Legislature(2007 - 2008)BUTROVICH 205
02/09/2007 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Conocophillips | |
| Exxonmobil | |
| Bp | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 9, 2007
3:31 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Senator Joe Thomas
COMMITTEE CALENDAR
Presentations by upstream shareholders
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOE MARUSHACK, Vice President
Gas Development
ConocoPhillips
POSITION STATEMENT: Presented update on gasline development.
MARTIN MASSEY, Joint Interest Manager
U.S. Operations ExxonMobil Production
Houston TX
POSITION STATEMENT: Presented update on gasline development.
MARK NELSON, Commercial Negotiator
ExxonMobil
POSITION STATEMENT: Presented update on gasline development.
ANGUS WALKER, Commercial Vice President
BP Alaska
POSITION STATEMENT: Presented update on gasline development.
DAVE VAN TUYL, Manager
Gas Commercialization
BP Alaska
POSITION STATEMENT: Presented update on gasline development.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:31:55 PM. Present at the call to
order were Senators Wagoner, Stedman, Stevens, Wielechowski, and
Huggins. Senator Green joined the committee at 3:33.
^Presentations by Upstream Stakeholders:
^ConocoPhillips
JOE MARUSHACK, Vice President, ConocoPhillips, said that moving
the pipeline project forward is critical. He said he might be
freer to tell him what he thinks today, because he will be
moving on to take the lead in ConocoPhillips' Australian unit in
the next month or two. He said he has met in front of committees
like this many times over the last six years and it has been a
unique experience. He said he would address the issues that he
thinks are really important in moving forward saying, "I truly
believe, now more than ever, we are at a critical time in moving
this project forward."
3:33:16 PM
SENATOR GREEN joined the committee.
CHAIR HUGGINS said he wanted speakers to keep in mind three main
items that FERC said are milestones attributed to producers as
critical items in the past - physical certainty for the State of
Alaska tax and royalty provisions, certain jurisdictional
permitting and financing issues and regulatory action in U.S.
and Canada, and reasonable assurance over time that the project
is economically feasible.
3:36:10 PM
MR. MARUSHACK said he would address number one and three, but he
disagreed on the permitting issue. He said he has worked on this
project for six years and in the past he has felt the "window of
opportunity" wasn't necessarily critical, because he always
recognized that there is a natural decline of the U.S. and
Canadian resource base and therefore, this project could fit in
with a ten-year time line between starting the project and first
gas. However, he said:
3:38:03 PM
Things changed about two years ago and I would not
advocate that we have any absolute train wreck on our
hands, but I will tell you this in my personal belief,
we have gone from being in front of the curve to being
in back of the curve right now and I'll tell you
exactly why that is.
There is growing competition not only of gas on gas,
but of all the other energy sources that are out
there. In particular, we've got coal-fired plants
being permitted right now in Texas and in places that
historically haven't been permitted. And that's a
legitimate loss of market for us. Coal is much like
our gas pipeline. When we get this gas pipeline going,
we'll flow that gas and it'll flow from then on for
the next 30 - 50 years, whatever it is. It will not be
interrupted. Coal-fired plants are almost the same
way. Once you start up a coal-fired plant, you
probably don't go back to gas or anything else. And we
are seeing clean coal-fired technology now that has
the ability to take some of our market. In addition to
that, you are aware there is LNG competition out
there; there's lots of gas in parts of the world, a
lot of it wants to come into this country.
We also face the dilemma not only of other energy
sources, but of massive competition for critical
components. By critical components, I mean steel,
machinery, labor, technical engineering and project
management. Again, over the last period of time where
we've seen prices really rise, we've seen projects
move in front of us. And so we are back in the queue
on getting steel and getting this equipment right now.
That's a real threat to us, especially given we
haven't announced this gas making its way to the Lower
48 and we still have a 9 - 10 year period in front of
us before that gas, once we make that announcement.
I believe that the market needs to know the Alaska gas
is coming and I believe they need to know it's coming
fairly quickly. This is a very complicated project and
if we had unanimous support at this particular time,
we could move this project forward.
I won't talk too much about the historic contract that
was put in place last year. We never really had time
to fix the issues that you had out there, but had we,
this project could be moving forward. We would be
hiring Alaskans and moving it forward today as we
speak.
We're now going to go into a new process. And that new
process is going to take a little bit of time. And
I'll give you an example of why I feel that way. When
we bring a new member onto our team, we bring
experienced people. We don't bring brand new people
out of college onto this gas pipeline team. We bring
people anywhere from 10 - 15 years experience who have
done projects all over the world, who have unique
attributes that make them important to this project.
It takes our team members about a year in order to be
productive. And you might ask the other companies
about that, too - but - there are certain things they
can do, but the project is so complicated and it's so
massive that to really become productive, it takes
about a year to understand this project. So, I think
it's going to take a new legislature and a new
administration a certain period of time to really get
comfortable with the issues and be able to move it
forward, too. So, we have to move forward together; we
have to move forward quickly; we have to avoid
rhetoric and at all costs, we have to avoid
litigation. If we're into a protracted litigation for
any reason, I fail to see how we can move this project
forward in the window that we've got.
The second point I want to leave with you is
ConocoPhillips is absolutely standing ready to move
this project forward. Now, we believe every company
has a core skill and they'll all tell you what their
core skills are, but one of our core skills is we
pride ourselves on being problems solvers. We don't
get rewarded; we don't get the opportunity to do other
projects if we sit on issues. We get rewarded and we
are motivated to make things happen. We want to work
with you as the legislature; we want to work with
Governor Palin; we want to move this thing forward now
as quickly as we can.
