prescriptive terms will preclude leaseholders from making a
conforming proposal thereby denying the state the opportunity to
consider terms from the largest stakeholders in the project's
successful development.
3:04:38 PM
MR. McMAHON offered the view that operation and construction
experience ought to be a significant consideration on projects
of this magnitude. He advised that the producers have worldwide
mega-project experience and have demonstrated success in meeting
project objectives. In fact, ExxonMobil has a record of
completing large projects within 15 percent of the cost
estimated at the time of project funding. The combined
experience and capability of ExxonMobil, ConocoPhillips Alaska,
Inc., and BP Exploration (Alaska) Inc., will provide the best
chance for delivering a successful project, he stated.
3:07:01 PM
MR. McMAHON relayed that the producers have extensive successful
experience in Arctic environments. He noted that ExxonMobil's
commitment to technology development has played an important
role in advancing oil and gas development in Alaska. He
attributed ExxonMobil's success to its research, technical
development, and a firm commitment to safety, health and
environmental care. In addition to its operating excellence,
ExxonMobil has the financial strength to make this project a
reality. Having maintained the highest credit rating for the
past 88 years, ExxonMobil has the financial strength and
flexibility to pursue opportunities worldwide through
fluctuating economic cycles.
3:09:56 PM
MR. McMAHON reminded members that the Alaska gas pipeline
project is a basin-opening project that will benefit the state
and the oil and gas industry in Alaska. He opined that these
projects are most successful when there is alignment between the
host government and the leaseholders and on a very high level
there is alignment between the three major producers and the
state. ExxonMobil believes that a producer gas pipeline project
will bring maximum benefit because the producers and the state
have the greatest incentive to control cost. Low capital and
operating cost combined with lower treatment and transportation
cost, results in a higher net-back value on the gas. He
highlighted that the state will receive most of its revenue from
the gas sales under the lease royalty agreements and production
taxes, which are valued based on the netback received from the
gas. He expressed the view that third-party owners do not share
the same incentives because they can benefit from increased
capital costs.
3:12:01 PM
MR. McMAHON stated that to mitigate the tremendous risks
associated with this project, ExxonMobil must have fiscal terms
that are predictable and durable before it can to proceed. He
relayed that ExxonMobil is willing to take the geologic, cost,
and commodity price risks, but it cannot risk a change in the
fiscal terms. That is of a different nature and totally beyond
his company's control. If fiscal terms are subject to change,
ExxonMobil cannot make a well-founded investment decision on
behalf of its shareholders. Because of the large investment
required to develop the gas pipeline, tax increases on oil and
gas related activities during the life of the project could
significantly impact the commercial viability of the project and
offset the benefits, he stated. He reiterated that AGIA should
allow market participants to put forth proposals on what is
required to make the project viable. This competitive process
will allow the state to consider the proposals that have the
best chance of delivering on the promise of an Alaska gas
pipeline.
3:15:16 PM
MR. McMAHON explained that AGIA must bring together the upstream
and midstream to provide an integrated proposal. The reason they
must come together is because the upstream pays for the
midstream. Upstream means the revenue generated from the sale of
the gas and liquids from the pipeline project. To calculate the
revenue from the upstream, there must be clarity on the taxes
and royalties from the beginning of the project. At a minimum
any proposal must demonstrate how a successful open season will
be achieved.
MR. McMAHON said that because the upstream inducements require
significant modification, he would suggest leaving the issue
open and allow an applicant to make a proposal to address those
terms. AGIA prescribes activities that must be completed in a
particular timeframe, which isn't consistent with good project
management practices. If the project is commercially viable,
milestones are unnecessary. AGIA generally lacks specifics on
key fiscal terms and other requirements. To address these gaps
commissioners are given broad authority to adopt additional
requirements and establish regulations. This would create
significant uncertainty, he stated. Finally, the parties must
have an efficient and impartial means to handle disagreements.
ExxonMobil believes that project related agreements ought to
provide for binding neutral arbitration as a mechanism for
dispute resolution.
3:18:50 PM
MR. MCMAHON stated that ExxonMobil agrees with some of the
changes that have been made to AGIA including: making the
state's entire capital contribution a bid variable; beefing up
evaluation criteria; recognizing the need to include terms in
the contract; and requiring legislative approval of any license
award. Other changes will limit bidders by eliminating
confidentiality protection for a licensee's proprietary and
trade secret information and requiring bidders to forgo the
right to challenge an improper award. At this stage AGIA is too
prescriptive to solicit quality market-based bids that are
necessary to move the project forward, he opined.
MR. McMAHON stated that his company is ready to work with the
administration and the legislature to establish a framework that
recognizes the integrated nature of the project and mitigates
the risks outlined above to allow the project to go forward.
ExxonMobil suggests amending AGIA to include a broad objective-
driven framework. Applicants should be allowed to propose how to
best meet those objectives and to identify state requirements to
advance the project. Such a process will bring more viable
applications, create more competition, and allow the state to
select the proposal that delivers the most value. ExxonMobil is
ready to participate in a competitive, open, and transparent
process as outlined above.
CHAIR FRENCH asked Mr. McMahon to send a copy of his statement
for the record.
3:21:22 PM
SENATOR THERRIAULT asked if participation by an ExxonMobil
affiliate might satisfy the Canadian demand for involvement in
the line running through that country.
