Legislature(2013 - 2014)BUTROVICH 205

01/27/2014 03:30 PM Senate RESOURCES


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03:31:11 PM Start
03:31:41 PM Presentation on Gasline Issues: Heads of Agreement
05:06:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Gasline Issues TELECONFERENCED
Heads of Agreement
Memorandum of Understanding
-Department of Natural Resources
-Department of Revenue
-- Testimony <Invitation Only> --
Bills Previously Heard/Scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        January 27, 2014                                                                                        
                           3:31 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator Fred Dyson, Vice Chair                                                                                                  
Senator Peter Micciche                                                                                                          
Senator Click Bishop (via teleconference)                                                                                       
Senator Lesil McGuire                                                                                                           
Senator Anna Fairclough                                                                                                         
Senator Hollis French                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION ON GASLINE ISSUES: HEADS OF AGREEMENT-MEMORANDUM OF                                                                
UNDERSTANDING                                                                                                                   
                                                                                                                                
     -HEARD                                                                                                                     
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ANGELA M. RODELL, Commissioner                                                                                                  
Alaska Department of Revenue                                                                                                    
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Provided an overview for the Heads of                                                                     
Agreement.                                                                                                                      
                                                                                                                                
JOE BALASH, Commissioner                                                                                                        
Alaska Department of Natural Resources                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Provided an overview for the Heads of                                                                     
Agreement.                                                                                                                      
                                                                                                                                
MIKE PAWLOWSKI, Deputy Commissioner                                                                                             
Alaska Department of Revenue                                                                                                    
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:  Provided  an  overview  for  the  Heads  of                                                             
Agreement.                                                                                                                      
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:31:11 PM                                                                                                                    
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting  to order at 3:31  p.m. Present at the  call to                                                               
order  were  Senators  Dyson, Fairclough,  French,  McGuire,  and                                                               
Chair Giessel.                                                                                                                  
                                                                                                                                
^PRESENTATION ON GASLINE ISSUES: HEADS OF AGREEMENT                                                                             
       PRESENTATION ON GASLINE ISSUES: HEADS OF AGREEMENT                                                                   
                                                                                                                              
3:31:41 PM                                                                                                                    
CHAIR GIESSEL  said the  committee will  begin the  discussion of                                                               
Alaska  gasline  issues. She  declared  that  the committee  will                                                               
review the Heads of Agreement (HOA) document.                                                                                   
                                                                                                                                
3:32:28 PM                                                                                                                    
CHAIR  GIESSEL  welcomed  Senator   Bishop  to  the  meeting  via                                                               
teleconference.                                                                                                                 
                                                                                                                                
3:32:34 PM                                                                                                                    
SENATOR  BISHOP  announced  that  he was  joining  the  committee                                                               
online from Fairbanks.                                                                                                          
                                                                                                                                
3:32:44 PM                                                                                                                    
ANGELA  M. RODELL,  Commissioner,  Alaska  Department of  Revenue                                                               
(DOR), Juneau, Alaska; said this is  a very exciting time for the                                                               
state of  Alaska. The state has  been working for a  long time on                                                               
figuring  out  how to  bring  to  bear commercialization  of  the                                                               
state's North Slope  gas and to find a way  to create opportunity                                                               
for Alaskan jobs, gas, and revenue.                                                                                             
                                                                                                                                
COMMISSIONER  RODELL explained  HOA  is an  "umbrella" format  in                                                               
which  the state  and the  parties  to the  agreements have  come                                                               
together, including [TransCanada-Alaska  Development Inc. (TADI)]                                                               
and Alaska  Gasline Development Corporation (AGDC).  She asserted                                                               
that HOA shows  the roadmap laid out over the  past two years and                                                               
provides a framework to address  the Governor's gasline bill. She                                                               
said today's  HOA overview will  provide a framework and  a basis                                                               
for understanding and to answer  questions the committee may have                                                               
about the  specific agreement. She  noted that the  Memorandum of                                                               
Understanding  (MOU)  with TransCanada  will  be  addressed at  a                                                               
later meeting.  She set  forth that  DOR wants  to work  with the                                                               
legislature  to  continue working  forward  and  moving the  very                                                               
important gasline project to the state's future forward.                                                                        
                                                                                                                                
3:34:58 PM                                                                                                                    
JOE BALASH, Commissioner, Alaska  Department of Natural Resources                                                               
(DNR), Anchorage, Alaska; announced that  the state is at a point                                                               
in time  and in  a place  with regard of  the development  of the                                                               
Alaska  Gasline Project  (AKGP) is  unique. He  noted that  there                                                               
were a  couple of  particular things that  are unique  about AKGP                                                               
that has him excited as an Alaskan.                                                                                             
                                                                                                                                
COMMISSIONER BALASH  pointed out  that with  enabling legislation                                                               
passage, the state and each of  the producer parties are going to                                                               
undertake  the  initial  marketing efforts  that  will  hopefully                                                               
result  in  the sales  and  purchase  agreements of  North  Slope                                                               
Liquid  Natural  Gas (LNG).  He  said  over  the past  couple  of                                                               
decades many  fine Alaskans have  gone out and attempted  to sell                                                               
Alaska LNG in  the Asia marketplace without gas  or agreements to                                                               
procure gas.  He asserted  that the  current gasline  proposal is                                                               
quite different.                                                                                                                
                                                                                                                                
He  addressed HOA  and noted  that  the approach  taken with  the                                                               
other parties is a phased approach  where each set of parties can                                                               
make  commitments that  are commensurate  with those  commitments                                                               
being made by the others. He  summarized that the intent is a two                                                               
year commitment  and tens of  millions of dollars on  the state's                                                               
part. He explained that all of  the chips are not being placed in                                                               
one hand  and no  one is  being asked to  sign up  for a  30 year                                                               
contract. He  said what is  being asked for  are a couple  of key                                                               
things  that will  enable  the  state to  engage  the market  and                                                               
really test whether the state has  a project that can fulfill all                                                               
of the goals that Alaskans have had for so many years.                                                                          
                                                                                                                                
3:37:22 PM                                                                                                                    
He explained the  key differences in considering  an LNG pipeline                                                               
project as opposed to a  North America based overland project. He                                                               
said   there   are   differences  in   the   market,   regulatory                                                               
jurisdiction,  and  types  of  contracts  involved.  The  biggest                                                               
difference is  there has to  be a buyer at  the other end  of the                                                               
contract for  an LNG  project. When the  project pursued  a North                                                               
America based project,  gas was to be taken from  the North Slope                                                               
fields through highly regulated infrastructure,  all the way to a                                                               
very  deep, liquid,  and transparent  market place.  He said  the                                                               
question was not whether the gas  could be sold, but how much the                                                               
gas could  be sold  for. He  continued that  the big  contract in                                                               
question was  the shipping contract,  typically taken out  by the                                                               
producer.                                                                                                                       
                                                                                                                                
COMMISSIONER BALASH said when  analyzing LNG arrangements, having                                                               
a  buyer in  place is  required.  He said  the basis  for an  LNG                                                               
project is the Sales and  Purchase Agreement (SPA), a daisy-chain                                                               
of contracts. He explained that an  LNG buyer is typically from a                                                               
country that does  not have domestic energy supplies  of its own;                                                               
therefore  they  are highly  interested  in  energy security  and                                                               
check every link  in the chain, all the way  up the reserves that                                                               
they are buying.                                                                                                                
                                                                                                                                
He said knowing  that there were differences with  an LNG project                                                               
caused a need  to know more. He recounted  that DNR commissioned,                                                               
with  the   assistance  of   DOR,  a  study   to  engage   in  an                                                               
investigation of  all the  differences in  LNG to  understand how                                                               
the state can maximize its value.                                                                                               
                                                                                                                                
3:39:34 PM                                                                                                                    
He  found  that  due  to   some  differences  in  the  regulatory                                                               
authority  that would  govern an  LNG  project, the  liquefaction                                                               
charges  that might  be levied  against Alaska's  gas as  royalty                                                               
owners could be quite high. He  noted that there were memories of                                                               
what had  gone on  with pipelines  in the  past and  the memories                                                               
caused pause to  reflect on why the state has  had challenges and                                                               
problems with the producers over  the years. He asserted that the                                                               
challenges  and   problems  came   down  to  a   misalignment  of                                                               
interests.  He said  the  question  of tolls  and  tariffs is  to                                                               
minimize  their impact  in order  for the  state to  maximize its                                                               
royalty revenue in  addition to the desire to see  the barrier to                                                               
entry as  low as  possible. He  said at  the end  of the  day the                                                               
state  is  going to  pay  for  its  share of  the  infrastructure                                                               
through tariffs and tolling arrangements  on the liquefaction. He                                                               
purposed taking a  look at what would happen if  the state was to                                                               
pay  for its  share of  the  infrastructure upfront  and take  an                                                               
equity position in  the project. What the DNR found  in the study                                                               
and  the  conclusions  fed  into  the thinking  on  HOA  and  the                                                               
approach to take going forward.                                                                                                 
                                                                                                                                
3:41:36 PM                                                                                                                    
He  said  regardless  of  whether  the  discussion  addressed  an                                                               
overland project  or an  LNG project; there  are some  key things                                                               
that matter greatly to Alaskans:                                                                                                
                                                                                                                                
   · Getting gas to Alaska's homes, communities, and businesses;                                                                
   · Making sure Alaskans get the jobs available from                                                                           
     construction and operation, as well as work for that                                                                       
     state's businesses;                                                                                                        
   · Making sure that Alaska maximizes its resource value,                                                                      
     incentivizes additional exploration, and develops the                                                                      
     incredible bounty of natural gas resource that is present                                                                  
     on the North Slope.                                                                                                        
                                                                                                                                
COMMISSIONER  BALASH set  forth  that  today's presentation  will                                                               
show that the  material has "checked the box" and  some very good                                                               
things have  been accomplished  for the people  of Alaska  at the                                                               
initial development stage of the  agreements that will follow. He                                                               
remarked  that the  DNR  worked hard  over  the provisions  being                                                               
presented and is eager to explain them to the committee.                                                                        
                                                                                                                                