I think our track record is pretty good in this
regard. It's early in the life-cycle of this
particular project, but we have to be ready to roll up
our sleeves and work out those issues. Actually, I
have some sympathy for a lot of what I've heard from
various individuals including a statement from the
Governor that she recently made in her state of the
state speech in Alaska, which was that there's a lot
of talk, talk, talk, and when do you stop talking and
when do you start doing things. And actually I get
frustrated with that, too, but the point is even
though that's an accurate statement, this is a
complicated project; it takes a long time to get up to
speed on it. It's very difficult - I couldn't dictate
the requirements that are going to be necessary to
move this to you and it would be very difficult to
dictate the requirements on the shipping commitments
to me. We've got to move this thing forward and work
it together.
3:40:48 PM
The next point I'd like to leave you with is a really
really important issue which - I'm just going to
digress and talk about the old contract just for one
or two sentences then I won't hit it again - but the
old contract was viewed as not a commitment to build a
pipeline and was centered exclusively around the
producers. And there's a reason for that. That old
contract addressed the resource issues. If we can
address the resource issue, the pipeline falls out of
that. And I'll explain why that is. The resource issue
is really the critical part of the equation here. The
resource pays for everything through the shipping
commitment. It's the most critical understanding in
moving this project forward. Basically, even though
this is a pipeline that will provide access to other
explorers, what we know now and one of the real
advantages we've got is we've got the ability to make
long-term shipping commitments if we can get the deal
right based on the balance sheets and the resources of
the three major North Slope producers and actually the
State of Alaska is in there, too. But those producers
and the State of Alaska basically are going to pay for
this project.
What we'll say when we say we making those shipping
commitments is we'll deliver the gas to the pipeline,
we'll commit to deliver the gas to the pipeline. We'll
pay the tariff - pretty much whatever it is under
certain circumstances. If the tariff is worth more
than the value of gas, like it could very well be and
likely would have been back in September of this year,
we will still make that gas flow, we will still pay
that tariff - even if we're under water. We'll
guarantee those shipping commitments for the term
offered - most likely that's 20 years or more and if
the cost of the project is more than expected, under
certain circumstances, we will take that risk. Alaska
is on the hook for that as well. If the project cost
blows up, your tax revenue is less, your royalty is
less, the impact to your Permanent Fund is less. Same
thing happens if the gas price goes down. You're in
the same exact position as we are. So, together we
share a huge amount of risk on this project and that's
really another reason why I believe we should be
aligned in moving it forward. But in any regard, once
the pipeline project is committed, Alaska and
producers are at risk of any combination of events and
once we've made that decision, it's irreversible.
3:43:13 PM
The pipeline, on the other hand, as opposed to the
resource - or the pipeline owners - however you want
to look at that, receives a regulated rate of return
based on their equity contribution. If the cost of the
project gets higher, they transfer that onto the
shippers, they transfer that [indisc.] to the resource
owners. So it's actually us again that pay for that.
If the market goes south again, the pipeline really
doesn't care about that because they receive a rate of
return off the shipping commitment and off that
tariff. So, prices go up; prices go down; we have the
impact. If costs go up, we have the impact of that.
The only time the pipeline company is really at any
risk for those dollars is between when the project's
planning starts and when a successful open season is
met. Those costs in there are probably anywhere
between $400 million - probably if you get to project
sanction around $1 billion or something like that. But
that's really the only time on this $20 billion or $30
billion project, or maybe more, that a pipeline
company really has any money at risk.
It's actually a little bit ironic that when you think
about the pipeline company, they really have fiscal
stability - because anything that happens - not
anything, but almost anything that happens on taxes,
they can pass on to the resource owners and the
shippers.
The last point I'll make on this I'll make is if your
- you know, this is a huge project in terms of the
cost - whatever it is - $20 billion, $30 billion, $40
billion - but given that, the only time that the
pipeline has any real risk in this project is up front
- and that's comparatively really small. If you can't
fund that upfront cost by yourself, then this project
really isn't for you.
So, I believe that if we address the resource issues
in some form or fashion, we can get a deal done, but
it's got to work for the state and it's got to work
for the producers. That's the critical item. Those
issues really involve what kind of agreement we can
reach to address how the producers will be taxed and
the terms around royalty and to the degree at which
the state will work with the producers, so the
producers can make this massive shipping commitment
and be relatively certain that any potential value and
upside is simply not going to be taxed away over time.
3:45:15 PM
You know, very simply put at least under the proposal
we made last summer, the producers will take a lot of
the risks inherent in a major mega project, but we ask
your understanding and your help in addressing issues
that are really under your control.
MR. MARUSHACK said he talked to the commissioners of the
Department of Natural Resources (DNR) and Department of Revenue
(DOR) about the new proposal. He hadn't heard any details. He
has met with them twice and had good dialogue both times. The
first time the commissioners explained what they thought the new
proposal was. The second time BP went through some issues and
ideas they had on the issue. He suggested that there were a few
things that would merit a thought process behind them. The idea
of splitting the pipeline issues from the resource issues has
some merit. That separates the confusion somewhat. The pipeline
issue is very simple, but the resource issues are very
complicated.
Also the idea of looking at different pipeline proposals makes
some sense to the state. However, he thought the fundamental
issue remains - you have to address the resource side of the
equation. "If you're successful on the resource side, the
pipeline will fall out of that."
3:46:50 PM
MR. MARUSHACK related that his personal frustration was managing
expectations and misunderstandings while retaining focus. He
said:
Sometimes it really appears to me that what people
think we're talking about is a parking garage. And we
build parking garages all over the place, so we simply
scale it up and now we've got a big parking garage.
It's not that much more complicated than that.
But actually, this is nothing like Lower 48 pipelines.
