Legislature(2013 - 2014)BUTROVICH 205
01/29/2014 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: State/transcanada Memorandum of Understanding | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 29, 2014
3:31 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Fred Dyson, Vice Chair (via teleconference)
Senator Peter Micciche
Senator Click Bishop
Senator Lesil McGuire
Senator Anna Fairclough
Senator Hollis French
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION: STATE/TRANSCANADA MEMORANDUM OF UNDERSTANDING
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOE BALASH, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Presented overview of the State/TransCanada
MOU.
ANGELA RODELL, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions about financial
arrangements in the State/TransCanada MOU.
TONY PALMER, Vice President
Major Projects Development
TransCanada Corp.
POSITION STATEMENT: Commented on the State/TransCanada MOU.
ACTION NARRATIVE
3:31:48 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 McGuire, Fairclough, French, Micciche,
Bishop, Dyson (via-teleconference), and Chair Giessel.
^Presentation: State/TransCanada Memorandum of Understanding
Presentation: State/TransCanada Memorandum of Understanding
3:32:26 PM
CHAIR GIESSEL announced the first order of business to be a
presentation on the State's Memorandum of Understanding (MOU)
with TransCanada.
3:33:16 PM
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
Anchorage, Alaska said he would try to provide a fairly high
level overview of the MOU that Commissioner Rodell and he struck
with TransCanada last month and how that fits into the larger
Heads Of Agreement (HOA) construct discussed on Monday.{ He
hoped to address the questions around why TransCanada, the
benefits the state will gain from this particular arrangement
and partnership, and start to familiarize the committee with
some of the numbers that are associated with this project and
what potentially will accrue to the state as a consequence of
ANS commercialization.
3:34:43 PM
COMMISSIONER BALASH reviewed that the HOA is a method for the
parties who have an interest in the gas or the infrastructure to
work together in the pursuit of the AKLNG project. The major
components of that project are the gas treatment plant (GTP),
the pipeline and the LNG plant.
3:35:19 PM
He said the departments are looking for a way to align the
state's interest in the royalty and production tax in an equity
position in the components of the project. Each party would own
its own share proportionate to its interest in the gas - the
State of Alaska (SOA) at the bottom. Depending upon the state's
percentage, each of the other three parties would vary depending
upon 20-25 percent. This allows them to structure the financing
for the state's share of the components in a way that suits its
interests.
On Monday he spoke about the state's strong interest in low
tariffs, but noted that the other parties are not necessarily
driven by the same concern. They may be seeking a higher return
on equity for the capital invested in the infrastructure, or
they may have a higher percentage of equity invested in it, and
minimizing their debt exposure for whatever corporate reason
they may have. Each of the three companies has very different
perspectives on these questions. In thinking of some of the
fights over tariffs charged on TAPS, he was not talking about
differences in cost, but differences in how they are financed,
the consequence on the tariff, and the resulting impact on the
state's royalty value.
3:37:18 PM
COMMISSIONER BALASH said the MOU with TransCanada would provide
for them to step into the state's shoes for the GTP and the
pipeline. It's further expected that the subsidiary the
legislature that is being asked to be established would be the
entity to hold the interest in the liquefaction plant. The
pipeline would have five offtake points to make sure Alaskans
are able to receive North Slope gas; and in order to facilitate
the movement of the state's share of the gas from the Slope to
market the DOR and DNR need to enter into contracts for capacity
in the GTP pipeline and LNP plant.
3:38:21 PM
SENATOR FRENCH asked him to explain more about TransCanada's
supplanting the SOA. What happened? Did the state sell
TransCanada its quarter?
COMMISSIONER BALASH answered that under the AGIA framework they
contemplated having an operator owning all the components. In
the course of time and discussions with the other parties, it
became clear that a joint venture approach was needed. It
fundamentally comes down to who has gas to move from the Slope
to market. So wanting to preserve the capital investment
proportions of the pre-FEED (Front End Engineering and Design)
phase he just outlined, they progressed to the MOU where
TransCanada would step into the state's shoes for the gas
treatment plant (GTP) and pipeline and therefore would not have
to pay its share of the development costs.
3:40:47 PM
SENATOR FRENCH said he had asked if the $400 million under the
HOA split out to about a quarter each and the commissioner had
said yes. So, the state is on the hook for $100 million. But he
just heard him say that TransCanada will front that money and,
therefore, the state would start building a debt to them.
COMMISSIONER BALASH said that was correct.
SENATOR FRENCH asked if that relationship would persist all
through the project: TransCanada putting up the money and he
would have to negotiate with them how to pay them back.
3:41:24 PM
ANGELA RODELL, Commissioner, Department of Revenue (DOR),
Juneau, Alaska clarified that the $400 million is the total
project cost. So, here they are talking about the portion
attributable to the midstream and the upstream costs (GTP and
pipeline); at this point they are not talking about the amounts
attributable to the liquefaction facility. So, the $400 million
is three things: liquefaction, pipeline and GTP. So, when the
state has 25 percent of $400 million the AGDC's subsidiary's
portion will be at roughly $100 million. In this presentation
they are talking about TransCanada's role in stepping up and
making those cash outlays for development costs associated with
the GTP and the pipeline during the pre-FEED stage.