3:43:04 PM                                                                                                                    
MIKE  PAWLOWSKI,   Deputy  Commissioner,  Alaska   Department  of                                                               
Revenue  (DOR),   Juneau,  Alaska;  said  the   purpose  for  the                                                               
presentation is to  give the public, legislators  and their staff                                                               
the  ability  to  read  the   HOA  in  the  appropriate  context,                                                               
understand the terms, and how the  terms relate to each other. He                                                               
set forth  that the DNR  and DOR will provide  their perspectives                                                               
on  what is  seen as  valuable  pieces that  support the  state's                                                               
interests.                                                                                                                      
                                                                                                                                
MR. PAWLOWSKI explained that the  Heads of Agreement (HOA) is not                                                               
a  binding legal  agreement  or  contract. HOA  is  a good  faith                                                               
effort, a first  step in alignment of principals,  and a guidance                                                               
document for  the parties as  they start to pursue  binding legal                                                               
agreements.  The HOA  process was  an  effort to  put together  a                                                               
plan, not  just for the  legislature, but  for the public  on how                                                               
the project will  proceed with all of the  parties aligned behind                                                               
the  plan.  HOA  is  saying,  "Under  these  terms  we  will  all                                                               
progress."  He  asserted  that  HOA is  not  locking-in  and  not                                                               
shutting down opportunity, but provides a guidance and pathway.                                                                 
                                                                                                                                
He said from an Alaskan's  perspective, what is uniquely exciting                                                               
about the HOA effort is that  the agreement exhibits a title page                                                               
that shows  an agreement among  and by the  Administration, AGDC,                                                               
TADI,  ExxonMobil Alaska  Production Inc.  (EMAP), ConocoPhillips                                                               
Alaska, Inc.  (ConocoPhillips), and BP Exploration  (BP). The HOA                                                               
was the  visionary alignment where  for the first time  the state                                                               
sees  the  groups  and parties  working  together  for  solutions                                                               
rather than  fighting over  divisive things.  HOA was  really the                                                               
effort  that is  going to  push a  very complex  and large  scale                                                               
project forward.                                                                                                                
                                                                                                                                
3:45:16 PM                                                                                                                    
MR. PAWLOWSKI  said he intends  to give members of  the committee                                                               
and  the public  a  picture of  what is  so  different about  the                                                               
Alaska  LNG Project  (AKGP). He  referred  to a  letter that  was                                                               
addressed  to  Governor Parnell  in  October  1, 2012;  noted  as                                                               
Exhibit 1B  of the HOA. The  letter shows that AKGP  is more than                                                               
just the  treatment plants  and the  pipelines that  Alaskans are                                                               
familiar with.  He explained that  AKGP includes the  addition of                                                               
the  liquefaction plant  which in  any measure  is a  world-scale                                                               
investment.  He detailed  that the  liquefaction plant  build-out                                                               
will  require  between  100,000  and 150,000  tons  of  steel  in                                                               
addition to employing a workforce  between 3,500 and 5,000 people                                                               
on  400  to  500  acres.  The liquefaction  plant  is  a  massive                                                               
addition to  AKGP and supplements the  already large undertakings                                                               
of  a   pipeline,  treatment  plant,  storage   facilities,  load                                                               
facilities, and the  work in the producing  fields that initially                                                               
includes Prudhoe  Bay and Point  Thomson. He said  AKGP's current                                                               
estimates run  $45 to $65  billion. He set  forth that AKGP  is a                                                               
world class effort being undertaken by world class parties.                                                                     
                                                                                                                                
He  explained   that  HOA's  organization  is   comprised  of  16                                                               
segments. The first segment opens  with recitals of recent events                                                               
with  understandings between  the  parties  about happenings  for                                                               
past,  present, and  future. There  are 13  articles that  govern                                                               
specific  guidelines for  the development  of projects,  the role                                                               
and responsibilities of the individual  parties to the agreement,                                                               
and  how the  parties will  work under  different regulatory  and                                                               
expansion  frameworks going  forward.  He noted  that Appendix  A                                                               
articulates  the  key  expansion  and  access.  He  addressed  an                                                               
exhibit  that  references  three   letters  to  Governor  Parnell                                                               
regarding the process that the state  has been under for the past                                                               
several  years regarding  transitioning  away  from the  overland                                                               
project under  the Alaska Gasline  Inducement Act  (AGIA) license                                                               
to what the plan is in HOA going forward.                                                                                       
                                                                                                                                
3:47:32 PM                                                                                                                    
He  noted  the  importance  to   first  recognize  who  is  being                                                               
referenced  in HOA.  He said  there  are four  terms that  define                                                               
different roles and responsibilities  throughout the HOA document                                                               
and noted as follows:                                                                                                           
                                                                                                                                
    1. Administration: applies broadly to the Department of                                                                     
     Natural  Resources (DNR)  and  the Department  of  Revenue                                                                 
     (DOR); the state  agencies that are charged with  managing                                                                 
     both the royalty  interests and the taxing interests  have                                                                 
     a specific place in the project as fiduciaries and as  the                                                                 
     agencies charged with  managing the resources. There  will                                                                 
     be references to  "Commissioners" that pertain to DNR  and                                                                 
     DOR.  References  to   "State"  applies  when  there   are                                                                 
     appropriate regulatory capacities  for the state that  are                                                                 
     separate and  apart from what  are specifically addressed                                                                  
     in HOA directly for the project.                                                                                           
   2. Parties or Party: is used to imply the Administration;                                                                    
     The Alaska  Gasline Development Corporation  (AGDC) or  an                                                                 
     appropriate  subsidiary; TransCanada  Alaska  Development,                                                                 
     Inc. (TADI);  ExxonMobil Alaska  Production, Inc.  (EMAP);                                                                 
     ConocoPhillips  Alaska,  Inc.  (ConocoPhillips);  and   BP                                                                 
     Exploration-Alaska, Inc. (BP). The "Parties" or  "Parties"                                                                 
     refers to everyone including the Administration.                                                                           
    3. Alaska LNG Parties: is a much more specific term that                                                                    
     includes  the   Alaska  Gasline  Development   Corporation                                                                 
     (AGDC) or an AGDC subsidiary, TADI, EMAP,  ConocoPhillips,                                                                 
     and BP. The Administration in not included. The reason  is                                                                 
     an  attempt to  help  separate the  agencies'  appropriate                                                                 
     roles  for both  shorter and  longer terms.  The  agencies                                                                 
     have an  interest in managing  Alaska's resource, but  not                                                                 
     necessarily an interest  in being in the operational  day-                                                                 
     to-day  efforts  of a  project;  those  are appropriately                                                                  
     separated   from    regulatory   functions   and    taxing                                                                 
     authorities of the state to TADI or AGDC to carry on  day-                                                                 
     to-day  commercial work  in the  project. As  the  project                                                                 
     moves forward  the intent is to  remove the agencies  from                                                                 
     the  day-to-day   commercial  operations  and  allow   the                                                                 
     business to  be the business as  long as the interests  of                                                                 
     the   state  are   protected.   Alaska  LNG   Parties   is                                                                 
     specifically those  with an interest  in the ownership  of                                                                 
     the  infrastructure  and  the  capacity  created  by  that                                                                 
     infrastructure,  that being  separate than  the  ownership                                                                 
     gas   in   the  infrastructure,   which   is   where  the                                                                  
     Administration has an interest.                                                                                            
  4. Producer Parties: have interest in the producing fields.                                                                   
     There is a  lot of work that  will have to happen  between                                                                 
     the Administration and  the Producer Parties to setup  how                                                                 
     gas is  delivered to the state  or the project. There  are                                                                 
     places where  the Producer Parties  are separate from  the                                                                 
     Administration and from the Alaska LNG Parties.                                                                            
                                                                                                                                
3:51:41 PM                                                                                                                    
MR. PAWLOWSKI  addressed "Key Recitals"  in pages 2 through  4 of                                                               
the HOA.  He explained that  the purpose of the  Recitals Section                                                               
is to describe the context  for the agreement, recent events, and                                                               
articulate  certain  goals  and  direction  for  the  Alaska  LNG                                                               
Project.  He  pointed  out  that  "Key  Recitals"  recognize  the                                                               
following:                                                                                                                      
                                                                                                                                
    1. Changed circumstances: Governor Parnell called for a                                                                     
     change  in  direction  under  the  AGIA  License  in   the                                                                 
     development of North Slope Gas Project to an LNG  Project;                                                                 
     that process started several years ago and has led to  the                                                                 
     development of the HOA document.                                                                                           
   2. Funding by the State under AGIA: provided support for key                                                                 
     activities   for   the   LNG   Project   that   both   the                                                                 
     Administration and  TADI believe  that transitioning  from                                                                 
     AGIA to  a more commercial  relationship was  appropriate.                                                                 
     The Summer  Field Season conducted  north of Livengood  in                                                                 
     2013 is an example of a key activity.                                                                                      
   3. AGDC is pursuing the Alaska  Stand Alone Pipeline  (ASAP)                                                                 
     Project:  the two  parties intend  to cooperate  with  the                                                                 
     Alaska LNG  Project. The  Governor made  reference to  the                                                                 
     recognition  during his  State  of the  State  address  as                                                                 
     Alaska's "ace in the hole."                                                                                                
   4. Alaska LNG Parties:  wish to  ramp up  the Pre-Front  End                                                                 
     Engineering and  Design (FEED) phase  of the LNG  project,                                                                 
     which is  estimated to cost over  $400 million during  the                                                                 
     next 12 to 18 months.                                                                                                      
                                                                                                                                
3:53:50 PM                                                                                                                    
MR. PAWLOWSKI said Article 1 of the  HOA goes from pages 4 - 7 of                                                               
the agreement. He noted that  Article 1 provides key definitions.                                                               
He explained that capitalized terms  have very specific meetings.                                                               
He noted key terms used in the agreement as follows:                                                                            
                                                                                                                                