MR. McMAHON replied his company hasn't focused on that at this
point, but ExxonMobil's interest in Canada would be held by a
Canadian affiliate. We're interested in working with any parties
that add value to the project and that includes Canadian
enterprises, he added.
SENATOR THERRIAULT said he understands that ExxonMobil's
corporate view is that Enbridge and TransCanada don't add value,
but it appears that they could satisfy this Canadian demand.
MR. McMAHON replied, "We continue to have dialog with Enbridge
and with TransCanada today."
SENATOR WIELECHOWSKI asked if the request for locked in rates
doesn't ask Alaska to assume huge risk.
MR. McMAHON said establishing the fiscal terms means talking
about how to split the revenue from the project between the
state and the producers. Given that this is a natural resource
project, there will be fluctuation in the actual revenue that
each party receives based on the volatility of natural gas
prices.
SENATOR WIELECHOWSKI commented that ExxonMobil would essentially
like to shift its risk onto the state.
MR. McMAHON replied we want clarity on what the split of revenue
will be over the life of the project.
SENATOR WIELECHOWSKI asked what type of assurance ExxonMobil can
give that it can actually access its gas under the Prudhoe Bay
Unit Operating Agreement.
MR. McMAHON said we'll need to work with AOGCC for gas offtake
rates and we already have commercial agreements among the
Prudhoe Bay owners that govern the taking of gas so we're
confident that we'll be able to take our share of the gas from
Prudhoe Bay.
SENATOR WIELECHOWSKI asked if he's familiar with the Prudhoe Bay
Unit Operating Agreement.
MR. McMAHON said no.
SENATOR WIELECHOWSKI relayed that there are differing opinions
as to what producers can and cannot do under that agreement. Do
you absolutely know you can take your gas?
MR. McMAHON said with alignment among the Prudhoe Bay
leaseholders, we're confident we can take our gas.
SENATOR WIELECHOWSKI relayed that many of his constituents are
asking why ExxonMobil should be allowed to participate in the
gas pipeline when it hasn't paid for the Exxon Valdez spill and
it hasn't developed Pt Thomson. He asked for a response.
MR. McMAHON replied:
As far as the Valdez oil spill, ExxonMobil has paid all the
damages associated with that-the actual damages ordered by
court and voluntarily, many within a year of the spill. The
current dispute that is open right now are punitive damages
appropriate in this case. That's the issue that's being
worked through the courts as we speak. And so we think that
that's best resolved in the courts. As far as Pt. Thomson's
concerned, we are involved in litigation over the Pt.
Thomson field and I'm really not at liberty to comment on
Pt. Thomson.
SENATOR HUGGINS asked for a comment on an international project
that was canceled when it was $3 billion over budget.
MR. McMAHON said he isn't familiar with it.
CHAIR FRENCH asked if ExxonMobil needs fiscal stability on taxes
across the spectrum.
MR. McMAHON said yes. Providing stability on just one form of
tax wouldn't be sufficient because the other taxes could be
increased to offset the fixed rate.
CHAIR FRENCH suggested ExxonMobil think about another
alternative. "You're forcing us to go to an all Alaska line or
some other route that allows us to actually get our gas to
market without your participation because of your request for
what I perceive as a political impossibility." The state derives
90 percent of its income from oil revenues so giving you what
you're asking for would threaten schools, roads, public safety,
and everything else. Even then there would be no guarantee that
you'd start digging on the pipeline, he said.
3:31:30 PM
MR. McMAHON acknowledged the statement.
SENATOR THERRIAULT relayed that in 2001 ExxonMobil resisted when
it was asked to help with financing a northwest pipeline
project. At that time the Secretary of Energy asked the major
producers to give the builder some kind of loan guarantee even
though they were barred from equity ownership. Basically you
told Congress that if you were going to participate you'd ask
for a waiver and you'd want some equity, but you wouldn't give a
loan guarantee. Now the issue is that the FT commitment really
finances the pipeline and is akin to a loan guarantee. The
argument then and the argument now aren't consistent, he said.
MR. McMAHON explained that in 2001 there was a different
regulatory regime for the natural gas business in North America
and the concept of FT commitments didn't exist. At that time
pipeline companies were a merchant transporter and as such they
bought, transported, and sold gas into the markets in North
America. Producers were prohibited from that business. Since
that time the natural gas pipeline business has been
deregulated. Now the pipeline companies are prohibited from
being a merchant; they transport gas for a fee and someone else
holds the shipping rights.
SENATOR THERRIAULT said there's the suggestion that FT
commitments are like a loan guarantee, but there's already a
separate federal government loan guarantee. Why are we being
told you're running significant risk? If the pipeline were to
cease operation it doesn't seem that you'd necessarily be
responsible for paying off the construction loan, he said.
MR. McMAHON explained that if the pipeline wasn't operational
that would be a force majeure event and under the FT agreements
his company wouldn't be required to make the payments. He
further explained that FT commitments are ship or pay and the
corporate balance sheet is on the line for that. The federal
loan guarantee would come into play only if all the shippers
failed to make their payments. Financiers will look first to the
holders of the FT commitments.
SENATOR THERRIAULT asked if the federal loan guarantee wouldn't
be available to pay off the construction loan if the pipeline
company were to declare bankruptcy.
MR. McMAHON said he would defer to the ExxonMobil financing
experts.
3:37:56 PM
CHAIR FRENCH advised that the committee would be happy to
receive a supplemental written response.