SENATOR FRENCH said he met with TransCanada and they are a
fantastic, adept, and intelligent group of people who know what
they are doing, but people are asking why them? AGIA didn't
work. We may be at the end of that road. How did we get from
that process to this one that is very different?
3:43:05 PM
COMMISSIONER BALASH answered that the reasons TransCanada as a
partner in this arrangement makes sense for the state will be
presented during the overview, and that many of the reasons the
state found TransCanada to be a good partner in the AGIA license
hold true in an LNG context. He said there is value to having an
independent pipeline company operating a portion of this project
in the state and in their pursuit of finding additional
customers and gas beyond Prudhoe Bay and Pt. Thomson. It's one
of the benefits they see to this particular arrangement.
SENATOR FRENCH asked where the state stands with AGIA.
3:44:04 PM
COMMISSIONER BALASH replied that the state expects to step out
of the AGIA license, but certain terms and conditions to that
license achieved some pretty important state interests, namely
low tariffs, instate use of gas, and a favorable expansion
principle. And those have all been achieved in this more
traditional arrangement between a shipper and a transporter, but
using some different tools and in the context of the other
parties pursing an aligned path together.
3:45:11 PM
He pointed out for the state's portion, TransCanada would be in
the GTP, the pipeline, and the Alaska Gasline Development Corp.
(AGDC) subsidiary in the LNG plant.
He showed a map of the oil and gas pipelines that TransCanada
had constructed or operates in North America; they are the
preeminent pipeline builder in North America and their ability
and reputation for building pipelines on time and on budget for
their customers is something that will serve Alaska well in the
next several steps in the progress of this project. He said the
state had aligned with them on a method for operation and
expansion on terms that are in Alaska's interests, in particular
the tariff terms, the commercial terms that will provide
economic benefits to Alaskans, and the experience they have
developed not only in Alaska's early stages of the other
project, but of having developed their expertise in the Canadian
Rockies. They are familiar with constructing in discontinuous
permafrost and the mountainous areas and have overcome those
challenges. That is experience that Alaska wants to have in this
particular project.
COMMISSIONER BALASH said the data TransCanada generated during
the term of the AGIA license to date is something the state has
the ability to buy out under its terms, but that is not what
they are going to do at this time. The cost of that under the
statute would be in excess of $100 million. However,
TransCanada, along with the other Alaska Pipeline Project (APP)
party are prepared to contribute that information to the AKLNG
project, so that cost will not have to be incurred again or the
effort duplicated. So, from Livengood north, pipeline
information, GTP information, all of that is not going to need
to be replicated.
Finally, he said they have an agreement that allows them to make
a seamless transition out of the license and into a more
traditional shipper transporter commercial arrangement that fits
in with the larger HOA construct.
3:48:22 PM
SENATOR FAIRCLOUGH asked if the data he was referring to was
that that ExxonMobil and TransCanada have a relationship with
right now.
COMMISSIONER BALASH answered yes.
SENATOR FAIRCLOUGH said that ExxonMobil would already be at the
table under the HOA and asked why put it on TransCanada's
balance sheets as far as something to negotiate.
COMMISSIONER BALASH replied it's not something that is being
negotiated; it is something TransCanada and ExxonMobil are
bringing to the table without cost or additional cost. The other
parties aren't paying TransCanada for that cost.
3:49:19 PM
COMMISSIONER BALASH said the definition of Memorandum of
Understanding (MOU) was taken from Investopedia and he clarified
that in this case the MOU is very clear. It is not binding on
DNR and DOR until the legislature enacts enabling legislation.
Today, under current law he does not have the authority to enter
into a binding agreement with TransCanada or anybody else. That
is one of the things they are seeking in the legislation he
hopes to talk with the committee about next week.
3:50:22 PM
SENATOR FRENCH asked if the enabling legislation has to be
agreeable to just TransCanada.
COMMISSIONER BALASH responded by noting Article 2.1(d) that
says:
The Parties agree to support the approval of the
Operative Terms in the Enabling Legislation, but
acknowledge that the Enabling Legislation may include
authorizations or conditions that vary from or
conflict with the Operative Terms. In such event, and
if Parties agree to accept the Enabling Legislation,
then the Transition Agreements will reflect the
Enabling Legislation terms and conditions
notwithstanding the Parties acknowledge above.
Or simply put, both TransCanada and the commissioners recognize
and appreciate the independent position that the legislature
holds in this regard and they are not in a position to dictate
terms to the legislature. However, they have described the
agreement they intend to enter into if given the authority they
are seeking in the legislation.
So, whatever terms and conditions may apply through the course
of the legislative process, there will be an opportunity for
them to react and testify, and for the commissioners, too.
Importantly, it is not just TransCanada who gets that option. If
the conditions imposed in legislation cause a result that he or
Commissioner Rodell find is no longer in the state's interest,
they are not obligated to pursue these agreements either.