   1. Enabling Legislation: describes the key components of the                                                                 
     legislation  necessary to  advance the  project.  Enabling                                                                 
     Legislation  as  constructed   in  the  statute  will   be                                                                 
     compared with  what is  envisioned in  HOA. The  documents                                                                 
     will be matched up going forward.                                                                                          
   2. Memorandum  of  Understanding   (MOU):  refers   to   the                                                                 
     agreement, referenced  in Article 5.4,  between the  state                                                                 
     and TransCanada.  The MOU allows  for the transition  from                                                                 
     the  AGIA  license  into  a  more  traditional  commercial                                                                 
     relationship of a shipper-transporter.                                                                                     
   3. Pre-FEED: means the Pre-Front End Engineering and  Design                                                                 
     work and  activities for the Alaska  LNG Project that  are                                                                 
     sufficient  to  support filings  for  the  Federal Energy                                                                  
     Regulatory Commission (FERC).                                                                                              
   4. Royalty in Kind (RIK):  is what is  described in  Article                                                                 
     8.1.1. Alaska can take  its share of gas produced in  lieu                                                                 
     of receiving payment for its royalty value.                                                                                
   5. Tax as Gas (TAG): used where there is an opportunity  for                                                                 
     certain  production  tax  obligations  to  be  paid   with                                                                 
     "molecules" instead of in value.                                                                                           
                                                                                                                                
3:56:07 PM                                                                                                                    
MR.  PAWLOWSKI addressed  "Key Provisions"  from "Principles  and                                                               
Benefits" set  out in Articles 2  and 3. The Key  Provision for a                                                               
principle set out in Article 2 is as follows:                                                                                   
                                                                                                                                
     Recognizes  that if  enabling legislation  is passed  that                                                                 
     the   Parties,   including   the   Administration,   would                                                                 
     negotiate contracts that would incorporate the  principles                                                                 
     in  the agreement;  this is  consistent with  the  phased-                                                                 
     approach  where the  HOA provides  the guiding  principles                                                                 
     that  will then  inform the  work  on much  more  detailed                                                                 
     agreement  in and  amongst the  different parties  to  the                                                                 
     HOA.                                                                                                                       
                                                                                                                                
He explained Article 3 regarding  the Key Provisions for benefits                                                               
of the Alaska LNG Project as follows:                                                                                           
   1. Gas to Alaskans,                                                                                                          
   2. Jobs for Alaskans,                                                                                                        
   3. Revenues to Alaska,                                                                                                       
   4. Opportunities for additional gas development.                                                                             
                                                                                                                                
He  referred   to  Commissioner   Balash's  statement   that  the                                                               
interests for  the state have  not changed. He asserted  that the                                                               
HOA process  positively demonstrates parties working  together to                                                               
solve problems and support benefits going forward.                                                                              
                                                                                                                                
He said Article 4 is a key  article in HOA and describes the work                                                               
that will  be conducted during  the Pre-FEED stage.  The Pre-FEED                                                               
stage is  expected to take between  18 and 24 months.  After Pre-                                                               
FEED is done,  each party will reevaluate the  project, the stage                                                               
of the project, and make  the individual decision to advance. The                                                               
Governor  described  the  process  as  a  "staged  approach."  He                                                               
explained that  measured and  methodical steps  will be  taken to                                                               
advance the  Alaska LNG Project  through the stage-gates  as more                                                               
is learned and each party's commitment grows.                                                                                   
                                                                                                                                
He explained  "Key Activities" described  in Article 4  about the                                                               
Pre-FEED stage as follows:                                                                                                      
                                                                                                                                
  1. The development of sufficient information for evaluating                                                                   
     the technical,  cost, and schedule  aspects of the  Alaska                                                                 
     LNG Project;  this is comparable to  the development of  a                                                                 
     blue-print.                                                                                                                
   2. The development of key project services agreements for                                                                    
     Alaska's  gas with  TransCandada and  AGDC or  subsidiary.                                                                 
     State agencies and Administration will have to enter  into                                                                 
     agreements for  the movement of  gas through the  pipeline                                                                 
     and through the liquefaction facility by working with  the                                                                 
     agencies' counterparties and agents in a transparent way                                                                   
     to protect Alaska's value.                                                                                                 
   3. The Parties will work to develop mutually agreeable gas                                                                   
     offtake and balancing agreements.                                                                                          
                                                                                                                                
MR. PAWLOWSKI  noted a previous  reference of how gas  comes into                                                               
AKGP and  how the state  takes possession of  the gas; that  is a                                                               
key contractual  and development work  that has to  happen during                                                               
the  Pre-FEED period.  He  said  there are  two  fields that  are                                                               
initially underpinning  the Alaska LNG Project  at the beginning:                                                               
Point Thomson  and Prudhoe Bay.  He said  Point 3 in  key Article                                                               
4's "Key Activities" addresses how  the state is taking its share                                                               
from Point  Thomson and  Prudhoe Bay  combined as  delivered into                                                               
the LNG Project and then taken out as LNG.                                                                                      
                                                                                                                                
3:59:36 PM                                                                                                                    
He remarked  about the Royalty Study  that was issued by  DNR and                                                               
referenced by  Commissioner Balash  as a key  piece of  work that                                                               
identified  some  deep concerns  the  state  had in  engaging  in                                                               
taking  gas in-kind.  One of  the  key concerns  was the  State's                                                               
inexperience  in   marketing.  In   Article  8.3.3  there   is  a                                                               
commitment by  the State  and Producer  Parties to  work together                                                               
with  each producer  to individually  develop agreements  for the                                                               
disposition of  a portion  of Alaska's  LNG. During  the Pre-FEED                                                               
stage the State  will have the opportunity,  not the requirement,                                                               
to pursue  joint-marketing with each producer  individually for a                                                               
share of  the LNG; that  goes a long  way to solving  the State's                                                               
inexperience in  engaging in  the LNG  market where  the Producer                                                               
Parties participate on a daily basis.                                                                                           
                                                                                                                                
SENATOR  DYSON   addressed  Point   3  and  asked   if  "mutually                                                               
agreeable"  includes  a  decision  by  the  Alaska  Oil  and  Gas                                                               
Conservation Commission (AOGCC).                                                                                                
                                                                                                                                
MR.  PAWLOWSKI  answered  that  AKGP and  production  of  gas  at                                                               
Prudhoe Bay and Point Thomson will  have to go through the AOGCC.                                                               
He said the  provision noted in Point 3 is  not contemplating how                                                               
to  work with  the AOGCC;  they are  a separate  entity and  will                                                               
define what  needs to be  done to protect  Alaska's hydrocarbons.                                                               
He set  forth that  the provision  is in  reference to  the State                                                               
working with the  Producer Parties to develop how  the State gets                                                               
gas  and  manages balancing  of  the  different streams  to  meet                                                               
Alaska's obligations.  AOGCC will maintain a  completely separate                                                               
review process.                                                                                                                 
                                                                                                                                
SENATOR DYSON  asked to confirm  that AOGCC will not  be involved                                                               
in the  Pre-FEED stage.  He assumed that  AOGCC will  be involved                                                               
with the outcome from Point 3 and  will do its job to protect the                                                               
people of Alaska's interests.                                                                                                   
                                                                                                                                
4:02:21 PM                                                                                                                    
MR. PAWLOWSKI  answered correct. He  said AOGCC will  be involved                                                               
at a later date to protect Alaska's interests.                                                                                  
                                                                                                                                
COMMISSIONER BALASH disclosed that DNR  shares a concern with the                                                               
in-kind approach in  that the State does not  control which field                                                               
is produced and  what amount; it really matters to  the State due                                                               
to varying royalty  rates between Prudhoe Bay  and Point Thomson.                                                               
He asserted  that the State  does not want  to be stuck  short or                                                               
long because  of a decision made  by AODCC as to  which field can                                                               
or should be  produced first or last. He explained  that the off-                                                               
take  agreements will  speak  to  how much  of  the  gas that  is                                                               
produced comes  to the  State and  the balancing  agreements will                                                               
help to make sure the State  does not windup short or long either                                                               
in a moment  or over any given period of  time. He continued that                                                               
Point 3  refers to  agreements between  DNR-DOR and  the Producer                                                               
Parties as to what amount of the  gas will come to the State as a                                                               
function of production, AOGCC's overlay is not addressed.                                                                       
                                                                                                                                
SENATOR DYSON asked for further  clarity in Commissioner Balash's                                                               
comments.                                                                                                                       
                                                                                                                                
CHAIR  GIESSEL noted  clarification has  occurred later  in prior                                                               
testimonies that she attended.                                                                                                  
                                                                                                                                
4:04:11 PM                                                                                                                    
SENATOR FRENCH addressed Point 3 and  asked if AOGCC will or will                                                               
not be involved.                                                                                                                
                                                                                                                                
MR. PAWLOWSKI  specified that  AOGCC is  above any  decision that                                                               
gets made between  parties. AOGCC is a  separate approval process                                                               
that is designed to protect  the state's resource in hydrocarbons                                                               
and maximizing hydrocarbon recovery.  He specified that AOGCC has                                                               
a role to play, but not within Point 3.                                                                                         
                                                                                                                                
SENATOR  FRENCH noted  that AOGCC  is thought  of as  setting the                                                               
offtake from  the North Slope; what  is safe to be  produced from                                                               
Prudhoe Bay, Point  Thomson, and Kuparuk. He said  the rate AOGCC                                                               
has set  so far is  far below what  is eventually believed  a gas                                                               
pipeline will  deliver. He asked  when the AOGCC's  decision will                                                               
be revisited.                                                                                                                   
                                                                                                                                
COMMISSIONER BALASH replied that the  operator at each field will                                                               
need to submit an application  to AOGCC for setting the allowable                                                               
offtake that will  very likely come in the  Front End Engineering                                                               
and Design (FEED)  stage of development. He  noted an interesting                                                               
tension   will  occur   prior  to   gas  offtake   regarding  the                                                               
possibility for added investment for oil recovery.                                                                              
                                                                                                                                