SENATOR THERRIAULT noted that ExxonMobil's 2001 congressional
testimony included the following statement: "There must be
assurance that the Canadian segment will be financed and
completed without our involvement." There seems to have been a
different world view at that time, he said.
MR. McMAHON said it was a different world given the different
regulatory regime.
SENATOR WIELECHOWSKI asked if his company would agree to put its
gas in the line if it isn't the licensee and the project is
economically viable.
MR. McMAHON said we'll assess the project that's proposed when
an open season is announced. ExxonMobil has a duty to its
shareholders and it has obligations under its lease agreements
with the State of Alaska. Those obligations will drive our
participation in an open season, he stated.
SENATOR WIELECHOWSKI asked if his company has analyzed whether
or not this project is profitable.
MR. McMAHON said we don't believe the project is commercially
viable under the current fiscal regime.
SENATOR WIELECHOWSKI asked if his company had calculated any
rates of return or net present values.
MR. McMAHON replied we analyze our business and make investment
decisions on a proprietary basis.
SENATOR WIELECHOWSKI noted that the state has talked about rates
of return averaging anywhere from 29.8 percent at $3.50/mcf to
90 percent at $8. Is your analysis different than that?
MR. McMAHON explained that determining the commercial viability
of a project has more to due with risk than a single number.
There's cost risk, price risk, completion risk, and fiscal risk.
3:41:24 PM
SENATOR WIELECHOWSKI asked if he had looked at and agrees with
the state's report or the EconOne analysis from last year.
MR. McMAHON said he hadn't seen the state report. He did look at
the EconOne analysis last year and his company does not agree
with it.
SENATOR WIELECHOWSKI said this is the first testimony he's heard
that the project isn't commercially viable.
MR. McMAHON said his company is willing to take on many of the
risks associated with the project including geologic risk, cost
risk, and commodity risk. However, fiscal risk must be addressed
and that's what his company hopes to achieve through the AGIA
process.
SENATOR WIELECHOWSKI asked if his company doesn't take on fiscal
risk every day in other countries.
MR. McMAHON said yes, but the sheer magnitude of this project
makes it different and that's what is driving the quest for
fiscal stability and predictability.
SENATOR WIELECHOWSKI asked if he'd agree that the all Alaska
line would be less risky.
3:44:16 PM
MR. McMAHON replied ExxonMobil has looked at LNG, gas to liquids
technology, and gas pipelines and it believes that a gas
pipeline to the North America markets offers the most promise
for a commercially viable project for the producers and the
state.
SENATOR WIELECHOWSKI reminded him that he just said that is a
much riskier project.
MR. McMAHON said there is extreme risk associated with a project
of the magnitude envisioned.
3:45:04 PM
SENATOR THERRIAULT said you don't get the type of certainty
you'd like in western democracies; you only get it in areas of
the world where it's virtually meaningless. You don't get it
here because of constitutional prohibitions and because of the
governmental system you're able to participate in. The proposed
reserves tax is a case in point. When that was on the general
election ballot last year, ExxonMobil participated in the "Vote
No" campaign and the citizens in the state did in fact vote no.
That governmental system keeps political risk and therefore
financial risk in balance. There isn't any reserves risk because
there's gas coming out of the ground every day. There is cost
risk because the price of steel could escalate, but you don't
have to build the upstream part. That pipe is built, the gas is
coming out, and the pipe's been amortized. It seems like there
are a number of things in place that make the risk manageable so
the claim that this is too risky just doesn't ring true, he
said.
MR. McMAHON said if this project were in Texas, the United
Kingdom, or Australia his company would seek the same
predictable and durable terms. He then read the following:
Most western democracies have broadly diversified
economies and when there's a need for more tax
revenues, those governments have many options
available to them on how best to raise the needed
additional revenue. For example, the United
States changes the rate of personal income taxes
as often a vehicle that's selected. There's no
need to target a particular industry. We need
fiscal predictability in Alaska for exactly the
same reasons that we insist on fiscal stability
in these other political jurisdictions. The
temptation to target the predominant industry to
provide additional revenue is always there and
fiscal stability provisions prevent these other
host governments from responding to that
temptation.
SENATOR THERRIAULT asked if his company couldn't divest itself
of some of the risk by selling at the wellhead.
MR. McMAHON said ExxonMobil is open to selling its gas at the
wellhead to any company that offers an attractive proposal
through a commercially viable project.
3:49:55 PM
SENATOR WIELECHOWSKI asked if it's fair to say that ExxonMobil
will not be participating in the bid if AGIA stays the same.
MR. McMAHON said if AGIA remains in its current form his company
would not be able to make a conforming bid.
SENATOR THERRIAULT asked if ExxonMobil wouldn't enter into
active negotiations with the project proponent about ways to
manage risk and use its corporate expertise to oversee the
project even though it wouldn't be an owner.
MR. McMAHON said it would depend on the structure of the open
season and the types of bids the project proponent would accept.
He said he doesn't know if it's a common practice or not.
At ease from 3:52:30 PM to 3:58:58 PM
CHAIR FRENCH reconvened the meeting and announced the next item
on the agenda is a presentation from ConocoPhillips.
WENDY KING, Manager Alaska North Slope (ANS) Gas,
ConocoPhillips, Anchorage, briefed the committee on
ConocoPhillips' business in Alaska and stated that her company
is committed to finding a way to develop the ANS gas resources
and is eager to find a framework by which the project can be
advanced. Although the resources committee made some thoughtful
changes, additional change is necessary, she stated.