3:52:36 PM
SENATOR MICCICHE asked if there are two things that the state no
longer has commitment through AGIA to TransCanada.
COMMISSIONER BALASH answered that was correct and it is
explained in the Recitals, paragraphs 11 and 12. He said they
are utilizing the no contest divorce provisions of that a
statute and both agree they are done with the AGIA license; the
trigger for that is passage of the enabling legislation.
SENATOR MICCICHE said that sometimes people stay together
because of the children and he wanted to independently evaluate
the value of having TransCanada involved and whether or not
there is residual commitment under AGIA. He wanted the
commissioner to help them understand those two issues.
COMMISSIONER BALASH answered that he believed they could show
some of those benefits to this particular partnership and why it
is in the state's interests and will provide value to Alaskans
independent of AGIA considerations.
3:54:47 PM
SENATOR FRENCH said a no-contest divorce could have come about
by several methods; the state could have decided to end it and
pay TransCanada off, it could have given support to another
project and paid TransCanada treble damages, or it could agree
that the project (an overland pipeline to Alberta and into the
North American market) was uneconomic. He asked who would really
contest the idea that an overland route to Chicago is
uneconomic.
COMMISSIONER BALASH responded that one of the issues that DNR
had to evaluate was the course that Alaska was going to pursue
in development of North Slope gas, and in examining AS 43.92.240
could assert that the project is uneconomic; the statute
provides a process to follow in the event the other party was to
object. That statute is not entirely clear and so very likely
the state would have had to avail itself of the arbitration
provisions, which he submitted was a course either party could
pursue and make it difficult on the other, exacting some toll -
time, resources, and frustration - that, in itself, would put a
cloud on things. However the state, and the DNR in particular,
removed one cloud at Pt. Thomson to facility progress here and
they aren't interested in creating another one (however short or
long it would be).
He said they could start fresh, but that begs the question of if
the state would still want to seek a partner, any partner, for
this project. The process for going about selecting those
partners would wind up looking very similar: who is prepared to
offer terms that are acceptable to the SOA that achieve its
goals as a resource owner and a party with an equity interest in
the gas? So, how long would we want to invest in that process?
What would that mean ultimately to the momentum of AKLNG? A
construct is in front of them now that allows another field
season to take place in 2014 and an opportunity to complete the
pre-FEED process in 2015. That has some value.
3:58:33 PM
COMMISSIONER BALASH said the timeline that fits in with what he
just described is if the legislature were to pass the enabling
legislation in April of this year, within 90 days, they would
seek to complete the precedent agreement (PA) and equity option
agreement that would be in place and resolve the obligations
associated with TransCanada's cash calls during this phase. If
for some reason at any point that PA was terminated, the state
would, like any shipper, pay TransCanada their development costs
and part company. If, however, the project is progressing, the
PA would be matured into a firm transportation services
agreement (TSA) that would come forward for public review and
legislative approval as part of the body of contracts that will
come forward in the HOA process, in all likelihood in the fall
of 2015.
The equity option would be available to the state during this
period (until the end of 2015) or the entry in the FEED,
whichever happens first. Then, ideally, they would see all of
the parties progress into FEED sometime in the winter of
2015/16.
4:00:27 PM
COMMISSIONER BALASH said apart from the MOU, itself, there are
two exhibits: Exhibit "B" contains a term sheet that would form
the basis of an agreement to enter into this summer whereby the
state would be able to buy back a portion up to 40 percent of
its equity in the GTP and pipeline. If that option were
exercised, he illustrated what it would look like: TransCanada
would remain an equity player and transporter in the GTP and
pipeline, but the same subsidiary that would be holding the
state's interest in the liquefaction plant would be able to come
into the pipeline and GTP. It doesn't necessarily mean it would
be that subsidiary, but it is the most likely scenario. Some
other form could be used.
He explained that it is possible that as they enter into efforts
to market the state's LNG in the next 18 months that they would
find a buyer who would be interested in holding equity in the
liquefaction plant and/or the associated pipeline and GTP. So,
there is some flexibility to be able to engage the market and
the LNG buyers on terms and on grounds that they are seeking in
other places in other jurisdictions. It is not unusual to see
the likes of Mitsubishi acquiring an equity stake in a
liquefaction facility as part of their purchase agreement for
the LNG, itself.
4:02:22 PM
SENATOR FRENCH remarked that the equity option term sheet was
complicated and provided how the state can buy back its portion
of the GTP and the pipeline from TransCanada through royalty gas
and taxed gas.
COMMISSIONER BALASH said that was right; the state would have to
"belly up" and pay its portion of the cost. If they took the
full 40 percent option, they would need to pay TransCanada back
40 percent of their costs incurred to date and going forward the
state would have to meet its share of the cash calls as the
project progresses through FEED and into construction.
SENATOR FRENCH asked if they would be getting some analysis from
their consultants about how those cash flows look under each
scenario.
CHAIR GIESSEL said yes.