4:06:26 PM                                                                                                                    
MR.  PAWLOWSKI addressed  the phased  stages  of development.  He                                                               
noted that the  State and the Parties are  finalizing the Concept                                                               
Selection Stage  of the project; at  that point there is  a stop-                                                               
and-go decision whether to move  AKGP into the Pre-FEED stage. He                                                               
declared that  the Parties believe  that there is  an opportunity                                                               
for Alaska  gas to compete globally  in the LNG market.  The next                                                               
step is  to go through  the ramp-up  of the Pre-FEED  stage. Once                                                               
the Pre-FEED stage  ends in 18 to 24 months,  a stop-and-go phase                                                               
occurs  to decide  whether to  move on  to the  FEED stage,  each                                                               
party makes that  decision for themselves. The  investment in the                                                               
Pre-Feed  stage is  hundreds  of millions  of  dollars, the  FEED                                                               
stage is  in the  billions, and  the Engineering  Procurement and                                                               
Construction  (EPC)  phase  is  in  the  tens  of  billions.  The                                                               
commitment to  AKGP and  the investment  grows during  stage gate                                                               
advancement.  The  HOA  is  the governing  document  for  how  to                                                               
advance through the  Pre-FEED stage; that is the  decision on the                                                               
table. He said  there will be lots of other  agreements that will                                                               
come back to the legislature and  the public as AKGP moves to the                                                               
FEED  stage. He  noted that  increased commitment  by all  of the                                                               
parties will occur in order to move AKGP forward.                                                                               
                                                                                                                                
4:08:21 PM                                                                                                                    
He addressed Article  5 and noted that the  article describes how                                                               
the  State would  participate in  AKGP and  recognizes some  "key                                                               
provisions" and elements of state participation as follows:                                                                     
                                                                                                                                
   1. State participation in the AKGP could yield significant                                                                   
    benefits to Alaska as follows:                                                                                              
     A.   Maximizing  the value  of the  state's resources  for                                                                 
          the people of Alaska.                                                                                                 
    B.  Delivering gas to Alaskans.                                                                                             
    C.  Public transparency of the state's approval process.                                                                    
     D.   An opportunity  for additional  state revenues;  with                                                                 
          that investment in infrastructure comes a return on                                                                   
          the investment.                                                                                                       
     E.   Access  and pro-expansion  principles for  AKGP  that                                                                 
          the state achieves by being an owner in the Project                                                                   
          and having access to the rights, not the obligation,                                                                  
          but the rights to expand AKGP.                                                                                        
     F.   Improving alignment  of interests  between the  State                                                                 
          and the Producer Parties.                                                                                             
    G.  Reducing valuation and other potential disputes that                                                                    
          Alaska is used to over the last several decades.                                                                      
          Again, having people work together to solve                                                                           
          problems, rather than fighting over AKGP.                                                                             
 2. State    participation   in    the    infrastructure    by                                                                  
        entering into agreements with TransCanada and a                                                                         
    subsidiary of AGDC to carry the state's interest in the                                                                     
    infrastructure.                                                                                                             
   3. State's interest should be consistent with the state's                                                                    
    share of the gas.                                                                                                           
                                                                                                                                
MR. PAWLOWSKI said  Article 5 describes the state's  share of the                                                               
gas  as  a  combination  of  the  state's  royalty  interest  and                                                               
production tax  interest. The HOA contemplates  a range somewhere                                                               
between 20 and  25 percent, something mutually  agreeable to move                                                               
the project forward through pre-FEED.                                                                                           
                                                                                                                                
4:10:22 PM                                                                                                                    
He  said  Article  6  describes   the  regulatory  framework  and                                                               
references some of the access  and expansion principles that will                                                               
govern AKGP not  just during the Pre-Feed stage,  but through the                                                               
life  of  the project.  He  explained  four "key  provisions"  in                                                               
Article 6 as follows:                                                                                                           
                                                                                                                                
    1. At least five Alaskan offtake points for Alaskans to                                                                     
    get access to their gas.                                                                                                    
      2. Locations of offtake points will be developed in                                                                       
     consultation with  AGDC. AGDC's  work on  ASAP by  working                                                                 
     with  Alaskans and  planning for  the development  of  in-                                                                 
     state gas  really adds value to  AKGP. AGDC's open  season                                                                 
     work going  through the first quarter  of 2015 matches  up                                                                 
     on the  calendar to the Pre-FEED  work being conducted  by                                                                 
     AKGP.  There  is  a  lot  of  potential  for  synergy  and                                                                 
     cooperation  that we  have  not identified  and  would  be                                                                 
     premature to  identify at this point;  this is one we  saw                                                                 
     right  out  the  gate  that  provided  real  benefits   to                                                                 
    Alaskans and AKGP.                                                                                                          
                                                                                                                                
He  said the  regulatory framework  recognizes that  there is  an                                                               
opportunity because  FERC, Section  3, provides  the availability                                                               
of what can  be a tailored regulatory framework  where the State,                                                               
working with the Parties, can  develop commercial terms that meet                                                               
the  regulatory  needs  of  the  state  to  protect  the  state's                                                               
interest and provide access to  other producers into the project.                                                               
He set forth  that the regulatory framework has led  to the third                                                               
key provision in Article 6 as follows:                                                                                          
                                                                                                                                
  3. Each Party's shares in the capacity of the infrastructure                                                                  
     are  managed  by each  party  on  a "live  and  let  live"                                                                 
    basis.                                                                                                                      
                                                                                                                                
MR.  PAWLOWSKI explained  that Key  Provision 3  provides a  real                                                               
opportunity  for  the  State  to   make  sure  upfront  that  its                                                               
capacity,  working  with TransCanada  and  AGDC,  can operate  as                                                               
noted in the fourth key provision:                                                                                              
                                                                                                                                
  4. AGDC and TransCanada's shares of capacity in the Project                                                                   
     are committed to provide access to third parties on  terms                                                                 
    developed with the state.                                                                                                   
                                                                                                                                
He  summarized that  Key  Provision  4 does  not  say that  other                                                               
parties won't  manage theirs to  provide the noted  benefits, but                                                               
the opportunity  is upfront and  clearly existing on  the state's                                                               
share of the infrastructure.                                                                                                    
                                                                                                                                
4:12:42 PM                                                                                                                    
He  explained  why  the expansion  principles  are  important  as                                                               
follows:                                                                                                                        
                                                                                                                                
   1. Alaska has significant gas resources on the North Slope.                                                                  
  2. Current known reserves are 35 trillion cubic feet (TCF).                                                                   
     The    USGS   estimates    of   technically    recoverable                                                                 
     conventional gas  resources in  the Arctic  are more  than                                                                 
     240  TCF.  The AKGP  needs  to  be about  opening  up  the                                                                 
     opportunity for  the North Slope gas,  in addition to  the                                                                 
    state's gas, to find an avenue and way to market.                                                                           
    3. Pro-expansion principles guarantee Alaska land beyond                                                                    
     Prudhoe Bay and Point Thomson continue to be explored  for                                                                 
     gas  and  that gas  will  get  into the  line  to  benefit                                                                 
    Alaskans.                                                                                                                   
                                                                                                                                
He addressed  "Appendix A:  Pro-Expansion Principles"  in Article                                                               
6. He explained  that the Parties will be committed  to some very                                                               
core principles. He  specified that each owner of  a component or                                                               
a share of a component has  the right, but not the obligation, to                                                               
expand  or  participate  in  the expansion.  He  pointed  out  in                                                               
Appendix-A  that the  bias is  towards expansions  proceeding; as                                                               
long  as  those   are  developed  on  a  sole   risk  basis.  The                                                               
opportunity exists to open the  infrastructure to more parties to                                                               
come in.  He emphasized that  all of  the Parties have  agreed to                                                               
the   process  for   initiating  expansion   and  providing   the                                                               
opportunity  of each  of the  owners to  participate. The  owners                                                               
participate in the  expansion by making the  expansion bigger. He                                                               
asserted that the expansion provision  is a critical piece to the                                                               
HOA and movement under the  regulatory principles in Article 6 is                                                               
as follows:                                                                                                                     
                                                                                                                                
     You see  attention in connection between  Article 6 and                                                                    
     the  state's  willingness  and interest  in  advancing,                                                                    
     under FERC Section 3,  through that tailored regulatory                                                                    
     framework,  to   the  development  of   the  commercial                                                                    
     principles    detailing   what    these   pro-expansion                                                                    
     principles are saying today.                                                                                               
                                                                                                                                
4:15:00 PM                                                                                                                    
SENATOR MCGUIRE  stated her appreciation towards  the "Big Three"                                                               
producers,  but noted  previous  discussions  on the  limitations                                                               
presented by the way the  Unit Operating Agreement was drafted in                                                               
a way that  has materially prevented opportunities  for one party                                                               
or  independents from  doing things  they want  to do  that might                                                               
benefit Alaskans.  She noted the  "legalize" language in  HOA and                                                               
asserted that there  are always attorneys willing  to defend both                                                               
sides of  an agreement.  She set  forth her  desire to  have some                                                               
discussion  to  know that  the  thought  exists to  really  think                                                               
through that  the HOA is  pro-Alaska. She  said she is  aware the                                                               
gasline will  be operated as  a contract carrier  and understands                                                               
the  desire  to  protect  the   Parties,  but  noted  the  future                                                               
necessity for  Alaska to  provide an  opportunity to  expand. She                                                               
remarked  seeing circumstances  where  someone  could argue  that                                                               
expansion  could materially  affect a  company's bottom  line and                                                               
precipitate a stance against expansion.                                                                                         
                                                                                                                                
MR. PAWLOWSKI  replied that  there are  caveats to  any expansion                                                               
policy that are contained within HOA. He continued as follows:                                                                  
                                                                                                                                