4:00:54 PM
MS. KING displayed a chart indicating that since 1970
ConocoPhillips has studied a number of different technologies to
market ANS gas resources. Since 2000 it has focused on a gas
pipeline project through Alaska and Canada for delivery to North
American markets. Working jointly with the other major
producers, it has spent $125 million on this project. During
2002, 2003, and 2004 it was involved in federal legislation.
Since 2003 ConocoPhillips has worked with the State of Alaska to
develop a framework to advance the gas pipeline project and that
effort continues today. Dialog and balanced accommodation of
reasonable concerns are essential to create the alignments
necessary to move this project forward, she stated.
4:02:34 PM
MS. KING displayed a graph demonstrating that the Alaska gas
pipeline project will be significantly larger than any other
North American project advanced since 1997. We know that this
project will cost more than $20 billion, but we don't know how
much more, she said. The sheer size and scale creates new risks
that even those of us in the industry don't normally look at
when analyzing a $2 billion to $3 billion project.
SENATOR THERRIAULT asked if the graph is showing the cost into
the Alberta Hub as $14 billion or $15 billion.
4:05:02 PM
MS. KING explained that the graph is intended to clarify-with
the 2001/2002 cost estimate-how much of the project is from
Alberta to Lower 48 markets. It doesn't factor in cost estimate
increases so the actual breakdown to Alberta versus Alberta to
the Lower 48 is unknown. Actually, she added, there are three
alternatives for that second leg. The first involves building
new pipe, the second expands the existing pipelines, and the
third alternative uses existing capacity. We haven't presupposed
any of the alternatives, but that commercial decision will be
addressed as the project schedule advances, she said.
4:07:08 PM
MS. KING referenced the DNR perspective of the project economics
and said those numbers imply that the gas sales via a third-
party pipeline are wildly economic and that the internal rate of
return (IRR) would drop significantly on an integrated basis if
an affiliate owned a corresponding share of the pipeline. Also,
the IRR figures assume that the producers' economics aren't
affected if the capital investments in the pipeline are made by
an unaffiliated company. This ignores the fact that the shipping
commitments are the most likely foundation for financing the
pipeline. It's not the credit of the pipeline that will make
this pipeline project go, it's the credit of the shippers, she
stated. Furthermore, the numbers don't include the uncertainties
that it costs to explore, find, and develop the gas to get it
into the midstream portions of the project.
4:08:57 PM
SENATOR WIELECHOWSKI asked what the standard rate of return is
for an upstream producer in oil and gas.
MS. KING replied she hasn't seen a standard rate of return on
projects she's worked on. Her company looks at a number of
financial metrics such as long-term cash flow, discounted cash
flow, profitability indexes, reserves, and cost per barrel.
Those metrics are weighed against the risks and uncertainties to
determine whether or not the risk/reward balance is appropriate
to make a stand-alone investment decision.
SENATOR WIELECHOWSKI asked what the rate of return was on the
$2.2 billion that ConocoPhillips made in Alaska last year.
MS. KING said she would do some research and supplement the
record.
SENATOR THERRIAULT said you make it sound as though an FT
commitment is almost a loan guarantee to the financial markets
that finance the line and I don't believe that's true.
MS. KING said her understanding of the financing is that a
pipeline company asks for ship or pay commitments. That is a
promise to pay for a certain capacity over a specified term
regardless of whether gas is shipped down the pipeline or not.
The pipeline entity will take that shipping commitment to the
bank and improve its ability to finance the project.
SENATOR THERRIAULT said his understanding is that the pipeline
entity shows the shipping commitment to the banker as proof that
the project is economically viable. ConocoPhillips' obligation
to pay is tied to the units that are shipped down the line; it
is not a commitment to pay the banker. That long-term obligation
to ship and pay may be a drag on the corporate balance sheet,
but you have the upside of finally booking the tremendous
reserves as an asset, he said. If the pipeline were to go
bankrupt, ConocoPhillips wouldn't be obligated to pay the bank
that financed the pipeline. Your company is only obliged to pay
as the units are actually shipped.
MS. KING said she isn't familiar with the term "booking the
value of the reserves," but her company doesn't realize the
financial value of the reserve until it's produced. The second
point is that if ConocoPhillips makes a shipping commitment it
is obligated to pay that pipeline entity even if it is unable to
get the gas into the pipeline. She acknowledged that she doesn't
know what course of events the bank follows if a pipeline
company defaults on a loan, but those shipping commitments were
used to get the financing so there has to be a link. "I'm happy
to follow up with our experts that are coming in here and try to
get more back to the committee on that," she said.
CHAIR FRENCH said we'd be happy to have you supplement the
record.
SENATOR THERRIAULT mentioned an article that talked about
multinational corporations that were having trouble replacing
reserves and commented that a company that isn't replacing
reserves will eventually go out of business. Investors really
look at that so it's got to be tremendously important to your
company, he said.
MS. KING said she understands what he's saying about reserve
replacement, but she isn't they're speaking a common language
when talking about "booking the reserves" versus "booking the
value of the reserves."
4:19:08 PM
CHAIR FRENCH noted that Senator Joe Thomas had joined the
meeting.
MS. KING displayed a slide outlining project risks. Steel and
labor costs are on the rise so the $20 billion cost estimate
could be significantly higher by the time actual construction
begins.