4:03:41 PM
SENATOR DYSON joined the committee
SENATOR FRENCH asked on Exhibit "B," if Condition 7(a) says the
state can't sell any of its portions to someone who essentially
is in competition with TransCanada and if there is any
restriction on their ability to sell their portion to say BP,
Encana, or to Gazprom.
4:04:33 PM
COMMISSIONER BALASH replied that he believed that there was a
limitation on their assignment or end sale, but he didn't know
exactly where in the agreements it was located.
SENATOR FRENCH said the state's conditions on transferring its
interest were described in page 2 of Exhibit B, 7A, and he
wondered if it was a one way restriction.
4:05:35 PM
COMMISSIONER BALASH replied he would get the specific reference
on the parties' rights for assignment or sale.
4:05:55 PM
SENATOR FAIRCLOUGH clarified that the state starts out as an
equal owner: so that we don't have to pay cash up front we're
letting someone else do that for us with an option to buy-back
accrued costs up to a limited amount. So, she assumed, that buy
back would carry interest and wanted to know what that rate
would be.
COMMISSIONER BALASH replied she was right and it was 7.1
percent, which is AFUDC that accrues for this period of
development. In looking at the 70/30 structure for construction
with an ROE and the debt blended it's 7.1 percent.
4:07:01 PM
SENATOR FAIRCLOUGH asked what TransCanada's bond rating is. She
noted that Alaska is rated AAA.
COMMISSIONER BALASH replied that he did not know, but he knew
that TransCanada's ratings were fairly high.
4:07:53 PM
SENATOR FAIRCLOUGH asked Commissioner Rodell for that
comparison, so they could see the difference in the borrowing
rate is and how that might work out on $100 million or the
estimated pre-FEED costs.
She said she had heard concerns about opportunities to enter the
pipeline and asked if the state exercises the 40 percent right,
would TransCanada retain 15 percent share (and the SOA would
actually have the smallest share in the pipeline, which has some
of the most secure rates of return (ROR) in the area of
investment).
COMMISSIONER BALASH answered that her math was correct. In terms
of the way the splits would occur if the tax rate and royalty
combination were set so that state was at 25 percent overall and
it exercised the full 40 percent option, it would be a 15/10
split in the pipeline and the GTP.
SENATOR FAIRCLOUGH asked if a certain level of information will
be available to different partners or are partners becoming
silent or cut off from information depending on their percentage
of ownership they have in particular components of the project.
COMMISSIONER BALASH replied that the access to information that
any party gets depends on their role overall. As a customer in
every one of the components, the state has secured in an HOA
some specific provisions that allow its service providers to
provide information, so that we get it from all of the
components in one way or another.
4:10:27 PM
SENATOR FRENCH said Exhibit "B" 3 describes a limited
partnership, a general partner that makes all the decisions on
behalf of the limited partnership and asked who the general is
in this paragraph. TransCanada?
COMMISSIONER BALASH nodded yes.
SENATOR FRENCH asked who the limited partner is.
COMMISSIONER BALASH replied that the state is one of the other
partners in the limited partnership agreement, and this section
is about its revenue interest in this transaction. This would
give us access to the returns Senator Fairclough asked about a
while ago. But, if all we were interested in was the revenue
interest, if we weren't particularly concerned about providing
access to third parties and developing gas beyond Prudhoe Bay
and Pt. Thomson, we probably wouldn't want to deal with a
partner in this particular fashion. We would be looking for
something different. But the benefits that will potential accrue
to the state if additional gas is found and produced and moved
through this infrastructure to market are pretty incredible and
well worth preserving and pursuing.
He explained that the nature of this partnership really calls
out the differences between them and us; we both have money and
credit. The difference is they know what they are doing; they
have built pipelines that have withstood severe earthquakes in
this continent and the one south of us. They know how to operate
these pipelines in the event of a disruption and get them back
running with very limited down time. That's their core business;
they do it every day and all over this hemisphere. The state
would have a hard time replicating that on its own.
4:13:51 PM
SENATOR BISHOP said he assumed that in protecting our positions
along the pipe he was referencing discoveries in Middle Earth
and other areas so they can get their gas in the pipe.
COMMISSIONER BALASH answered that was correct. The opportunities
for interconnections on this pipeline are ones that they will
have to pay attention to. Five offtakes might not be enough, but
one will certainly be in Nenana in order for the Interior to
take gas off. But potentially the gas resource in the Nenana
Basin could be monetized and moved into the system as well,
although they have issues there around gas quality and gas spec
that go back to the access terms in the HOA. But having a
company like TransCanada whose business is based on moving
people's gas, they are going to be interested in moving more gas
and will be driven by that particular motive. That will serve
the state's larger interests in the long run.
4:15:25 PM
SENATOR FAIRCLOUGH asked for the specific place in the MOU that
protects or limits TransCanada's ability to buy everyone else's
interests out. She said they don't know if one of the partners
that state is going forward with isn't acquiring other
relationships that will not aligned with Alaska's interests, at
least on lower tariffs. She also asked why 60/40 versus 50/50 or
Alaska taking the 60 percent share.