     One  of the  things from  my experience  and I  believe                                                                    
     Commissioner Balash  shares as well in  working through                                                                    
     this  document  is  especially in  the  development  of                                                                    
     these pro-expansion  principles, we  really saw  one of                                                                    
     the benefits  that TransCanada as  a partner  brings to                                                                    
     the table. Remember why  TransCanada was engaged during                                                                    
     the  AGIA  process,  there   were  many  Alaskans  that                                                                    
     thought  having  a  pipeline   company  being  able  to                                                                    
     operate  as  an  independent pipeline  company  brought                                                                    
     benefits   because  their   bias  was   always  towards                                                                    
     expansion.  The  flip  side   of  that  is  that  their                                                                    
     interest is  in the  expansion not  necessarily keeping                                                                    
     costs down in  the same way that the  producers want to                                                                    
     in  defending the  value  of their  gas.  So there  was                                                                    
     always  that  tension. But  on  the  expansion side  in                                                                    
     being  able  to  operate  as  a  third  party  pipeline                                                                    
     company; we saw  this as enabling that  and I encourage                                                                    
     you  as TransCanada  comes before  this committee  as a                                                                    
     panel, asking  them about do  they see  these expansion                                                                    
     principles  providing them  the  opportunity to  really                                                                    
     have  those expansions  and there  are  some "terms  of                                                                    
     art"  here,   but  they   represent  some   very  clear                                                                    
     decisions at  the federal  level around  how expansions                                                                    
     work and  we'll be  able to get  into that  detail with                                                                    
     the committee in the future.                                                                                               
                                                                                                                                
4:17:54 PM                                                                                                                    
SENATOR MCGUIRE  asked to clarify  that "terms of  art" specifies                                                               
FERC rulings and languages specifically related to expansions.                                                                  
                                                                                                                                
MR. PAWLOWSKI  replied that Senator  McGuire is referring  to the                                                               
"Panhandle Decision."                                                                                                           
                                                                                                                                
He addressed  "enabling legislation"  referenced in Article  7 in                                                               
HOA.  He  explained  that  Article   7  describes  the  necessary                                                               
components of  enabling legislation  that the Parties  believe is                                                               
necessary  to advance  the project  through  Pre-Feed. Article  7                                                               
describes the two-stage process  that the Governor articulated in                                                               
the State of  the State Address. The HOA asks  the legislature to                                                               
take a look at setting  general take-terms today and enabling the                                                               
Administration,  AGDC,  and TransCanada  to  really  get to  work                                                               
crafting  some of  the more  detailed agreements  by testing  the                                                               
markets, seeing  if there  is a viable  project, and  then having                                                               
the  contracts  come  back  to the  legislature  as  the  project                                                               
advances  through Pre-FEED.  More  detailed design  work will  be                                                               
received and better project estimates  provided before a decision                                                               
in the FEED stage is made.  He explained that the legislation was                                                               
developed by the  Administration and the committees  will need to                                                               
engage all  of the  parties to  match the  legislation up  to the                                                               
necessary components of HOA.                                                                                                    
                                                                                                                                
4:19:46 PM                                                                                                                    
He   explained   the   advancement  timeline   through   enabling                                                               
legislation as follows:                                                                                                         
                                                                                                                                
   · April 2014:    Legislature passes enabling legislation.                                                                    
   · 2014 - 2015:   Administration and Alaska LNG Project                                                                       
                    Parties develop project enabling                                                                            
                    contracts.                                                                                                  
                                                                                                                                
MR. PAWLOWSKI  noted that unlike  previous efforts, there  is not                                                               
the belief that  one contract will make AKGP go  forward. He said                                                               
there   are  multiple   agreements  with   the  market,   service                                                               
providers, and producers  that are going to need  to be developed                                                               
to  govern  an   LNG  project.  He  pointed   out  that  multiple                                                               
agreements are one  of the challenges of an LNG  project that are                                                               
different than an overland pipeline project.                                                                                    
                                                                                                                                
He continued to address the advancement timeline as follows:                                                                    
                                                                                                                                
   · 2015:          Legislature considers project enabling                                                                      
                    contracts.                                                                                                  
  · 2015 - 2016:   Parties decide whether to advance to FEED.                                                                   
                                                                                                                                
4:20:55 PM                                                                                                                    
He addressed Article  8 and explained that  the article describes                                                               
the  royalties and  production tax  mechanisms that  will provide                                                               
the type of  clarity needed for parties to know  what the state's                                                               
share is  in addition  to other  Parties in  each element  of the                                                               
infrastructure. He referenced  the State Participation Provisions                                                               
and noted  that the state's  participation in  the infrastructure                                                               
needs to  be consistent  with the  state's share  of the  gas. He                                                               
specified that  the state's share  of the  gas is derived  from a                                                               
combination of royalty plus production tax.                                                                                     
                                                                                                                                
He  explained some  "Key Provisions"  in the  Royalty Section  as                                                               
follows:                                                                                                                        
                                                                                                                                
   1. Alaska Statute AS 38.05.182(a) provides that "Royalties                                                                   
     on  oil  and  gas  shall  be  taken  in-kind  unless   the                                                                 
     commissioner  (DNR) determines  that the  taking in  money                                                                 
     would be in the  best interest of the state;" that is  the                                                                 
     law  of the  land directing  the Commissioner  to gas  in-                                                                 
     kind.                                                                                                                      
    2. The November 2013 "Alaska North Slope Royalty Study"                                                                     
     performed by  Black & Veatch  identified potential  issues                                                                 
     related  to   Alaska  taking   in-kind,  primarily   those                                                                 
     associated  with marketing  risk.  What Article  8  really                                                                 
     recognizes is that  we see real opportunities in-kind  and                                                                 
     we see some risks,  but we need to work together with  all                                                                 
     of the parties to minimize those risks and maximize  those                                                                 
     benefits. We  believe some of the  terms that they  agreed                                                                 
     to in the HOA  provide the first material step to  solving                                                                 
     those problems.                                                                                                            
  3. In Article 8.3.3 the Producer Parties commit, if asked by                                                                  
     the state to "Negotiate separately with the state in  good                                                                 
     faith to enter into an agreement with the state  regarding                                                                 
     the purchase or other disposition of a portion of the  LNG                                                                 
     that is  made from the state's  deliveries (RIK + TAG)  of                                                                 
     natural gas to  the Alaska LNG project." That  willingness                                                                 
     to step up and work with the State on the marketing issue                                                                  
     provides an avenue to start to solve some of that in-kind                                                                  
     concern.                                                                                                                   
                                                                                                                                
MR. PAWLOWSKI  explained that Article  8 additionally  covers the                                                               
concept of taxes-gas. He said  as legislation moves forward there                                                               
is an opportunity to provide  the ability to pay production taxes                                                               
with molecules  instead of money,  just as royalty would  be paid                                                               
with  molecules  instead  money;  those molecules  will  be  sold                                                               
through  contract  converted into  revenues  flowed  back to  the                                                               
state.  He  set forth  that  as  the legislation  continues,  the                                                               
committee will  see the way  DNR and  DOR are structured  to work                                                               
together to manage  the flow back to the General  Fund and defend                                                               
the interest. He summarized as follows:                                                                                         
                                                                                                                                
     The  HOA  provides, given  resolution  of  some of  the                                                                    
     issues  and  risks  that  we   see,  that  this  is  an                                                                    
     opportunity to maximize the state's  value and we see a                                                                    
     chance  here  to  move  forward.  We  look  forward  to                                                                    
     working with all  of the parties to  advance under this                                                                    
     agreement.                                                                                                                 
                                                                                                                                
4:23:45 PM                                                                                                                    
SENATOR DYSON  referenced Article  8 and  noted a  previous issue                                                               
with oil  and gas producers  in dealing with  "fiscal certainty."                                                               
He summarized that  the proposal in Article 8 is  kind of a "back                                                               
door"  way of  having production  taxes around  the principle  of                                                               
future legislators not being bound by present actions.                                                                          
                                                                                                                                
COMMISSIONER BALASH  replied that what Senator  Dyson is touching                                                               
on is  something that is  going to be  a very important  facet of                                                               
the negotiations and  contracting that takes place  over the next                                                               
few months.  There is  going to  be a number  of things  that the                                                               
parties have to sit down and  work through in answering the "what                                                               
ifs." He  noted that  one "what if"  is going to  be what  if the                                                               
legislature changes taxes, up or  down, and what opportunities or                                                               
challenges will be presented. He  pointed out that the State will                                                               
have  multiple commercial  relationships and  interconnections by                                                               
and  among the  Parties.  He continued  to  address the  question                                                               
regarding fiscal uncertainty as follows:                                                                                        
                                                                                                                                
     Ultimately  how we  resolve that  question is  going to                                                                    
     receive an  inordinate amount of  scrutiny in  2015. We                                                                    
     aren't  certain how  that's going  to be  solved today.                                                                    
     What I can tell you  is that the desire, fundamentally,                                                                    
     for some measure  of predictability as to  our share of                                                                    
     the gas  and the  duration of the  terms for  the state                                                                    
     will become  very important because  if we're  going to                                                                    
     take  out capacity  on our  infrastructure for  20 plus                                                                    
     years,  we're going  to want  some  certainty from  the                                                                    
     upstream  parties that  they're going  to provide  gas.                                                                    
     We're also  going to have  the need  for understandings                                                                    
     around the market  against the sale of  the LNG itself.                                                                    
     The manner  by which all  of the Parties  achieve those                                                                    
     elements   of  certainty   that  allow   them  to   get                                                                    
     comfortable with the decision to  invest is going to be                                                                    
     one ultimately based on some interdependence.                                                                              
                                                                                                                                
4:27:10 PM                                                                                                                    
SENATOR  DYSON  asked if  there  is  a mechanism  whereby  future                                                               
legislatures  would   be  precluded  from   changing  production,                                                               
profit, or windfall  taxes someway related to  getting payment in                                                               
molecules instead of dollars.                                                                                                   
                                                                                                                                
COMMISSIONER BALASH replied  that his expectation is  not a "thou                                                               
shalt not."  He explained that  the question is what  will happen                                                               
"if."                                                                                                                           
                                                                                                                                
SENATOR DYSON  clarified that Commissioner Balash  is saying that                                                               
the intent  is trying to  structure the  agreement so that  if an                                                               
irresponsible legislature  or administration in the  future tried                                                               
to kill  the "golden goose,"  the trip-wires within  the contract                                                               
would  make it  demonstrably not  in their  interest to  kill the                                                               
goose.                                                                                                                          
                                                                                                                                