This is a major infrastructure project - on scale with
anything in the world. And as such, there are really
no models for this project. It's unique; it's got a
myriad of complexities and there are very few
simplifications that you can make in this project. But
the most important thing on this project is to get it
moving right now. And why I'm really saying that is a
project like this, you get into an endless series of
do-loops on what ifs and if you ever start down that
path - and I have a little experience on a few
projects where folks what if, what if, what if, what
if - you can never get to the finish line on those
projects. Basically, you've got to take a long-term
look and focus on what's the most critical issue and
the most critical issue is getting started on the
project right now. And if you do that, and if we can
build this project, then everything else gets better,
if you will.
If we want a spur line at South Central [Alaska] that
spur line is a lot more economic if it's built off of
this major economy-of-scale main pipeline project. If
you want to take liquids off, again, you're a lot
better off taking liquids off of an economic massive
project than any other concept that I can think of.
Jobs - the more economic the project, the more jobs
that will be created. If it's an uneconomic project, a
sub-economic project, it will not support the growth
in jobs in the state.
Exploration and access - we don't explore for gas
right now. If we had this project coming, we would be
exploring for gas and that's a whole new massive
industry for the State of Alaska.
And then state economic growth - it's really in our
interest as well as your interest that this project be
successful and it spins off substantial revenues to
the state - because we need additional sources of
revenue in here and this gas pipeline project should
provide that.
3:49:06 PM
Now really, we tend to get sometimes mixed up in
emotion and I think the producers sometimes have that
issue as bad as other folks. I'll give you a couple of
examples on things that are basically rhetoric that
has to really stop in order to move this project
forward and starting to understand and work with each
other. And a couple of them are probably some things
like fiscal certainty. I suspect when producers say
fiscal certainty, some people think that's attack on
sovereignty. It's really not, but some people think it
is.
Now from our side, we've got these problems, too. When
folks say rolled-in rate, I can tell you we think
that's code for subsidizing other companies. Neither
of those are probably legitimate and both of them have
to be addressed, but it's just examples of areas that
we've got to work our way through and not get caught
up in that rhetoric. I honestly believe ConocoPhillips
and the State are aligned in wanting to have the best
project move forward. We want revenues for the state,
we want revenues for our self, we want an exploration
business here; we want to grow this business. We think
we have a lot of insight into this area and probably
some competitive advantages and we want this project
to happen.
Another series of issues really - I'll focus on this
rhetoric issue a little bit. It's really damaging; it
causes us to lose some focus - is there's a
misunderstanding that this project is wildly economic,
obviously economic. And I'll give you a couple of
examples why nobody can really say that. The first is
dealing with cost. Now in 2001, we put $125 million
into this project, didn't weld a piece of steel and we
basically had a cost estimate at the time of $20
billion. Since then, steel prices have doubled, labor
has gone way up, the queue for equipment has
drastically changed, project management skills are
much more difficult to find and the bottom line is
nobody - not us, not anybody else - can tell you
exactly what their projects costs are until they
rebuild all that engineering work. Now I can tell you
it's not $20 billion anymore. It's north of $25
billion, I would guess. But nobody can really tell you
to what extent how high that is. So that's the cost
side of the equation and you're only going to know
that when we invest another $100 million or so in
order to get that.
The other equation is the market. And the market is
$10 last year and it's below $4 last year. It's all
over the place and it's hugely volatile. And if you
look a the long-term, the forward curves, if you will,
sometimes they can be above $10, sometimes they are
below $8, the bottom line is nobody really knows what
prices are going to be. All we can really do is get
the most economic project that we possibly can. We've
got to get our deal done; we've got to put Alaskans to
work, we've got to move this project forward and we'll
find over time if we can get to that project sanction
and move this project forward.
3:51:57 PM
So, I'll conclude my prepared remarks, if you will, by
leaving you just four key items. One, ConocoPhillips
is ready to solve issues with you and the Governor. We
think we're pretty good at it; we think we're
reasonable; we think there's a historic basis for us
to make those statements, but we need the legislature
and the administration to actively engage with us. I
don't see any way we can move this forward if we're
not actively engaging together.
The key to addressing the pipeline is really to
address the resource issues. We've got to provided
adequate security to the companies in the areas where
the state can so that those shipping commitments can
be made, because they are the critical component in
making this project happen. Although the pipeline will
serve a lot of parties, the bottom line is that it's
really the three major producers, as well as the
state, that are on the hook for this pipeline project.
Time is important and though we don't need to rush
into a bad deal, we need to be telling the market our
gas is coming. This project is difficult; it's
complicated; we've got to be on the same team. I think
it's going to be extremely difficult to move this
project forward unless the entire state of Alaska and
the producers are all on the same page trying to move
this forward. We've got to stay laser-focused on
getting this project moving forward together. And I'll
leave my conclude remarks by just telling you that I'm
personally committed to this project still and even
after I leave this area, I'm going to be watching this
like hawk doing everything I possibly can to help move
this project forward. ConocoPhillips is committed and
I appreciate the opportunity for you to listen to my
thoughts.
3:53:26 PM
SENATOR WAGONER asked the average price of gas overall last
year.
MR. MARUSHACK guessed north of $8 and he offered to get the
correct information for him.
3:55:19 PM
SENATOR WIELECHOWSKI asked if one of the producers wanted to
take its share of Prudhoe Bay gas and participate in an open
season and the others were not interested, would ConocoPhillips
agree to that.
MR. MARUSHACK answered that there are probably ways of doing
that, but then the gas balancing issues at Prudhoe Bay would
have to be looked at - how would that affect the other
producers, how does that affect oil production and pressure
maintenance. It's not a simple question. It's been thought about
a little bit, but there are no firm answers.