4:16:38 PM
COMMISSIONER BALASH answered that the conversation didn't start
at 60/40 and that a couple of things were driving TransCanada's
perspective as well as the state's; the desire to see an
independent pipeline company in a position to play a lead role
on this component of the project in particular and that is
driven in part by the overall position among and relative to the
other parties. The state did not initially start out to provide
all of its equity to TransCanada, but over the course of
conversations with and among all the parties, it became clear
that TransCanada's position would impact whether or not they got
to be the lead on the pipeline, and while that question isn't
settled finally, if the state's position is 25 percent in the
gas and TransCanada steps into a 25 percent position in the
pipeline, they would be the number two party in the percentages
for the pipeline: ExxonMobil would be the top, then TransCanada
followed by ConocoPhillips and BP. So, they would have a much
stronger argument to be the lead on the pipeline during
construction and ultimately hopefully, operation.
4:18:32 PM
SENATOR DYSON said everyone worries about conflicts of interest.
When he worked in the industry he found that the parent company
would have other divisions that were doing things and he would
ask if he was supposed to give them a special leg up if he
needed their type of services. The answer was often no, that
they were a separate enterprise that had to compete with
everyone else. So, each of these producers has competing energy
delivery interests at various places in the world and critics of
what they are trying to do can ask how they know they are not
going to put those interests there and delay this one under the
table so the other one can get to market first. TransCanada has
significant interest in several other pipelines on this
continent and the horse race of getting the molecules to the
best market at the right time could be argued.
4:20:42 PM
COMMISSIONER BALASH replied that he couldn't answer for the
other parties, but from the state's point of view he was
concerned about it. Why would any of the companies work to
advance this project on terms that meet the state's interests?
Ultimately the state had to satisfy itself as to the motivations
of everybody. He had observed in the larger construct of the
HOA, being a direct participant, especially in the marketing
side of this, the state would get a window into the marketplace
that it has never had before. It will inform us about all of the
parties and all of the opportunities. Specifically with regard
to TransCanada there are opportunities for the state to
terminate the agreement with them if they are ever in breach, if
they are not pursuing the project in the manner agreed to in a
positive direction: meeting the cash obligations in the venture
agreements and so forth. In such event, that interest reverts
back to the state. That marketing opportunity will tell the
state whether they have a real game here. In the LNG business
it's all about the SPAs and whether you have buyers at the other
end that are prepared to pay for 20-plus years to get the
energy.
4:23:11 PM
SENATOR DYSON said in his limited experience, the case could be
made that various components of the industry get together to
work on lots of projects all over the world that arguably are
competitive and that there is lots of precedent for them working
on the individual ones, but he worried as much about the major
producers that have very different interests than TransCanada.
4:24:25 PM
COMMISSIONER BALASH responded that the state and the other
parties in this venture will have to compete in the marketplace
on cost of supply, they will have to compete for capital inside
their companies, and in some cases that capital is quite scarce;
and he wouldn't be surprised to see some of the other parties
bring in partners, as well, because they may have to.
4:25:02 PM
SENATOR GIESSEL welcomed Mr. Palmer and asked him TransCanada's
bonding rating and why this project would be prioritized over
other pipeline projects.
4:25:22 PM
TONY PALMER, Vice President, Major Projects Development,
TransCanada, said he is also president of TransCanada's Alaska
interests. He said TransCanada's bond rating is A- and clarified
that at this stage of development costs are funded with equity,
not debt. No bank would be willing to lend money at this stage
of a project. In fact, debt for a project usually comes at the
time of final investment: after pre-FEED and FEED. He assured
them that 7.1 percent is below TransCanada's cost of equity.
4:26:37 PM
MR. PALMER said being involved in other projects is one of
TransCanada's strengths; they are an energy infrastructure
company. They build, own, and operate pipeline projects across
North America. They own 10,000 miles of pipeline in the U.S. and
30,000 of gas pipeline in Canada, and they have owned them for
60 years. It's what they do for a living. They also have a large
oil pipeline business, a large gas storage business, and a power
generation business.
He elaborated that if TransCanada was only seeking to do one
thing in the next 10 years (approximate timeframe for this
project to be in service), they should be looked at with some
suspicion, that they were not successful in attracting other
businesses. They have potential projects to build pipelines in
Canada to LNG projects, to build oil pipeline projects south
(one in particular) in the Lower 48, and they have a project to
build an oil pipeline to the East Coast of Canada. They are all
in the order of $35 billion portfolio to be constructed in the
next 5-10 years, and TransCanada has competed vigorously for
that business.
4:28:02 PM
MR. PALMER said that TransCanada doesn't win all of the
competitions, but they win their fair share and bring a great
deal of value to any party that wants to build a major pipeline
in North America. They are sponsors of two pipelines to the
British Columbia coast for LNG sponsors: one to Kitimat for the
Shell/Kogas, CNPC Mitsubishi Consortium, for which they competed
vigorously and successfully obtain a year and a half ago based
on their expertise and commercial terms, and the second project
to Prince Rupert for the PETRONAS Company, which they also
competed vigorously for and captured. They also competed for the
business under AGIA six years ago and succeeded.