MR. PAWLOWSKI  offered that moving  on to the next  topic touches                                                               
on the question Senator Dyson raised.                                                                                           
                                                                                                                                
He addressed Articles  9 and 10 in HOA that  detailed other terms                                                               
that  are  necessary  to  advance  a  project.  He  continued  to                                                               
describe Articles 9 and 10 as follows:                                                                                          
                                                                                                                                
     At  the   stage  we   are  at   in  this   project,  we                                                                    
     collectively,  not  just  state,  don't  know  what  is                                                                    
     necessary to  advance the project. When  you talk about                                                                    
     durability  or frameworks  and how  long the  contracts                                                                    
     are going  to be,  we don't have  the answers  to those                                                                    
     yet. There's an important  difference between trying to                                                                    
     do something  through a  back-door rather  than saying,                                                                    
     "They're  going to  have to  be sufficient  duration to                                                                    
     contracts to make a project  work;" those are all going                                                                    
     to be done in the light  of public and part of a public                                                                    
     discussion over the next several  years, it's not a "We                                                                    
     should make  that decision today." We  need to continue                                                                    
     to work for, not just  what the other Parties need, but                                                                    
     what the state  does. Article 9.2 talks  about some key                                                                    
     criteria for duration. There can  be durability, but it                                                                    
     is  for   specific  reasons  and   it  is   to  support                                                                    
     investment   decisions,   permit   realization   of   a                                                                    
     competitive   economic  return   to  enable   necessary                                                                    
     financing, and  to support gas  and LNG  sales. There's                                                                    
     going   to  be   reasons  why   things  need   to  have                                                                    
     durability, not  durability for durability's  sake. One                                                                    
     of the  things we  talk about  is if  there is  not gas                                                                    
     committed, what is the durability  around that. We have                                                                    
     to work  through those problems,  they are going  to be                                                                    
     big problems,  but that  is part  of the  phased stage-                                                                    
     gated  approach to  this project.  As commitments  from                                                                    
     both  sides  build, the  level  of  commitment of  both                                                                    
     sides build until we have a project.                                                                                       
                                                                                                                                
4:30:45 PM                                                                                                                    
SENATOR DYSON  declared that he  should not have used  the phrase                                                               
"back  door." He  asserted that  he did  not mean  sneaky, but  a                                                               
really different  way of approaching  the stability  in limiting.                                                               
He asserted  that some  of Mr.  Balash's statements  sound almost                                                               
like production tax as being part of the royalty framework.                                                                     
                                                                                                                                
MR. PAWLOWSKI  replied that the  attempt with the  production tax                                                               
as "gas concept" is to,  from an economic perspective, get closer                                                               
to the royalty and there are a  number of reasons why to do that.                                                               
He explained  that production  tax is  a cost,  if a  producer is                                                               
looking at  marketing gas it is  a cost. He pointed  out that the                                                               
carve-out  for  Cook  Inlet's tax  ceiling  was  largely  because                                                               
changes in the  production tax at the time flowed  through to the                                                               
rate payers in  the contract. The end result was  a carve-out for                                                               
Cook Inlet taxes to protect the  gas market in Cook Inlet. Having                                                               
the production  tax shift  over to something  that is  similar to                                                               
royalty will  remove that  as a  cost from  the perspective  of a                                                               
producer who  is trying to  market. He noted that  some important                                                               
nuances regarding the  production tax shift will  be addressed in                                                               
later legislation.  He said everything  is about how  cheaply all                                                               
of our  gas gets  to compete with  British Columbia,  Russia, and                                                               
the  Australian  projects  that  are trying  to  chase  the  same                                                               
market. There are still costs  in the state-take, but by shifting                                                               
production  tax   to  something   that  is  supported   by  state                                                               
investment, we don't have to cut the  tax to the same way, yet we                                                               
can allow the gas to be competitively priced.                                                                                   
                                                                                                                                
4:32:34 PM                                                                                                                    
SENATOR  FRENCH  asked  to   clarify  that  Alaska's  production,                                                               
royalty,  and  property taxes  will  all  be collapsed  into  one                                                               
payment which will come to the state in gas rather than money.                                                                  
                                                                                                                                
MR. PAWLOWSKI replied that a  key difference is that the property                                                               
tax is not  included. He explained that the state  gas share is a                                                               
combination of the royalty plus  the production tax. The property                                                               
tax  and the  corporate  income tax  are separate  considerations                                                               
that are outside of the state's gas share.                                                                                      
                                                                                                                                
He continued with  Articles 9 and 10, calling  attention to Point                                                               
1 regarding  property tax. He said  property tax on a  $45 to $65                                                               
billion piece of  infrastructure is a major cost  to the project.                                                               
There  are  substantial property  tax  revenues  derived from  an                                                               
infrastructure  investment the  size of  AKGP. He  explained that                                                               
Alaska's  property tax  is shared  with  municipalities in  local                                                               
jurisdictions. He asserted that  the Administration was not going                                                               
to come  to the table  with a  proposal for property  tax without                                                               
engaging in  a consultative process  with the tax paying  and tax                                                               
jurisdictions,  in  addition  to   municipalities  that  are  not                                                               
directly related to the project. He  said in HOA is the idea that                                                               
in consultation  with local governments, another  thing that will                                                               
be pursued is the development of  a payment in lieu of tax system                                                               
and impact  payments to  govern the  project. There  is a  lot of                                                               
opportunity  to help,  we  have seen  many  bills introduced  the                                                               
years  to   suspend  property   taxes  during   construction,  as                                                               
incentives to  move the  project forwards.  He asserted  that the                                                               
state needs  to work together  with communities who are  going to                                                               
share the taxing jurisdiction to develop  what is the best way to                                                               
benefit them and  the state to move the project  forward; that is                                                               
a whole  separate substantial  revenue stream  to both  the state                                                               
and municipalities for the project.                                                                                             
                                                                                                                                
4:34:57 PM                                                                                                                    
SENATOR  FRENCH  asked  where  corporate  income  tax  was  being                                                               
addressed.                                                                                                                      
                                                                                                                                
MR. PAWLOWSKI replied that there  is no contemplation of anything                                                               
related to corporate  income tax. He noted  that corporate income                                                               
tax  will be  addressed  in  HOA and  specified  in the  statutes                                                               
introduced  to  the legislature  that  there  is  a key  part  of                                                               
including the production tax gas  in the apportionment factor for                                                               
the calculation of  corporate income tax to be sure  we are doing                                                               
the  apportionment factors  correctly for  corporate income  tax.                                                               
There  is  no real  changes  to  corporate  income tax  that  are                                                               
necessary.                                                                                                                      
                                                                                                                                
4:35:33 PM                                                                                                                    
MR. PAWLOWSKI  continued to address "key  provisions" in Articles                                                               
9  and  10  that included:  the  development  of  infrastructure;                                                               
local,  state,  and  federal  permitting  requirements;  and  the                                                               
continuation of  a healthy, long  term oil business. He  said the                                                               
development of gas and the  competitiveness of gas will depend on                                                               
how the  cost of the  Prudhoe Bay and North  Slope infrastructure                                                               
are  being borne.  He summarized  that a  healthy, long  term oil                                                               
business is key to moving gas forward.                                                                                          
                                                                                                                                
He  addressed  Article  11  and   explained  that  the  provision                                                               
provides key principles  that are guidance for  the project going                                                               
forward that  are very important  to Alaskans. He set  forth that                                                               
AKGP's  estimated  cost  is  $45  to  $65  billion  with  a  peak                                                               
construction workforce  of 9,000  to 15,000  jobs. He  noted that                                                               
the exciting part of an LNG  project is the long term operational                                                               
jobs that  exist in  Alaska. He explained  that pipelines  have a                                                               
smaller  operational workforce  than an  LNG plant;  current AKGP                                                               
estimates show 1,000  long term jobs in the  operations stage. He                                                               
noted the  importance in understanding  the need to be  sure that                                                               
AKGP was supporting key principles to Alaskans by:                                                                              
                                                                                                                                
   · Hiring Alaska residents,                                                                                                   
   · Contracting with Alaska businesses,                                                                                        
      · Participating with the Alaska Department of Labor                                                                       
     Workforce Development to update training plans,                                                                            
   · Providing training for potential Alaskans to work on the                                                                   
     project,                                                                                                                   
  · Committing to negotiating in good faith for project labor                                                                   
     agreements.                                                                                                                
                                                                                                                                
He said all of the  previously mentioned key principles provide a                                                               
mechanism for Alaskans  to participate in and  benefit from AKGP.                                                               
He  set   forth  that  AKGP   is  a   multigenerational  economic                                                               
opportunity for the state.                                                                                                      
                                                                                                                                
He  referenced Point  Thomson  and noted  the  importance in  the                                                               
Administration's  efforts  to  work  together  with  the  working                                                               
interest owners  to come to  an amicable settlement.  He asserted                                                               
that the  Point Thomson Settlement  jump-started and served  as a                                                               
foundation  in the  development  of AKGP.  He  detailed that  the                                                               
reserves  of gas  at Point  Thomson are  critical to  moving AKGP                                                               
forward with  the Prudhoe  gas. He mentioned  a quotation  from a                                                               
letter dated October 2012 to Governor Parnell as follows:                                                                       
                                                                                                                                
    While    North   Slope    gas   commercialization    is                                                                     
       challenging, working together, we can maintain the                                                                       
     momentum toward our shared vision for Alaska.                                                                              
                                                                                                                                
MR. PAWLOWSKI  noted the difference  made from the  Point Thomson                                                               
Settlement as follows:                                                                                                          
                                                                                                                                
     When I  think as  Alaskans we  find so  different about                                                                    
     this  effort is  that it  provides a  mechanism in  the                                                                    
     Heads of Agreement in going  forward for the parties to                                                                    
     work together  instead of fighting over  a project that                                                                    
     is going to be critical to Alaska's future.                                                                                
                                                                                                                                