4:20:32 PM
SENATOR WIELECHOWSKI reviewed the graph and said he's not sure
it's fair to use cost figures back to January 2001 when her
company was prepared to enter into a contract in May 2006.
That's a more appropriate starting point, he opined.
MS. KING explained that ConocoPhillips was mindful of what had
happened to project costs as it worked through the different tax
and royalty terms associated with the last proposal. But it's my
understanding that we aren't working under the old proposal, she
said. We've been asked to find a new framework to advance the
project and we're willing to do that. We're simply pointing out
that there are uncertainties and risks associated with this
project that we'll be considering as we try to find a balance. I
believe we can bridge the gap, she said.
SENATOR WIELECHOWSKI said he's sure ConocoPhillips wouldn't have
entered into a contract in May 2006 using January 2001 steel and
labor costs estimates. Those increases had to be factored in
somehow, he said.
MS. KING said when ConocoPhillips was involved with the
negotiations last year it did the appropriate work to assess the
uncertainties and risks. That was a proposal that would allow
the project to go forward. Clearly people don't want to work off
that old proposal now so her company has to find a new balance.
She explained that ConocoPhillips uses a gated, decision-making
process and it is not at a decision gate right now. A lot more
engineering is required before the actual project sanction
decision.
4:26:52 PM
MS. KING said price is another project risk. Predicting
natural gas prices is challenging and it's risk that is
borne entirely by the shippers. A pipeline entity isn't
exposed if it has firm shipping commitments because it will
get paid day in and day out. Other risks and uncertainties
include: world-scale logistics, world-scale material
procurement, labor availability, weather, reserves and
deliverability. With these risks and uncertainties, she
questions whether any entity is capable of guaranteeing an
economic return on this project. We are willing to
guarantee assumptions in our work and back them up in a
contractual arrangement, but is a pipeline entity willing
to come up here and build this project without firm
shipping commitments? Even if an entity said yes, could it
get financing?
4:30:33 PM
SENATOR THERRIAULT said with regard to price risk he
recalls that when ConocoPhillips acquired Burlington
Resources, Inc., analysts put a price per unit of gas at $6
or $7 based on the cost of acquiring those reserves. That
has to say something about what you thought the price might
do going forward, he said. Under the old contract, Mr. Van
Meurs proposed a risk sharing arrangement such that the
state would pick up some risk on the down side and in
return it would share on the up side. The producers said
no, which is another indication that you thought it was
more likely that the price of gas would go up. With regard
to reserves risk, Prudhoe Bay is a lower risk than others
because it's probably the largest and most well-understood
basin in the world in terms of getting the resource out of
the ground. As far as tax risk is concerned, ConocoPhillips
in particular indicated it was ready to strike a deal
before long-term certainty on oil was added to the deal. If
you look at the things that are being highlighted as high
risk, there are indications that perhaps that isn't the
corporate view, or sources of information have helped to
mitigate those risks, or the state has actually offered
things to mitigate some of the risk and your company
declined, he stated.
MS. KING said after the Burlington Resources acquisition
she recalls that some of the quotes were only partial
quotes. Although commodity price risk is something that
ConocoPhillips takes on, there is a distinction between
short-term and long-term price forecasting. With regard to
reserves and deliverability risk she explained that there's
clearly risk with deliverability. Even when you're working
with known reserves, producing has associated risks. With
regard to the price differential payment, she explained
that it was part of a past proposal that related to
upstream cost allowance.
4:36:15 PM
SENATOR WIELECHOWSKI commented it's risk versus reward.
You're in the business of potentially earning up to 100
percent return and you ought to keep that in mind when you
talk about risk. The rewards are huge.
MS. KING pointed out that the authors of AGIA recognized
that the licensee could see the project as uneconomic in
the future. If that weren't the case there wouldn't be a
provision to set up an arbitration panel to deal with that
issue. That is a reflection of the risk associated with
this project. She continued to say:
It is important for us to reduce the differences
in our perceptions about the economic drivers and
risks on this project. It is also vitally
important to have a common understanding about
what gas resources we have and how they are used.
ConocoPhillips has a 36 percent working interest
in Prudhoe Bay that represents a majority of our
known resource on the North Slope. Prudhoe Bay is
circulating approximately 8 bcf/day gas into that
producing oil reservoir. That gas serves to keep
the reservoir pressure up so more oil can be
produced. Some of that gas is converted to
miscible injectant and is injected into Prudhoe
and other reservoirs to improve oil recovery and
some of that gas is blended with oil for shipment
as NGLs-natural gas liquids-that go down TAPS.
We have invested billions of dollars at Prudhoe
Bay to produce more and more and more oil from
that field. And the Prudhoe Bay gas has been and
continues to work hard to produce more oil.
Neither the gas nor the owners are sitting there
idle right now. I am most disappointed in talk
about litigation for getting a gas pipeline. I
see litigation as a lose lose proposition. I'd
rather see a process by which we're creating work
for engineers rather than creating work for
lawyers. As a member of the House Minority
described it, they saw it as the state's nuclear
option. I actually agree. While we are fighting
out litigation, costs could be continuing to
rise, gas demand could be destructed and we'd be
accomplishing nothing that could get us closer to
make this project a reality.