He said the MOU and the HOA are the result of more than a year
of hard work by the administration, the three producers and
TransCanada and there were compromises by all parties. He said
TransCanada absolutely wishes to pursue infrastructure projects
across North America and has done large projects in Mexico as
well and has one underway there today.
4:29:57 PM
SENATOR DYSON said the layman may look at that and say that all
three projects may not be economically viable and asked how that
would work.
4:30:43 PM
MR. PALMER replied that TransCanada is capable of doing multiple
projects; that is the nature of their business. They build about
625 miles of gas pipelines per year across North America; this
project would be approximately 800 miles to be constructed over
four years. So, if you consider what they are building every
year and multiply that by four, they build about 2400-2500 miles
of pipe in four years.
This project is substantial as are the projects in Canada at
400-500 miles a piece (on an earlier timeframe than the others).
The PETRONAS has final investment decision this December and
will be in service by the end of 2018; the Shell project has a
final investment decision in 2015 and is scheduled to be in
service in 2019. The proposed schedule for this project actually
fits well, because people would be completing those other
projects and moving onto construction of this one, in the event
that is successful.
4:32:21 PM
SENATOR DYSON said he didn't think all three projects would make
it, because the market for North American gas wouldn't support
all three. He hears TransCanada saying they don't care;
whichever one does it they will perform for them.
4:33:13 PM
MR. PALMER replied that TransCanada absolutely intends to build
all three projects for their customers if they decide to
proceed. TransCanada did not market gas, but he thought the
global LNG market in Asia has an opportunity north of 20-22
bcf/day in 2025 after existing projects in Papua New Guinea and
Australia take their share of the market. Many more projects are
proposed: the Lower 48 has announced projects something north of
30 bcf/day and Canada has announced something north of 20
bcf/day. Africa, Mozambique, Tanzania, Australia and Russia, you
get another 10 or 20 for a total of 70 bcf/day - into a 20
bcf/day market. It isn't unusual. In the LNG business you will
always see more projects announced than actually get completed.
They do have to compete and there are some fundamentals that
determine whether or not you have a chance to win the game.
SENATOR DYSON said he wanted Mr. Palmer to be able to defend
that his participation in several different projects is the kind
of thing that happens often in the industry and that his
personal position is that all three of these may indeed reach
the home stretch.
4:35:16 PM
MR. PALMER responded that it is common in the industry.
TransCanada is cautious about what projects they participate in
and have been invited to participate in more than these three,
but these have fundamentals that are critical to be able to
compete. They all have equity supply - certainly Alaska has
sufficient gas supply and it's available to this project if
sanctioned by the legislature; secondly, a capable pipeline
company is needed to get the permits and get across that
mountain range - TransCanada provides that.
Thirdly, a capable company is needed to build a liquefaction
plant and clearly the three major producers have done that many
times. You also need access into those markets; the Asian
markets are not like domestic markets where you have thousands
of players buying and selling gas in liquid markets and you can
turn on a screen and find out what the price of gas is by the
day. That's not the case in Asia, and Alaska has three major
producers that sell gas into that market every day - and the
state has the opportunity to participate with them in the HOA.
Finally, Mr. Palmer said credit is needed to be able to support
a $45-65 billion project, a huge amount of money for any one
party. So these five parties together have that credit. And you
must be cost competitive, but the cost competitiveness of Alaska
gas relative to the Gulf Coast and B.C. is not the critical
factor here. They are all in the same range; everyone has to
solve issues so they can compete in the marketplace. This
project as currently coordinated has an opportunity to compete
in the market and win. That is why TransCanada is participating.
4:38:26 PM
SENATOR BISHOP emphasized that he heard the Asian market was
going to grow by 40 percent and that TransCanada had said other
companies approached them, so they were kicking the tires and
looking at the projects that could get over the top.
MR. PALMER agreed and reiterated that TransCanada doesn't always
win every competition, but they have been relatively successful.
They decided that other projects didn't have the necessary
components and didn't pursue them.
4:39:39 PM
COMMISSIONER BALASH said he would next talk about the terms in
Exhibit "C" of the MOU that lay out the terms in the midstream
services agreement. The terms are lengthy, but the major ones
are the "Favorable Debt to Equity Ratio" that does a lot for the
state in terms of cash flow for making the North Slope an
attractive place to explore for gas and commercialize it, and
the role of cash contributions - the capital TransCanada will
employ means the state will not have to front cash during
project development. Further, they have committed to a
particular cost of debt that is attractive.
Because the state has ongoing obligations and assets in the
treasury that have an opportunity to earn returns, when you
consider the opportunity cost of capital in combination with
what TransCanada is providing, the state's net present value
(NPV) is improved overall the commissioner said.
TransCanada has committed to offer new customers tariff terms
that are premised on a 70/30 capital structure. It's difficult
if not impossible to predict what the appropriate ROE and cost
of debt will be when those expansions occur, but the leverage
associated with that particular capital structure is going to be
attractive and incentivize additional exploration efforts.