3:56:23 PM
SENATOR STEDMAN said he didn't look forward to having a project
and an open season when no one shows up and he asked who he
thought would show up.
MR. MARUSHACK replied the first thing you have to have is some
sort of agreement on taxes with the state that will allow long-
term shipping commitments. He likened a long-term shipping
agreement to owning a house.
We're going to live in the house forever. We're going
to pay for the house no matter what, but we've got to
know that we're going to have the wherewithal to pay
for that house and to actually make some profits when
we do that. So, I believe we've got to have a deal
around the fiscal terms that will allow those shipping
commitments to happen.
Now, there's another issue out there, too, Senator,
and that is the issue of cost overruns. Now I can tell
you with pretty great certainty that if the producers
- let me just talk ConocoPhillips and not the
producers - if we're managing that project, we have an
ownership in that pipeline, we'll take the cost
overrun risk. We do it over the world; we'll do it on
this one, too. But - and the reason for that is
because we have a process that we think has the best
opportunity of keeping that cost as low - it's not
that we don't have overruns, it's that if we have the
problem ourselves, we'll pay for it ourselves. I think
it's going to be more difficult, however, if it's
somebody else that wants to build that because they
wouldn't have the same interest in making absolutely
guaranteed that it's the lowest cost project and have
the same sort of processes. And again it gets into
this disconnect where if you don't own the resource
and yet you are going to be held whole on the pipeline
itself, there's less interest in making absolutely
sure that the cost is as low as possible. I wouldn't
say impossible and there may be ways around it, but I
do think it's an issue that the producers are very
interested in managing that cost and that means
matching up throughput with ownership for the most
part. I think those are probably the two big items
that I can think of off the top of my head that are
probably the most critical items in making sure we
don't have a train wreck when we have that open
season. Believe me, an open season process where
nobody shows would be a terrible thing for the state;
it would not be good thing for the producers.
3:59:28 PM
And this really gets into what happens in that case.
One this is for sure; we've lost a lot of time, we've
sent a terrible signal to the market, we may end up in
some sort of litigation, which adds more delay onto
that and so, I think this has to be avoided at all
costs. The way to do that is to get our deal done on
the resource side and then we've got to figure out if
- again I think it's probably best - if we're aligned
on the pipeline and the resource and shipping
commitments.
4:00:04 PM
SENATOR STEDMAN said it appears that the new contract is going
to be vastly different than the old one. Clearly gas in-kind was
an issue. He asked if shared ownership of the pipeline with the
state would be problematic rather than the alignment that was in
the old contract - using 20 percent gas in-kind.
4:02:18 PM
MR. MARUSHACK replied that the old contract for the most part
was whatever you ship, you own. He thought ConocoPhillips could
find a way of working around the state not wanting to take a
shipping commitment. The shipping commitment would have to be
addressed somehow.
4:02:56 PM
MR. MARUSHACK related that he just had his board to talk issues
over with and they have all been in his position at the table,
but he realizes the state has a board of 600,000 people who
haven't sat across the table. "That's something that we've got
to be cognizant of and help you with, too, because the way
you've got to sell your side of the deal is probably much more
difficult than the way I have to sell my side."
4:03:37 PM
SENATOR WAGONER asked for a scenario on cost overruns and how
those would affect the tariff.
MR. MARUSHACK replied with what he said was not an accurate
example. He started with a $25 billion project. He assumed that
would make an average toll of about $3 mcf/20 years. The
producers all sign up for that deal and a problem comes up and
the cost is $50 billion by the time they are done. If that
happened, one might expect the toll to go from $3 to $6. The
producers are still on the hook for that.
And so, here's what happens. If gas prices are $8 and
the toll is $6, we've got $20 to do all our
development work and whatever else we need to do.
Maybe it makes some profit, maybe it doesn't. If it's
$5, or if it's $4, we ship that gas. We pay the toll;
and we sell the gas at a loss. So, that's the cruel
reality. This is why it's so important to the
producers that they have some management of that
project. The other thing is, too, if you're going to
live in the house and you're going to pay for the
house, how many of you don't own your house? Nobody
probably - and so that's another reason you don't want
to pay a rate of return to somebody when you could pay
it yourself if basically you're going to live in the
house and own it your whole life.
4:05:56 PM
CHAIR HUGGINS mentioned if the existing PPT would be about right
going into this process.
MR. MARUSHACK replied no, in the last contract the state took
7.25 percent of the gross. "It wasn't a net calculation at all."
His personal view on PPT is that it would not result in what the
state wants - which is more investment on the oil side long-
term. Alaska has a fairly steep decline and if it doesn't get
enough investment, it will be even worse. It represents a
substantial increase on taxes on oil, which affects investment
long-term and under the current PPT, if that is transferred to
gas, that is a big problem.
4:07:18 PM
CHAIR HUGGINS asked him if he had any showstoppers to bring
before the committee that he hadn't touched on before he leaves.
MR. MARUSHACK replied he could figure out how to give the state
almost anything it needs if it would be willing to give him
something else in return. That means huge amounts of tradeoffs
and a lot of understanding.
I would say this. If they aren't showstoppers, they're
pretty close - one of which is we have to address the
resource issues. There's no way around addressing the
resource issues. It's too big a project; it's too big
a risk on the part of the producers. It has to be
done. Another one is...no public company is going to
subsidize another public company. So to the extent
that there's any issues out there that might be viewed
as that, we've got to find a way to work around that.
That doesn't necessarily mean that I'm telling you
anything does or doesn't work. But I'm telling you a
showstopper would be you're not going to get any
company to subsidize another company.
The third one is not a showstopper, but it's a serious
issue. I personally have trouble figuring out how you
make that shipping commitment if you don't control the
cost and so I think those three things are extremely
important issues for us. But again, you know, almost
anything else, if you say you really need something,
I'll bet I can figure out a way to - or my team and BP
and Exxon could figure out a way to get it for you.