4:39:48 PM
MS. KING displaying a graph that reflects the 10-year project
timeline after AGIA. She highlighted that open season is from 18
months to two years after the project planning commences. During
the permitting and engineering phases the focus will be on
project costs and mitigating risks and uncertainties. Almost
every year there will be a critical decision-gate and if the
project still looks viable, the next phase is started. Roughly,
it was estimated to cost $1 billion to get through the first
four years. At that point you make the decision to move to the
construction phases. She advised that is the 2001 $19 billion
cost estimate.
4:41:30 PM
CHAIR FRENCH asked if the $1 billion is shared among the three
producers.
MS. KING replied it's $1 billion gross.
CHAIR FRENCH asked where the FERC certificate is indicated.
MS. KING pointed to the two yellow boxes at the top of the
graph. The first is when you file the FERC and NEB certificates
and the second one is when you receive the FERC and NEB
certificates. The project sanction decision would be made after
receiving the FERC certificate.
CHAIR FRENCH asked who makes that separate project sanction
decision.
MS. KING said on a project of this magnitude the project
sanction decision would go before the board. FERC could put
conditions on a certificate so you'd assess whether or not those
conditions change the economic viability or risk/reward balance
of the project.
CHAIR FRENCH said from a timing perspective, the decision would
fall hard on heels of the FERC certificate. That's when you make
the decision to commit money for construction.
MS. KING said yes; but the parties would need the time to do due
diligence to make that huge investment decision.
4:43:35 PM
MS. KING displayed a "pipe" graph of front end loading and cost
estimates. She explained that the feasibility phase will take
about two years and cost about two percent of the total project.
That's where preliminary design is done and fatal risks are
identified and mitigated. This phase provides the best
opportunity to spend good money on engineering that will reduce
costs later on, she said.
Once you move from the feasibility phase into the design phase
you'll spend about five percent of the total project cost. For
this project that's when you'd get the major permits. You'd be
finishing the design optimization and you'd have about ten
percent of the detailed design complete. At that point you'd be
implementing risk mitigation plans. While advancing the
engineering, environmental, and permitting work, the goal is to
try and define the project more and reduce uncertainties.
The execute phase is when you're actually out there and
construction is ongoing. At that time the risk mitigation
options are limited and expensive. If the upfront work isn't
right, this phase will be expensive.
4:45:41 PM
MS. KING stated that the open season is critical to the project
because: it allows open access to the pipeline; it demonstrates
no discrimination; it's required by ANGPA in Section 103(e); it
establishes the demand for capacity, which impacts size, design,
and the cost of the pipeline; and it supports whether or not the
project is commercially viable and can get financing.
4:46:38 PM
SENATOR HUGGINS said in his view the binding open season is the
critical event. He questioned what might be more important.
MS. KING said an open season, receiving the FERC certificate,
and making the project sanction decision will all be critical
milestones.
SENATOR HUGGINS noted that ConocoPhillips shows receiving the
FERC certificate in about 4 years and AGIA estimates submitting
the FERC application in about five years. He asked for help in
understanding the difference.
MS. KING recalled that the only specific timeline in AGIA is
that the initial open season is to be concluded within three
years. The five-year timeline accommodates the circumstance
where a party isn't ready to move into the execution phase. The
FERC certificate has been received, but the party hasn't been
able to receive credit support and/or shipping commitments.
4:48:46 PM
MS. KING expressed the view that the current structure of AGIA
hinders competition and creative alternatives. Why would the
state want to block alternative projects instead of letting the
free market work the most efficiently? For all practical
purposes, it's difficult to see how an alternative project could
be advanced any time over the next decade, she said. The
licensed project assurance clause in Section 540, Senate version
page 22 is particularly problematic with respect to fair and
open competition. The provision severely constrains the state's
right to change tax and royalty terms, which is a contractual
arrangement, for a project other than the licensed project. Even
when the licensed project is not moving forward or is fully
subscribed for over a decade. It also creates litigation
exposure to the licensee. The word "preferential" could be
easily disputed if the licensee was not satisfied with the
state's actions, she said. The benefits of the AGIA coordinator
and streamline permitting are exclusive to the state's chosen
winner, but what if the winner can't deliver on the project that
was promised in the application? The state could be tied up for
a decade with an entity that was picked before most of the front
end engineering design work is done, she said. Also, an
alternative project could experience difficulties in getting
their permits done efficiently or face more burdensome
conditions if the state didn't want to cooperate with the
alternative project.
MS. KING said she's been asked if AS 38.05.020(b)(9) offers an
alternative vehicle for streamlined permitting for an
alternative project. She reviewed the statute and wonders why
the administration developed the AGIA coordinator position and
mirrored it so closely to the federal legislation. Clearly, the
powers of the coordinator with respect to the discretionary
authority of the various state agencies-the Section 410-are not
available under that statute, she said.
4:52:04 PM
MS. KING drew attention to the federal streamline permitting
process that would apply to any project that is being advanced.
In passing the Alaska Natural Gas Pipeline Act in 2004, Congress
clarified that the pipeline application process should be
market-driven and that the streamline permitting be available to
any project sponsor. Instead of creating disincentives for some
projects and special preference or rights for other sponsors,
Congress ensured that the competition would be on a level
playing field. She said we request that these sections be
amended to make it clear that other projects could advance.