Finally, they have planned for five offtake points for gas to
Alaskans and secured distance sensitive rates with three zones
for those instate deliveries.
COMMISSIONER BALASH said when you look at the favorable debt to
equity ratio slide; from the middle to the left you see the
ratio of debt to equity with the terms assumed in this
arrangement 75/25 with 12/5 percent as the ROE/cost of debt. To
the right is a figure of 12 percent ROE premised on the 75/25
structure and then the ROE is varied down to 10 and up to 14 to
illustrate the impact of that change. One sees for the GTP and
pipeline services the state's tariff is impacted far more by the
ratio of debt to equity than the ROE.
He said they expect some tough questions on why 12 percent ROE
in this contract with TransCanada, but he ultimately thought
they had struck a fair balance in the combination of debt to
equity in the ROE. TransCanada was open to having a lower ROE,
but they wanted a higher equity component in the capitalization
structure. So, they wound up with 75/25 and 12 and 5.
4:44:32 PM
Continuing on the same theme, Commissioner Balash said slide 11
used the same calibration of the debt to equity ratio and the
ROEs and showed the impact ultimately on the state's NPV: the
higher the tariff the lower the state's net back and its
ultimate revenue. The far left indicated a 55/45 split resulted
in $6.9 billion and to the far right a 95/5 split would get us
up to $7.8 billion. The impacts of going from 12 down to 11 for
the ROE are measured within $100 million. So, in the tug and
pull negotiation with Mr. Palmer, the commissioner said the
state satisfied itself that that combination serves the state's
long term needs quite well.
4:45:56 PM
COMMISSIONER BALASH said regarding the cash needs to go to
construction on this project he had three combinations of
information paired according to the boundaries of the HOA for
the state's overall share (20 or 25 percent). On the left hand
side, that pair looks at a situation of SOA ownership period; no
TransCanada involvement in any component. In the middle
TransCanada carries the state's interest in the GTP and the
pipeline; and in the far right, it shows what happens if the
state exercises its equity call-back option in Exhibit "B."
Taking into account the CAPEX the state would have to contribute
and the debt assumed getting past FID, the combination of those
two is reflected in the bar charts. In the 100 percent state
ownership scenario at 25 percent, the state needs to come up
with approximately $11.4 billion for our share of the GTP,
pipeline and liquefaction. With TransCanada standing in our
shoes for the GTP and pipeline, that same 25 percent position
requires just under $6 billion for our share of the liquefaction
plant and marine facilities.
4:48:06 PM
He next illustrated the impacts of the question of TransCanada
or no TransCanada on the state's revenues (corporate income and
property taxes) and explained that annually the state would have
competing needs and draws on its assets, but they are not
impacted by this question, so they weren't included.
With no TransCanada involvement the state's cash calls aren't
really that big moving through the initial stages of project
development, in the 10s or 100 millions of dollars. However,
those cash calls ramp up considerably in the construction phase
or FID, to the point that the state would need to come up with
more $1 billion annually for a period of years starting in 2019
and progressing through 2023. Then the project hits in-service,
ramps up production, and the revenues start coming in.
COMMISSIONER BALASH emphasized that there would be competition
for dollars in the next decade if the state goes it alone
without a partner and that the state would have some heavy water
to carry.
4:50:08 PM
SENATOR FRENCH asked him to talk a little bit more about some of
the other assumptions associated with the price of LNG:
transportation costs, tanker fees, and other moving parts.
COMMISSIONER BALASH replied that the full range of assumptions
he used in the models are in the Black & Veatch royalty study
that was released in November, but broadly speaking the LNG
pricing that is assumed for these numbers are continuing to rely
on an oil linked price (but the oil price forecast here is $90),
so they are being fairly conservative. That study assumes about
$1 for tanker costs to move from the liquefaction facility to
market and the costs of transportation are as reflected in the
25 percent scenario with the 75/25 debt equity split and the 12
percent ROE and 5 percent cost of debt. The chart (slide 13)
reflects the revenues associated with the production of gas and
sale of LNG from the proven resources at Prudhoe Bay and Pt.
Thomson. So, in 2043 a drop in revenues is seen, which reflects
the finite resource in those places, but they expect that
additional gas will be found that will complete the trajectory
on out in the years beyond 2043.
4:52:18 PM
SENATOR FRENCH said the state's projected oil prices are always
wrong, and asked for every $5 increment we are off (either high
or low) what the change in the graph is. In other words, when
would the state's revenues go down to nothing?
COMMISSIONER BALASH said he could run a break-even analysis;
however, he observed that until they know what the terms for the
SPA are going to be, it's hard to say what the break-even price
is.
He explained that it is not unusual for buyers to seek an "S
curve" where the seller of the LNG is protected on the low side
to make sure they are going to cover their costs; the buyer is
naturally going to seek some sort of cap on the high side. Here
they expect a linear linkage not an S curve. They could look at
what an S curve would need to look like to make sure the state
doesn't go below zero, but he could also do just a price
sensitivity.
4:54:16 PM
SENATOR FRENCH said he wanted to know the downside.