It's just a matter of what the offset is to that, sir.
4:09:17 PM
CHAIR HUGGINS asked what he would say to the Governor about the
new process.
MR. MARUSHACK replied that everyone deserves the benefit of a
doubt until they see what comes out.
We are here to do a deal. We're here to work with the
administration. When I say that, I actually believe
it's going to take a huge amount of negotiations. I
remember when we first started this with the prior
administration. Will Condon was on the other side and
we were talking, talking, talking. We thought we were
negotiating. We are not negotiating until we're
working 16 hours a day, seven days a week and working
late at nights. I've never done a deal yet that wasn't
full-time, painful lots of time and effort, on these
big projects. So, I would voice let's get to the
table; lets start working these issues. Let's focus on
the resource issues because the pipeline will actually
fall out as a result of that....If people are
flexible, we can get to the finish line on it.
CHAIR HUGGINS asked him to estimate when he thought the state
would get to the point of shipping gas.
MR. MARUSHACK replied that once they have a resource deal that
meets the state's and the producer's needs, 9 - 10 years from
first gas at signing. That's assuming they can get the materials
they need. He didn't know what it would take to get to that
point. He said that it took Wendy King a year to get up to speed
on this and it will take the new people at least that.
4:12:39 PM
SENATOR WAGONER pointed out that the PPT is at 22.5 percent and
the contract was negotiated at 7.5 percent - gross versus net.
4:13:17 PM
CHAIR HUGGINS announced that ExxonMobil's presentation would
come next and that Mark Nelson, Commercial Negotiator for
ExxonMobil was at the table.
^ExxonMobil
MARTY MASSEY, Joint Interest Manager for U.S. Operations for
ExxonMobil Production testified via teleconference and said he
is responsible for commercialization of ExxonMobil's gas
resource in Alaska and has had this position since 2001; Mr.
Nelson had been working in Alaska with him for the last several
years. He said that ExxonMobil is committed to advancing the
Alaska gas pipeline forward and are ready to work with the
legislature and Governor Palin and her cabinet. This project has
the potential to add over 1 bcf/day of gas to ExxonMobil, which
is more than their current daily gas production; it can also add
over 1 billion oil equivalent of crude reserves. That is nearly
enough to replace a full year of its production.
Given the significant impact this project can have on
our business, we are obviously very interested in
progressing it so we start getting revenue from this
important resource. We've spent a lot of money over
the years, $180 million or so, studying ways to
commercialize Alaska gas and since the 1970s we have
evaluated LNG, we've looked at gas to liquids and
we've looked at gas pipelines. Based on these studies,
we've determined that a producer gas pipeline project
will result in the best value for the state, the
producers and the nation. It is a bit disappointing
having been so involved in the last effort, you know
that we didn't get it done, because we could be
getting ready to get out in the field to gather
information necessary to finalize the design and
conduct an open season.
MR. MASSEY recognized that public comments have to be addressed
to the satisfaction of the state and the producers and
ExxonMobil is ready to do that. The Governor is considering an
RFP process and he has met with her on several occasions and
hoped for a successful result.
MR. MASSEY agreed that the scope of the project and the risks
that come with it are not well-understood saying, "The project
is a world-scale undertaking with significant risks. It will be
the largest private investment in North America...."
He said many factors impact commercial viability like the costs
that are going up on materials and labor. The estimate in 2001
was $20 billion. In addition, inflation and a number of other
mega projects are going on in the world. Gas prices remain very
volatile. Other risks have been mentioned like cost overruns,
schedule delays, construction conditions, regulatory and state
fiscal uncertainties.
With size comes complexity, Mr. Massey said, and then it's even
more important to get the design concept right - the contracting
and marketing plans and executing them well. With size come the
consequences of poor execution. He said a limited number of
companies have demonstrated the capabilities and financial
strength to effectively participate and manage this world-scale
mega project. "The producers - ExxonMobil, BP and ConocoPhillips
- are strongly represented as project developers in these sorts
of projects worldwide and have demonstrated success in meeting
the project deadlines."
4:19:25 PM
MR. MASSEY said it was important to recognize that the federal
government has also addressed risks associated with this project
and has established a federal pipeline coordinator office.
Producers have the maximum incentive to control the costs; low
capital and operating costs will result in a lower toll and that
will result in a higher netback value for the gas. Also the
project they envision will go into a premium gas market. And the
state receives the majority of the revenue from the value of the
gas. There is no such incentive for third-party owners who
benefit from increased capital costs. The producers also have
the necessary project and operating experience.
You know, this is a basin-opening project and with any
basin-opening project, it requires alignment between
the host government and the leaseholders. The
producers and the state both want to develop ANS gas
and open the basin to gas exploration. Also obviously,
Alaskans are going to be key to the project execution.
Both the state and us want Alaskans to benefit, you
know, for the job opportunities.
4:21:15 PM
MR. MASSEY went on to explain how pipelines are financed and who
bears the risk. Commercially sound oil and gas pipeline projects
traditionally have been financible if they have a couple things:
one is strong sponsors with proven track records and the
financial strength to backstop commitments. The producers have
this financial strength. The commitments will take the form of
firm transportation agreements. He said that to provide funding,
any financial institution will require firm long-term shipper
pay contracts; those have to be provided by credit worthy
parties.
I think that Joe said it very well that when we sign
up those transportation commitments, we will pay
whether the gas flows and whether or not what the
price is. These firm transportation commitments are
needed for pipeline investors to show the creditor
that it has the capacity confirmed over sufficient
duration to secure the financing. Pipeline owners rely
on the financial strength of shippers to secure that
project financing and it's also required to obtain a
first certificate.