4:54:32 PM
MS. KING questioned why the state would be so prescriptive in
the bid requirements. In particular, she drew attention to
Section 43.90.140 on page 4, line 23. Under the provisions
outlined, an applicant would be required to demonstrate to the
administration's satisfaction that each of the requirements was
met before the bid could be reviewed by the public and the
legislature. Any bid that failed to meet even one of those
requirements would be rejected as a non-conforming bid even if
that bid brought the best overall solution to the state and to
the challenges facing this project.
MS. KING expressed concern with the prescriptive and narrow in
terms of: the project size receipt and delivery points; the
project cost and tools; and work commitments. She asked how you
balance the fact that many of those requirements are going to
get passed on to the shippers. Also, what happens when the
applicant can't deliver what was promised? We're concerned that
the current bid process encourages bidders to bid high and then
beg forgiveness rather than to bid realistically, she said.
MS. KING suggested changing the current list of bid requirements
to bid variables or making them objective based. That would be
consistent with the administration's goal of a fair and
transparent process, but it would allow companies like
ConocoPhillips to use its experience and creativity in bringing
a solution forward. The state does not need to accept any bid
unless it meets the needs of Alaska, she said. With regard to
the "must haves," the state could say it has these objectives
and request a company bring the most creative solution forward
to meet those demands. This would create more alternatives for
the state and it would give the state the right to reject the
proposal if it doesn't meet its needs, she said.
4:57:21 PM
MS. KING expressed concern with the resource package defined in
Sections 43.90.300 to 310 and 320 and reiterated that risk
associated with tax and royalties has always posed the greatest
obstacle to a gas pipeline project. We need to find a vehicle to
work through the resource issues because those sections wouldn't
be in the bill if the administration had not recognized that
changes were needed. We appreciate that the administration
proposing the ten year stability provision, but we had
understood that the issue of fiscal stability and predictability
would likely be decided by the Alaska Supreme Court. Although
the bill promises to make some changes, the current form would
in fact force the resource owners to accept the future
regulations albeit in contractual form.
MS. KING said the bill promises a degree of protection against
changes on the gas production taxes, but it doesn't identify the
protected production tax rate and the period of relative
stability is insufficient for a project of this magnitude. Also,
there is no protection against increases in other taxes that may
be aimed at circumventing that protection. ConocoPhillips
suggests converting the resource package to a bid variable where
resource owner/applicants can propose the resource terms and the
public and the legislature can review them. This will provide an
option by which the public and the legislature can see the
midstream and the resource sides that provide a foundation for
the project to go forward.
4:59:50 PM
CHAIR FRENCH said if we were to take your advice and make the
resource inducements bid variables, what would it do to your
open season posture if you proposed total tax stability for 30
years and the legislature rejected it?
MS. KING said if the resource inducements were expressed as bid
variables and the state wasn't satisfied with the proposal, she
hopes that would set up a vehicle for working through the issues
prior to an open season.
SENATOR WIELECHOWSKI said he suspects that if there are bid
variables, the contract will be exactly the same as last year
and that wasn't acceptable to Alaskans.
MS. KING replied ConocoPhillips is on record saying it was
willing to make changes to address the public comments. The
current difficulty is that there isn't a vehicle for working
through those issues. It's particularly problematic to deal with
the complexity of those issues in this forum, she said.
5:02:11 PM
MS. KING displayed a slide of the exploration and permitted well
sites on the North Slope between 2000 and 2007 and said as the
state's largest explorer, ConocoPhillips wants to ensure that
the pipeline can accommodate new gas on a fair and reasonable
basis. The best way to encourage more exploration is to get the
pipeline built in the first place, she said. It's a concern that
the discussion about tolls and tariffs has become confusing, but
in her mind it's clear that FERC is going to serve as the
adjudicator about issues regarding rate treatment and the
expansions.
CHAIR FRENCH asked if the state automatically gets a seat at the
table to argue its case to FERC regarding rates.
MS. KING said she expects that the state would have a role.
5:04:24 PM
SENATOR THERRIAULT said he can't speak specifically to the
state's standing, but because the rate impacts the state's
royalty and taxes it would always have seat.
MS. KING questioned whether all the state's promises to
explorers are actually eliciting the desired behavior. She
pointed out that the explorer issues have been debated in
federal legislation and before FERC. Both times a balance was
struck and there is still no drilling so why would a company
drill now when the state continues to push to provide guaranteed
subsidized rates for those that defer the decision to drill. She
expressed the view that if some of those companies had drilled
wells in their gas prospects, perhaps more gas would have been
found and that could be helping to improve the viability of the
project right now.
MS. KING said the mandated expansion provisions in ANGPA Section
105 are unprecedented. If a shipper is willing to sign up for
firm shipping commitments, and can demonstrate that the
expansion won't require others to subsidize it, FERC can order
an expansion. She said there's no problem with a party showing
up and making a firm shipping commitment even if they don't have
gas right now. The real issue isn't access; it's the cost of the
access.
5:06:36 PM
SENATOR WIELECHOWSKI noted that ConocoPhillips was in this same
position years ago when it was forced to sell Milne Point
because it couldn't afford to pay the incremental rates on the
tariff. We're trying to avoid that sort of situation because
it's not good for either the state or an explorer he said.
MS. KING said she's not aware that ConocoPhillips was forced to
divest of Milne Point.
SENATOR WIELECHOWSKI read a statement from the ConocoPhillips
CEO stating that it broke his heart to trade Milne Point, but it
was necessary because the pipeline tariffs took away the value
of the property.