4:38:58 PM                                                                                                                    
He  revealed that  a website  [www.dnr.alaska.gov/AKgas.htm] will                                                               
be accessible for the legislature  and public to follow additions                                                               
to the supportive information and documents provided for AKGP.                                                                  
                                                                                                                                
SENATOR  FAIRCLOUGH noted  that Alaskans  will want  to know  why                                                               
TransCanada.                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH explained  that the  State has  been working                                                               
with TransCanada in  the AGIA framework and  the proposed project                                                               
is a step  forward and continuation. He set forth  that the State                                                               
is  leaving   the  AGIA  license  behind   with  TransCanada  and                                                               
continuing to move forward with  TransCanada. He explained that a                                                               
presentation on terms  with TransCanada will be  presented to the                                                               
committee at the  following meeting. He specified  that the terms                                                               
with   TransCanada  will   be  a   more  traditional   commercial                                                               
relationship.  He said  the presentation  will highlight  for the                                                               
committee and the  public the reasons why it makes  sense for the                                                               
state  from   a  commercial   and  quantifiable   standpoint.  He                                                               
explained that qualitatively there are  a couple of things he can                                                               
point to regarding TransCanada:                                                                                                 
                                                                                                                                
   1. Preeminent pipeline company in North America,                                                                             
   2. Knows how to operate in the Arctic,                                                                                       
   3. Demonstrated to be a worthy partner with DNR,                                                                             
  4. Shouldered up with the other Parties and found solutions                                                                   
     to problems.                                                                                                               
                                                                                                                                
COMMISSIONER BALASH declared that at the  end of the day what the                                                               
DNR sees as the real value is to  have a company that is going to                                                               
be able to do the following:                                                                                                    
                                                                                                                                
  1. Step in and operate like an independent pipeline company,                                                                  
   2. Knows the state,                                                                                                          
   3. Has been in Alaska and is familiar with issues that are                                                                   
     important to Alaskans,                                                                                                     
   4. Not going to face a steep learning curve.                                                                                 
                                                                                                                                
He explained that the  Administration considered strongly whether                                                               
to  continue   forward  with  TransCanada   and  the   fact  that                                                               
TransCanada  was prepared  to meet  Alaska's terms  was no  small                                                               
thing.  He  revealed   that  DNR  will  get   into  the  specific                                                               
combination of the  terms, the debt to equity ratio,  and some of                                                               
the options that will be held by the state.                                                                                     
                                                                                                                                
4:42:21 PM                                                                                                                    
SENATOR FAIRCLOUGH set  forth for the departments  to be prepared                                                               
to answer  why TransCanada would  put U.S. interests in  front of                                                               
Canadian interests  when Canada has  a project that is  trying to                                                               
compete specifically  with the same  market that Alaska  is going                                                               
after. She said  she would like the people of  Alaska to hear the                                                               
safeguards that are  in place to make sure  Alaskan interests are                                                               
in front of Canadian interests in reference to AKGP.                                                                            
                                                                                                                                
SENATOR MICCICHE  stated that he  finds Section  9.3 interesting,                                                               
especially  9.3.1(b)  in  reference  to  impact  payments  during                                                               
construction.  He asked  if Mr.  Pawlowski  could explain  impact                                                               
payments  and if  the costs  could be  incurred as  an additional                                                               
service prior to there being any taxable value.                                                                                 
                                                                                                                                
MR.  PAWLOWSKI  replied  that  DOR has  not  delved  into  impact                                                               
payments  when consulting  with local  communities. He  explained                                                               
that impact  payments are traditionally  meant to  substitute for                                                               
what  would be  the property  tax value  during the  construction                                                               
period.  He said  assets are  put into  place with  taxable value                                                               
during the  construction period. He continued  to address working                                                               
with communities to determine impact payments as follows:                                                                       
                                                                                                                                
     How  exactly the  impact payments  and  the payment  in                                                                    
     lieu of taxes  are structured is going to  depend a lot                                                                    
     on the  needs of  the project in  terms of  net present                                                                    
     values  and the  needs of  the communities  for revenue                                                                    
     before  construction.  As you  know  there  is a  major                                                                    
     impact on communities  of an influx of  workers, of the                                                                    
     needs of  the infrastructure,  so there's  got to  be a                                                                    
     balance  somewhere of  how  those  impact payments  are                                                                    
     supporting  those very  real needs  at the  local level                                                                    
     while  providing  an   opportunity  for  the  project's                                                                    
     sponsors,  which in  this case  would also  include the                                                                    
     state,   to    achieve   a   strong   value    on   the                                                                    
     commercialization  of  the  project going  forward.  We                                                                    
     don't have  an answer,  we have not  predetermined what                                                                    
     the numbers  should look like,  and we look  forward to                                                                    
     the process  of working with communities  to get there.                                                                    
     As in the  Pre-FEED stage, we know more  about what the                                                                    
     needs are going to be at the community levels.                                                                             
                                                                                                                                
4:45:16 PM                                                                                                                    
SENATOR MICCICHE  declared as a  former small town mayor  that he                                                               
believes it  is an excellent  consideration to have  an agreement                                                               
and  is glad  to see  it. He  remarked that  communities will  be                                                               
comforted  to  know that  they  are  being  looked out  for  pre-                                                               
construction  completion. He  said he  will be  working with  the                                                               
Department of Labor on the  legal constraints for Alaska hire. He                                                               
noted  testimony  on  gas  to Alaskans,  jobs  to  Alaskans,  and                                                               
revenue  to the  state. He  asserted that  "jobs to  Alaskans" is                                                               
something that he would like  to revisit pertaining to the extent                                                               
of the  constraints. He asserted  how AKGP is received  will vary                                                               
dramatically  and  depend  on opportunities  existing  for  young                                                               
Alaskans.                                                                                                                       
                                                                                                                                
COMMISSIONER  BALASH replied  that  the intent  is  to deal  with                                                               
"jobs  to Alaskans"  in a  new way  and wait  until right  before                                                               
construction begins  in order  to not  allow lawyers  enough time                                                               
before jobs are available.                                                                                                      
                                                                                                                                
SENATOR DYSON  commented that there is  an awful lot that  is not                                                               
being  said  during  the  overview. He  mentioned  being  in  the                                                               
legislature for  18 years  and noted  two issues  regarding labor                                                               
agreements:                                                                                                                     
                                                                                                                                
  1. Construction unions with bylaws that do not allow Alaskan                                                                  
     hire if out of state union members are on the membership                                                                   
     rolls.                                                                                                                     
   2. Senator Bishop will provide great help to the committee                                                                   
     to  support  an  Alaskan  who  is  qualified  and  can  be                                                                 
     licensed  under state  law can  become a  bargaining  unit                                                                 
     member.  Bargaining units  should have  Alaskans on  their                                                                 
     books in other jurisdictions.                                                                                              
                                                                                                                                
MR. PAWLOWSKI added that through  settlements and contracts there                                                               
are a  lot more things  that can  be done about  Alaska-hire than                                                               
through statutes.  He noted that  the departments can  assist the                                                               
committee  in providing  guidelines for  contractual development.                                                               
He asserted that  HOA has captured the  Alaska-hire principal and                                                               
noted the importance of structuring the agreement going forward.                                                                
                                                                                                                                
4:48:30 PM                                                                                                                    
SENATOR FAIRCLOUGH noted Senator  Dyson's concerns. She specified                                                               
that  one of  the issues  on a  project labor  agreement for  her                                                               
consideration  is   going  to  be  retirement   portability.  She                                                               
referenced  the period  during the  Trans-Alaska Pipeline  System                                                               
(TAPS)  and  noted  that  many people  left  without  seeing  the                                                               
benefit from  their work in  savings accounts without  funds. She                                                               
addressed  Senator Micciche's  consideration for  negotiations on                                                               
social impacts  and noted during  TAPS construction  the increase                                                               
in rape  and domestic violence  in smaller communities.  She said                                                               
she hoped  that the particular  social impacts noted will  not go                                                               
unnoticed. She  noted that  those directly  involved in  TAPS may                                                               
not  have known  about  the  social impacts,  but  the state  did                                                               
pickup quite a  bit of cost in placing  support facilities across                                                               
Alaska  to  support  individuals  that  were  traumatized,  taken                                                               
advantage of, and had their lives changes.                                                                                      
                                                                                                                                
She  inquired from  an Alaskan  perspective  if individuals  will                                                               
have an  opportunity to participate  in AKGP. She  specified that                                                               
other bills  addressed distributing  a "permanent fund"  so there                                                               
is investment  cash flow coming  into some households  that allow                                                               
Alaskans to  be a part  of a  long term pipeline  investment. She                                                               
expressed her  desire for the  ability for Alaskans to  invest or                                                               
at least be  able to buy shares in one  of the participating AKGP                                                               
entities.  She   noted  the   importance  of   affordable  energy                                                               
throughout Alaska and addressed  AKGP's offtake points. She asked                                                               
if there  will be  added cost  for smaller  communities receiving                                                               
low pressure gas from the offtake points.                                                                                       
                                                                                                                                
MR. PAWLOWSKI replied that Steve  Butt, AKGP Project Manager will                                                               
address  the technical  aspects with  the committee  at a  future                                                               
meeting. He  noted that the  Administration has been  focusing on                                                               
LNG  opportunities beyond  the  project's  traditional route.  He                                                               
noted an  example of micro-scale  LNG delivered on the  water and                                                               
Alaska's potential future benefits from small scale LNG.                                                                        
                                                                                                                                
He   addressed   investment   participation   and   noted   DOR's                                                               
commissioner is aware  of the complications that  come along with                                                               
investment by Alaskans. He said  DOR will work with the committee                                                               
to address investment challenges and opportunities.                                                                             
                                                                                                                                
4:53:21 PM                                                                                                                    
SENATOR FRENCH  asked about Alaska's relationship  with the other                                                               
HOA members  between now  and whenever it  wraps up.  He inquired                                                               
how the  State works with the  other members. He asked  about the                                                               
$400 million cost for AKGP's Pre-FEED phase and Alaska's share.                                                                 
                                                                                                                                