The shippers provide the underpinning for this
financing and the risk will be passed back to them in
the form of committed tariffs. The producers have the
financial strength to backstop the commitments that we
talk about, but the producers cannot make the firm
commitments unless they're confident the gas pipeline
project can be built and operated on a long-term
commercially viable basis including being competitive
with other sources of supply.
If you think through that, it only makes sense that
the parties taking the risks need to be able to manage
those risks - especially on something that has the
scope of this project.
4:23:19 PM
MR. MASSEY said ExxonMobil is committed and ready to move the
project forward.
4:23:36 PM
SENATOR WAGONER said it looks like they were starting all over
again, but he hoped not. Last year, Mr. Massey stated that
ExxonMobil may or may not elect to continue ownership of the
pipeline after construction is done and gas is being shipped. He
asked since FERC sets the rate, and if ExxonMobil has an overrun
of $5 billion for a $25 billion project, would the rate for
shipping be figured on the $25 billion or, if line is sold to an
independent pipeline company, would ExxonMobil ask FERC for an
adjustment to the tariff to include its total purchase price of
the project and therefore, roll in the $5 billion. Mr. Marushack
figured the shipping would be figured on the $25 billion.
MR. MASSEY replied:
I believe the way that process would work is that when
we sign the firm transportation commitment, the deal
is basically done at that point in time and we will be
committed to pay that tariff within some constraints,
no matter what it costs. And that tariff is pretty
well locked in through that firm transportation
commitment and FERC will basically bless that when the
pipeline is completed, you know, from construction.
That's what you would be selling, if you sold it - is
you know the pipeline asset - and you know the
commitment that someone has given to the pipeline for
the firm transportation. You know, we've said before
and I think you're exactly right that a lot of the
risk associated with this is upfront when you're in
the construction period and trying to get this project
started. You still have the ongoing risk after that of
the fact that you've made that firm transportation
commitment and it will probably still be difficult to
sell the project, you know, while you're in that firm
transportation commitment mode. But, you know, that
first 15 - 20 years, but that doesn't mean it can't
happen and it has happened in other places. I hope
that answers your question.
SENATOR WAGONER asked if an independent pipeline company would
want to pay more than $25 billion for it.
MR. MASSEY replied probably not:
It really gets down to a commercial deal at that point
in terms of what somebody is willing to pay for your
interest and what they're going to get is, you know,
the deal that's been cut and has been blessed by FERC.
SENATOR WAGONER responded, "All I'm saying is it'll lower their
rate of return if they paid the higher figure, because the price
is set by FERC and it isn't going to change."
MR. MASSEY responded, "That's right."
4:27:03 PM
SENATOR STEDMAN asked how he defined alignment and non-
alignment.
MR. MASSEY replied that alignment can take on many things; but
this project is so complex that it can't get started unless the
state and the producers are all on the same page.
If we're at odds with one another, we're not going to
be successful. It doesn't stop with just the deal. We
have to work together on how do we permit the thing,
how do we put the other necessary things in place....
The project is just too big, too risky for anyone to
try to do that without having that alignment. If you
look back to the past deal - and I'll try not to talk
about the past deal - but we were aligned in that we
both had an ownership position in the project. With
that becomes - that kind of motivates you. We had to
put money into the deal and all of us had to put money
into it together. It motivates the parties to make it
happen. And that was one of the benefits associated
with that. That doesn't mean that has to be there, but
the concept has proven successful in many projects
around the world - for the host government, if you
will, to take an ownership in a big project like this.
4:29:06 PM
SENATOR STEDMAN asked what risks a third-party pipeline builder
would face.
MR. MASSEY replied that the risk is upfront for them and how
much capital they are really willing to invest - such that
during the open season, someone will really be there to make a
commitment to their project. Once they have that commitment,
because it's a regulated activity, they are guaranteed a return.
I think that's why you'll find as you go forward here
that there will be very few companies that are willing
to put a lot of money up front at risk associated with
this project, especially until they get this firm
transportation commitment.
4:30:21 PM
SENATOR WIELECHOWSKI asked if ExxonMobil was not taking its gas
out, would it allow the state to take its royalty share in-kind
to participate in an open season.
MR. MASSEY replied that is a good question, but he had not
looked at it in terms of what the agreements would allow.
I've not really addressed that because we've hinted to
work together to try to move this with all the
parties. It is difficult to see a smaller project
without the economies of scale being commercially
viable, but that doesn't say, based on different
parties needs and so forth, and what they're trying to
achieve that it couldn't happen. And I'll just have to
tell you, we will have to go look at that. We have
not.
SENATOR WIELECHOWSKI asked if one of the producers wanted to
take its share of Prudhoe Bay gas and participate in an open
season and the others were not interested, would ExxonMobil
agree.
MR. MASSEY replied:
The three of us have said that a project of this
magnitude takes all three of us including the state.
We're all major working interest owners in Prudhoe and
Pt. Thomson and Prudhoe is going to be the major field
that backs this thing and it really is going to take
all three of us. So, we just really haven't dealt with
that issue.
CHAIR HUGGINS indicated there were no further questions and
thanked Mr. Massey and Mr. Nelson for their remarks.
4:32:24 PM
^^BP
ANGUS WALKER, Commercial Vice President, BP Alaska, and DAVID
VAN TUYL, Manager, Gas Commercialization, BP Alaska, introduced
themselves.
MR. WALKER said that because of the newness of his role, Mr. Van
Tuyl would provide the bulk of BP's briefing. However, he
reiterated that BP is 100 percent committed to moving the Alaska
gas pipeline project forward. It's a very important project for
both BP and Alaska. He said, "It is clearly something that is
vital to extending the life of the North Slope and economic life
of Alaska, itself," and to do it properly they must work
together closely.