MS. KING said she doesn't know the specifics of the Milne Point
trade, but she does know that Congress has given FERC the right
to mandate an expansion on this pipeline and FERC has said there
is the rebuttable presumption of rolled-in rates. We aren't
challenging that issue, she said. ConocoPhillips believes that
if gas is found and there's need for an expansion there are
vehicles by which parties can get access to it. The issue here
is who will pay for that expansion. Through AGIA the state asks
the initial shippers, including the state, to be willing to
subsidize other companies' exploration efforts. You're asking
the state to consider subsidizing the federal government if the
expansion comes from the federal waters of the Beaufort Sea, she
said.
5:09:38 PM
MS. KING said ConocoPhillips does not oppose rolled-in rates; it
is simply proposing that FERC adjudicate the issue. According to
Order 2005 the objective of the Act is "to adopt rolled-in
treatment up to the point that would cause there to be a subsidy
of expansion shippers by initial shippers, if any subsidy were
to be found." She posed several hypothetical examples to
highlight concerns related to presupposing the FERC process via
AGIA.
MS. KING said there are a couple of key questions related to
expansions. The first asks what happens when an expansion is
particularly small. In that circumstance it's possible that the
incremental costs and incremental fuel could be higher. She
suggested that the parties would want to argue before FERC about
whether or not that expansion is a subsidy. Another case might
relate to fuel use. In compression expansions, fuel usage
depends on the amount of gas that's moving through the
compressor and down the pipe. Clearly you would want to look at
the cost of fuel.
CHAIR FRENCH asked if it would lower her anxiety if the cost of
fuel were included in calculating the expansion costs.
MS. KING said her anxiety will be lower when FERC actually plays
the role it is intended to play.
CHAIR FRENCH said it strikes him that it's necessary to
incorporate fuel cost as part of a legitimate expansion.
MS. KING said fuel is clearly a component that FERC will review
when it decides how to handle the rate treatment. Continuing
with the presentation she described sequential expansions and
pointed out that after several expansions the in-field
compressor stations might not be in the optimum locations.
5:15:32 PM
MS. KING said ConocoPhillips supports the state in its desire to
incentivize North Slope exploration and believes that the state
already has the tools to motivate and enhance expansions.
Clearly, there are royalty reductions, tax credits and other
alternatives that the state can look at in specific cases to
determine the best way to "incent" the exploration. Also, the
state could make a capital contribution to the future expansion.
She said it's inappropriate to require existing shippers to
subsidize the parties that did not take on the initial risk.
Signing up for a 20-year shipping commitment is greater risk and
asks for greater exposure than asking a company to drill one
exploration well that might be a dry hole. We can't let unknown
gas prospects drive the timing and the development of
approximately 35 tcf of known resource and the largest private
construction project in North America.
5:18:04 PM
MS. KING suggested the following changes to AGIA.
· Convert AGIA bid requirements to bid variables because
doing so provides an option for potential bidders to
include certain commitments and uncertainties in exchange
for others. This approach will also create an avenue by
which resource owner/applicants can propose packages on the
resource terms. It will provide more bidders for the state
to consider and the state would still have the ability to
reject the bid that doesn't meet objectives.
· ConocoPhillips requests that the exclusivity provisions be
amended to provide the state with more options. The treble
damages clause is a significant issue that ties the state's
ability to discuss resource terms for any alternative
project over the next decade. Allow the coordinator and the
streamlined permitting to apply to any Alaska gas pipeline
project just like in the federal legislation. There must be
some benefits in the provisions over existing law or the
administration wouldn't have provided them.
· Finally, ConocoPhillips wants to achieve a framework that
promotes the development of the Alaska North Slope gas
resources and that addresses the legitimate interests of
all parties. This project is so difficult that all parties
must be on the same team and be willing to compromise. No
party will work harder than ConocoPhillips to make this
project a reality.
5:19:34 PM
SENATOR THERRIAULT asked if AGIA isn't trying to say that
if a party has constructive and creative ideas, now's the
time to step forward.
MS. KING said our suggested changes wouldn't preclude
commercial parties from having conversations at anytime.
ConocoPhillips sees concerns with the prescriptive bid
requirements regardless of the partnering structure. She
reiterated that movement from bid requirements to bid
variables allows the legislature the discretion to approve
or disapprove the administration's proposed licensee. The
exclusivity provisions are problematic. The licensee may
have a good plan, but if they stumble, the state will be
tied up for 10 years. That's a concern with such a large
and unpredictable project.
CHAIR HUGGINS said his thinking has come full circle and
his current preference is to have a consortium. Some of the
flags that have been raised ought to be addressed, he said.
With regard to the pipeline coordinator job, it's incumbent
upon this committee to make sure it's legal. If there are
points that require clarification, I hope that we get those
clarified to the benefit to the state at a minimum, he
stated.
SENATOR THERRIAULT said he has questions regarding the
issue of the rolled-in rates and if the state would be the
ultimate victim. He asked if AGIA allows the state to go to
FERC and argue against a rolled-in rate if it is
disadvantageous to the state. Perhaps AGIA can be
structured so that companies wanting to bid for capacity
have to agree to the rolled-in rate unless released by the
state. He said he would explore the structure of a release
mechanism with the administration.
MS. KING asked the committee to consider converting the bid
requirements to bid variables and closing the exclusivity
provisions.
There being nothing further to come before the committee,
Chair French adjourned the meeting at 5:26:44 PM.
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