COMMISSIONER  BALASH replied  that the  $400 million  is a  total                                                               
figure  and  Alaska's share  would  be  a  fraction of  that.  He                                                               
reiterated that  the percentage for  the state will  be somewhere                                                               
between 20  to 25 percent  and the state's  share will be  $80 to                                                               
$100 million. He pointed out  that the agreement with TransCanada                                                               
will not  require Alaska  to front  any cash  or meet  cash calls                                                               
during the  Pre-FEED phase  or subsequent phases  so long  as the                                                               
state  maintains a  relationship  with  TransCanada. He  detailed                                                               
that  the  state's share  is  actually  going  to be  a  fraction                                                               
further of the  $80 to $100 million. He explained  that the costs                                                               
will be  reviewed during the  course of the fiscal  note analysis                                                               
in  making  sure  that the  State's  subsidiary  is  sufficiently                                                               
capitalized to meet the expected  cash call needs during the Pre-                                                               
FEED phase.                                                                                                                     
                                                                                                                                
SENATOR  FRENCH addressed  the election  between Royalty  in Kind                                                               
(RIK) and Royalty  in Value (RIV) as something  Alaska has always                                                               
treasured and  enjoyed being  able to exercise.  He said  RIK and                                                               
RIV  are one  of  Alaska's prerogatives  of  being sovereign.  He                                                               
asserted  that HOA  and enabling  legislation will  surrender RIK                                                               
and  RIV  to  producers  by  letting  them  make  a  onetime  and                                                               
irrevocable choice. He asked why  Alaska should give up something                                                               
that the state enjoys using for multiple years in the oil area.                                                                 
                                                                                                                                
4:55:46 PM                                                                                                                    
MR. PAWLOWSKI replied that the choice  on tax as gas is not given                                                               
to  the producer.  He specified  that the  choice of  tax as  gas                                                               
depends  on the  DNR initially  making modifications  to specific                                                               
leases. The option  for tax as gas only becomes  available if the                                                               
state elects  to do  so and  then the tax  as gas  option becomes                                                               
available.                                                                                                                      
                                                                                                                                
SENATOR FRENCH asked about the royalty side.                                                                                    
                                                                                                                                
4:57:03 PM                                                                                                                    
COMMISSIONER  BALASH  addressed  the recent  Royalty  Study  that                                                               
specified  legitimate commercial  complaints with  regard to  the                                                               
state's ability  to switch  back and  forth from  RIV to  RIK. He                                                               
noted that the state's ability to  switch back and forth does not                                                               
always create  problems, what matters is  how much of the  gas in                                                               
question  is being  committed to  Sales  and Purchase  Agreements                                                               
(SPA). He explained  that Prudhoe Bay has 24  trillion cubic feet                                                               
of gas  and if  the collection  of SPAs  total 16  trillion cubic                                                               
feet  of gas,  the  state's ability  to switch  is  not going  to                                                               
create a  complication for the  buyer, seller,  and relationship.                                                               
He  stated that  a commercial  hardship  may occur  if the  state                                                               
decides to switch when the  SPAs necessary to underwrite AKGP add                                                               
up  to 24  trillion  cubic feet.  He noted  the  challenge for  a                                                               
seller to tell a buyer that  gas is available for 20 years unless                                                               
people in  Alaska decide to  switch. He remarked that  the choice                                                               
to keep  RIV and RIK  switchable is  going to impact  the state's                                                               
value one way or the other. He continued to explain as follows:                                                                 
                                                                                                                                
     Whether we feel  it in the value we  realize or whether                                                                    
     we  make a  long term  commitment  to one  form or  the                                                                    
     other, there  is a choice  to be  made here and  we can                                                                    
     choose  to keep  it on  a switchable  basis, but  it is                                                                    
     going  to impact  our value  one way  or the  other and                                                                    
     that  is  something   that  when  we  do   get  to  the                                                                    
     legislation  you  will see  we  are  not asking  for  a                                                                    
     choice to be made and left,  it is going to depend upon                                                                    
     the  circumstances that  we face  based  on the  lessee                                                                    
     that  is  approaching  us. Again,  going  back  to  the                                                                    
     question  of  whether  or not  the  SPAs  involved  are                                                                    
     committing all of the gas, or just some of the gas.                                                                        
                                                                                                                                
4:59:37 PM                                                                                                                    
SENATOR   FRENCH  replied   that   he  looked   forward  to   the                                                               
conversation.                                                                                                                   
                                                                                                                                
CHAIR  GIESSEL asked  how Commissioner  Balash  would respond  to                                                               
people  who asked  why AKGP  will go  forward when  so many  have                                                               
failed.                                                                                                                         
                                                                                                                                
COMMISSIONER  BALASH remarked  about  the  collection of  parties                                                               
that have signed  on to HOA has  not existed over the  past 10 to                                                               
15 years.  He said  the collection  of parties  alone is  not the                                                               
answer and a  commensurate commitment level will  be required for                                                               
AKGP to proceed  during development. He set forth  that the State                                                               
is  going   to  reserve  certain  prerogatives   and  choices  by                                                               
maintaining  its "ace  in the  hole"  through AGDC  and the  ASAP                                                               
Project.  He  noted  that  the  impact  from  the  Point  Thomson                                                               
Settlement  (PTS)  goes  directly to  the  producers'  commercial                                                               
interests. He  explained that  PTS resulted  in an  obligation on                                                               
the  part of  the  lessees to  do certain  things  to hold  their                                                               
leases. The  lessees acknowledged that  the land is the  state of                                                               
Alaska's and  doing nothing will  result in lessees  losing their                                                               
leases.  He said  first along  the  way to  development at  Point                                                               
Thomson  is the  initial  production system;  a relatively  small                                                               
cycling  project that  will  kick  out 10,000  barrels  a day  of                                                               
liquids  and  needs  to  be  brought online  by  early  2016.  He                                                               
explained that the working interest  owners at Point Thomson will                                                               
be  able to  keep  some of  their acreage  if  the small  cycling                                                               
project is  brought online by  2016 and the  rest may be  kept if                                                               
the field  is more  fully developed. He  detailed three  ways for                                                               
the Producers to meet their PTS obligation by 2019:                                                                             
                                                                                                                                
   1. Expand the cycling effort,                                                                                                
   2. Blowdown Point Thomson and move gas over to Prudhoe Bay                                                                   
     and recover more black oil,                                                                                                
   3. Sanction a major gas sale project.                                                                                        
                                                                                                                                
COMMISSIONER  BALASH  addressed  the scheduled  progression  form                                                               
Pre-FEED  to FEED  to  Final Investment  Decision  (FID) and  the                                                               
associated timelines. He noted that  FID is projected to occur in                                                               
2017 or 2018,  beating the 2019 date. He  asserted that retaining                                                               
Point Thomson  lease positions, staying  on plan,  and committing                                                               
to sanction before 2019 is important to the lessees.                                                                            
                                                                                                                                
5:03:16 PM                                                                                                                    
He pointed  out an issue  that has  confounded folks who  want to                                                               
commercialize Prudhoe Bay and that  is the gas impact consequence                                                               
on oil.  He explained  that Prudhoe  Bay is both  an oil  and gas                                                               
field.  He said  for  many years  the Prudhoe  Bay  gas has  been                                                               
reinjected in order  to recover more oil. He  revealed that every                                                               
time gas  is reinjected,  less oil  is recovered  and a  point of                                                               
diminishing returns  is reached in  terms of using up  the energy                                                               
to recycle  gas. He asserted  that there is ultimately  a tipping                                                               
point, a  point at  which there  is no  longer a  loss associated                                                               
with gas  blowdown at Prudhoe Bay.  He said estimates based  on a                                                               
limited set  of data suggest that  the tipping point is  going to                                                               
arrive  somewhere in  the early  part of  the next  decade, which                                                               
coincides  with  the  first  dates  that come  out  of  the  AKGP                                                               
timelines. He  noted that  BP, the operator,  has access  to more                                                               
detailed  information   and  can   provide  the   committee  with                                                               
additional information about when the tipping point might occur.                                                                
                                                                                                                                
SENATOR DYSON  set forth  that as  Prudhoe Bay  development moves                                                               
towards  trying  to  harvest  heavy  oil,  carbon  dioxide  (CO2)                                                               
stripped from the gas is almost  like magic in lifting heavy oil.                                                               
He asserted  that there will  be a "sweet  spot" in CO2  use that                                                               
will  add  to  the  economics  of the  gas  treatment  plant  and                                                               
facility.                                                                                                                       
                                                                                                                                
5:05:27 PM                                                                                                                    
COMMISSIONER BALASH  replied that Senator Dyson's  observation is                                                               
a very true statement.                                                                                                          
                                                                                                                                
MR. PAWLOWSKI added that he looks  at what is different today and                                                               
in the  future. He noted  recent activity with an  office opening                                                               
and land  acquisition in Kenai.  He said land  is in place  or at                                                               
least  a good  assessment  of land  rights in  order  to file  an                                                               
export license. He  set forth that people are  actually doing the                                                               
work that needs to  be done to move AKGP forward  and the work is                                                               
happening now.  He stated that he  does not just look  at what is                                                               
driving  the longer  term,  but  are the  parties  doing what  is                                                               
necessary today to advance the  project and the answer is clearly                                                               
yes due to the work that started a few months ago.                                                                              
                                                                                                                                
5:06:22 PM                                                                                                                    
CHAIR GIESSEL  announced that TransCanada  will be  attending the                                                               
next   committee   meeting   to   address   the   Memorandum   of                                                               
Understanding (MOU).                                                                                                            
                                                                                                                                
5:06:47 PM                                                                                                                    
There being  no further  business to  come before  the committee,                                                               
Chair Giessel  adjourned the Senate  Resources Committee  at 5:06                                                               
p.m.                                                                                                                            
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
SRES Heads of Agreement Presentation Rodell, Balash, Pawlowski revised 20140127.pdf SRES 1/27/2014 3:30:00 PM
SRES Heads of Agreement 20140129.pdf SRES 1/27/2014 3:30:00 PM
SRES Memorandum of Understanding 20140127.pdf SRES 1/27/2014 3:30:00 PM