4:35:02 PM
MR. VAN TUYL emphasized that BP is ready to go forward and ready
to work with the state on this project. It represents the
largest known undeveloped resource in BP's portfolio and he
said, "We would very much like to remove that distinction of
this Alaska gas resource." He said the gas project is important
on its own, but it also extends the economic life of light oil
production from the North Slope as well as open other
opportunities. He stated:
BP stands ready to work with the new administration
and the legislature to reach a balanced fiscal
framework that works for all the parties. Finally,
that successful agreement with the state is going to
set a stable foundation for a healthy viable oil and
gas business for decades to come.
He said that BP has a long history in Alaska and has been
actively involved in exploring for, developing and producing
Alaska's North Slope energy resources for decades and, "We have
the opportunity for a bright future ahead, as Angus said. In
fact, we envision a 50-year future in Alaska." With that, he
showed the committee a graph of BP's production through time. He
emphasized a few key points - that production is declining was
one - even with significant new investment. The decline in
production can be made up with some new opportunities - from
heavy oil resources and gas. However, the future is not a given,
but it is what is possible and that, "That future is only made
possible with an Alaska gas pipeline project."
MR. VAN TUYL said the gas pipeline would give BP the opportunity
to extend the life of its economic oil production into the
future. It opens up the opportunity to unlock the heavy oil
resource that's on the Slope and creates a new gas industry in
Alaska. It creates a new source of revenue for resource owners -
including the state.
The gasline gives them the opportunity to extend the life of the
basin.
4:39:44 PM
The next slide showed what Mr. Van Tuyl called cornerstone
concepts. Any project contains three basic kinds of risks: price
risk of what the product will actually get in the marketplace,
the cost of development, and fiscal and regulatory risk.
He explained that the price is set by markets, which remain
volatile and that the producers are price takers, not price
makers, just like the state. The project costs have also risen.
As energy prices have increased over the last few years, the
costs of bringing that energy to market have also risen
dramatically. Steel prices have doubled, costs for labor,
fabrication, engineering, permitting and buying equipment have
also increased significantly. This presents a major challenge
for any mega-project. But remember, Mr. Van Tuyl said:
The Alaska gas pipeline project is not any mega-
project....Because of its size, it's really in a class
of its own. It's potentially the largest privately
funded infrastructure project ever. We need to bear in
mind because of that a sobering fact is that most
mega-projects exceed their sanctioned cost estimates.
So, while gas prices have generally increased over the
past couple of years, so have project costs. And the
net result is that the project remains challenged.
4:42:10 PM
And finally, as we said, there's fiscal risk
associated with any project. So, we have these risks.
How are these risks best managed? Price risk is
inherent to any commodity like energy. It's borne by
the resource owners. It's a risk that producers here
in the state take. It's what we're in the business of
taking. Cost risks on mega-projects is something that
companies like my company, BP, ExxonMobil,
ConocoPhillips are well acquainted with managing
through rigorous project management processes. And as
fellow resource owners along with the state, we think
that careful management of costs is absolutely
critical in maximizing the value of the resource.
That's really the benefit of this project - is getting
the - maximizing the value of Alaska's gas resource.
The people that hold that risk, the cost risk, need to
be able to manage that risk. They're the ones most
incentivized to manage that risk.
Finally, fiscal risk - fiscal risk is mitigated,
simply put, by an investor knowing the rules. That's
what reduces the investment risk. The state can work
with investors to minimize that risk. So, we've mapped
out before us what we think is an amazing opportunity,
but one that comes with significant risks. Therefore,
we need to get the risk and reward balance right.
4:43:55 PM
MR. VAN TUYL said he thinks the state is uniquely positioned to
help overcome these challenges through an open process.
We think it should be open with the same rules for all
the parties. That would allow the best project to move
ahead. One of the things we think is really important
is allowing the free market to work. That's when the
best ideas are created. Certainly a project like this
needs good ideas to allow that best project to emerge.
We think the process should take advantage of some
common goals that we have. One is that we're all ready
to see a gas pipeline project advance. Another is that
we think the process needs to have legislative and
public support and also we think again that the
resulting project has to maximize the value of
Alaska's resources. I can't say that enough.
4:45:16 PM
MR. VAN TUYL closed with another look into the future.
The future that Angus and I spoke about at the open is
right in front of us. It's captured the imagination of
BP; it holds incredible opportunity for the state. We
think it's the promise for future generations of
Alaskans and it's available to us. As exciting as it
is to talk about the future, we would much rather be
rolling up our sleeves to begin work. We think that's
made possible once we jointly define the rules that
establish that risk/reward balance we talked about for
the project. So to close, I'd like to emphasize again
that BP standing ready, willing and able to work to
this future in an open process with the state and the
legislature as we described, that allows for a timely
resolution so that we can actually get about getting
started with the project. And with that, I'll conclude
and thank you again for the opportunity to testify and
I'd be happy to answer any questions that you might
have.
4:46:23 PM
SENATOR WIELECHOWSKI asked how much in federal loan guarantees
this project has.
MR. VAN TUYL replied that federal loan guarantees provide up to
$18 billion of the project capital.
SENATOR WIELECHOWSKI asked if any other project in the country
has that amount of loan guarantees.
MR. VAN TUYL replied that he was aware of none.
SENATOR WIELECHOWSKI commented that they are talking about
allowing the free markets to work, but there is significant
government interplay with the $18 billion guaranteed. "So, we're
a little bit outside the free market, already."
SENATOR STEDMAN asked if the full faith and credit of BP would
be on the line to access that credit guarantee.
MR. VAN TUYL replied:
Any federal guarantees are only available to the
holders of a certificate of public convenience and
necessity offered by the FERC and the National Energy
Board in Canada. To hold that certificate, those
companies would have needed to enter into these firm
transportation arrangements which are backed by their
basically a corporate guarantee. So the short answer
to your question is yes.
SENATOR STEDMAN said:
Not to diminish the value of the loan guarantee, but
if the three majors were to gather on a pipeline -
one-third, one-third, one-third - to be accessed those
loan guarantees, we'd pretty much have to liquidate
the equity out of at least one of the companies and
severely damage the other two.
MR. VAN TUYL replied:
The project itself will be backstopped by firm
transportation commitments. The federal loan
guarantees, if they're used, would enable the
investors in the project, perhaps, to get a better
financing rate on - bearing in mind that some of the
companies here before you have some of the best
balance sheets in the world and can already obtain
pretty attractive financing - but the ultimate
backstop of those firm transportation commitments that
underpin the project are guaranteed by those
corporations. Those FT arrangements aren't backstopped
by the federal government.
4:49:41 PM
SENATOR STEDMAN asked what the state could do to assure that
people show up at an open season.
MR. VAN TUYL replied that it is in everyone's best interest to
insure a successful open season.
A couple of key ingredients are that the service
that's offered is a service that is responsible to the
customers. What that means is we have a low cost
project that is offered that encourages shippers to
participate. We do that if we have confidence that we
have these cost management practices that we have in
place and that we have confidence that we can deliver
a low cost project.
Cost management is one thing that's very important and
the other is to insure that those folks that will be
making those firm transportation agreements at the
open season have confidence, again, that they know the
rules. This is what both Joe and Marty talked about
and the need to define the resource terms in advance
of the open season. That reduces a huge risk for the
resource owners who will be making that commitment and
that would make that possible.
4:51:23 PM
SENATOR THOMAS said that Prudhoe is short on gas at this point
and he asked what volume would be necessary to move the project
forward.
MR. VAN TUYL replied that 51 tcf of gas would be needed for a
project that would extend out 35 years. Prudhoe Bay has a known
resource of 24 tcf; Pt. Thomson has a known resource of 8 tcf;
and other places around the Slope add up to 34 - 35 tcf. All of
that is needed, so more exploration is important. He was
disappointed with the Pt Thomson situation and thought that
people need to work together jointly to solve it.
4:52:55 PM
SENATOR THOMAS said that once that's established, what has been
done to establish where the other 15 tcf of gas will come from.
MR. VAN TUYL replied that Mining and Minerals Service (MMS) and
United States Geological Survey (USGS) studies indicate 100 -
200 tcf of additional gas. This project will create incentive to
explore and find it.
4:54:23 PM
CHAIR HUGGINS said last year they went through an exhaustive
process and multiple sessions and asked him what parameters may
have changed from his corporate perspective that would come to
bear in the new process.
MR. VAN TUYL agreed that last year he and his colleagues had
gone through a rigorous process and projecting that forward, he
didn't see necessary just one solution to all the problems that
are before them. He said they stand ready to address the
concerns that were raised last session. They are open to new
ideas on how to get the risk and reward balance right.
4:56:38 PM
CHAIR HUGGINS said his constituents want a pipeline and he
didn't want to test their patience. The legislature wants to
work with all the parties to make this project work. The
administration wants the same. He asked if any of the producers
wanted to make any other comments.
4:57:45 PM
SENATOR WAGONER wanted MR. MARUSHACK to come back and talk about
how difficult LNG siting is in Long Beach. "You know it's easy
to get a FERC permit sometimes, but it's pretty darn hard
sometimes to site an LNG facility." He explained that the reason
he asked this is because there is a lot of angst among some of
them about how LNG is going to flood the market and take the
market away and there won't be an opportunity for a pipeline. "I
think that's some scare tactics that some people are using and
they're not necessarily true."
MR. MARUSHACK responded that hopefully ConocoPhillips wasn't
using those tactics, but agreed that siting LNG facilities is
tough on the Gulf Coast. A number of them have gone forward.
Four facilities already exist. ConocoPhillips' facility in Maine
was turned down by the locals and the one in Long Beach is
difficult. However, he doesn't believe that LNG by itself is
really the competition. It always goes to the coast and then the
gas has to be pushed all the way across the country. The Alaska
pipeline project goes to the middle of the country and out from
there. He thought that was a real advantage over LNG with an
isolated market with a long ways to go to get it to other
locations other than the Gulf Coast.
But the problem now is these other alternatives - coal
and the real emphasis on alternate energies including
ethanol and things like that. I see those and in fact,
more importantly, the way I see it, Marianne Kah, our
chief economist, has talked to you all and she sees
this as a real issue and she has been clear, I think,
with me and with members of the legislature that she
believes we've got to move this thing forward real
quick. The market must know - everyone knows it's
going to happen - it's going to be 10 years from when
we start, but the market must know this gas happens.
Just by knowing that, 4 bcf/day is a huge volume. That
will create opportunities for us if the market knows
that's coming.
5:00:49 PM
CHAIR HUGGINS asked using the Gulf Coast, what the timeline is
from concept to production for citing an LNG plant.
MR. MARUSHACK replied the real problem now is there is a huge
backlog of LNG exchanger equipment, so you've got to be in line
or else you've really got a long time line in front of you.
Almost any major infrastructure project, you're talking about
that 8 - 10 year time period. ConocoPhillips got its LNG
facility in the Gulf Coast in 5 years from design, but that was
only for the receiving terminal. That has to be matched up with
where the resource is coming from.
CHAIR HUGGINS thanked everyone for their comments and adjourned
the meeting at 5:02:05 PM.
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