COMMISSIONER BALASH agreed.
SENATOR BISHOP asked what the payback on this model is.
COMMISSIONER BALASH replied that the payback factor depends on
the prices that are assumed and when project start up actually
hits. He though payback could come within the decade and maybe
within five or six years or less.
4:55:36 PM
He said the Division of Treasury has a pretty good record of
long term earning power; the investments they make have a 10-
year return that hovers around 6 percent. So, when you take into
account the opportunity cost associated with the use of our own
equity, one sees the same pairings of no TransCanada, with
TransCanada, and the 40 percent buy back reflected in the
state's total cash flows on slide 14. In the 25 percent scenario
one sees total cash flows being the highest with TransCanada as
a partner, because the state is not having to sacrifice the
opportunity to earn a return on its capital in the near term.
4:56:54 PM
COMMISSIONER BALASH noted the gas potential and cash flow
possibilities indicated on slide 15 and stated that there is in
excess of 200 tcf/gas of undiscovered technically recoverable
resource on the North Slope, enough to add another train of
liquefaction capacity in Nikiski with a corresponding additional
train for treatment at the Slope. He said there is no guarantee
that the North Slope gas that is found will require the same
kind of treatment as Prudhoe Bay and Pt. Thomson gas, but he
assumed that for this illustration.
COMMISSIONER BALASH said you see a "step-change" in state
revenues in the out years reflecting the progression or revenue
from the yet-to-find resource as well as the expanded volumes of
gas. He said the comparison showed different combinations of
revenue streams and that is where the value of a company, like
TransCanada, that is pursuing the business of moving more gas
comes into the picture. He said he thinks Alaska's long term
future is going to benefit from those expansions and increments
of capacity in the liquefaction terminal, itself.
4:59:23 PM
COMMISSIONER BALASH said the distance sensitive rates, for the
Nenana zone in particular, is just common sense. The farther you
have to move your gas, the more you have to pay; the shorter you
move your gas the less you pay. The $1.82 treatment of the gas
doesn't change regardless of where it goes. The pipeline charge
is what varies.
5:00:02 PM
SENATOR MICCICHE asked what he used for a delivery location in
South Central.
COMMISSIONER BALASH answered Big Lake, the first opportunity to
tie into the Enstar system.
SENATOR BISHOP asked if the $3.70 was the cost delivered to
Fairbanks.
COMMISSIONER BALASH answered that was cost of transport to the
city gate and does not include the cost of the commodity.
5:00:40 PM
SENATOR BISHOP remarked that was a good number.
COMMISSIONER BALASH added that one of the provisions is the
ability to utilize backhaul service, so that if the commodity is
cheaper in Cook Inlet than it is on the North Slope, folks in
Fairbanks will get the benefit of that price either way; however
they will have to make some choices as far as signing up for
service and supply.
5:01:25 PM
SENATOR FRENCH asked Senator Bishop to explain page 5 of Exhibit
"C" that says: "You can take gas off for non-LNG consumption."
COMMISSIONER BALASH answered that makes sure they have full
utilization of the pipe from the North Slope all the way to the
LNG plant. That is the basis for the system and the five instate
offtake points are for points exclusive of the end point. In
other words, between Prudhoe Bay and Nikiski there would be five
points; Nikiski doesn't count as one of the five.
5:02:36 PM
SENATOR FRENCH said there is no prohibition if Yukon River, for
instance, wanted to make a little LNG and ship it down the river
to a village.
COMMISSIONER BALASH answered no.
SENATOR MICCICHE said folks were expecting them to ask why
TransCanada? It's a great company; they have an incredible
safety and environmental record and their pipeline operations
are some of the best on the planet. But the MOU and the Recitals
lean very heavy on an implied commitment under AGIA and he
wished they weren't there. Their job is to get the best deal for
Alaskans going forward and he wanted to see that consideration
separated. He asked why the state had not considered an RFP
option for the company partnering on the midstream side of this
project.
5:04:29 PM
COMMISSIONER BALASH answered that a couple of things flow into
that issue and that the state could have gone down the RFP road.
However, in order to do that, they would have needed to step out
of the present arrangement with TransCanada and a number of
questions come out of that: who will determine the basis for
awarding that RFP? The AGIA process has a statutory directive
that the departments followed to issue a request for
applications with a deadline and then evaluate those responses,
develop a finding, forward that to the legislature, and have it
approved. That process all told took nearly two years. So, one
of the things they wanted to achieve here was to maintain
momentum in the progress of AKLNG, and the terms offered by
TransCanada were compared against others in North America, but
in particular taking into account the competition that took
place between the Alaska Pipeline Project (APP) and Denali back
in to 2010 when they were both conducting open seasons. That
was for service to Alberta, in some ways not the best
comparison, but one that they accounted for. While they could
consider a competitive award process, his question would be of
all the things that come into the picture, how do they equalize
one company versus another? How is the expertise compared, the
familiarity with one versus another? Those would require some
subjective decision making that would be just as susceptible to
second guessing as this set of decisions.
5:06:58 PM
SENATOR MICCICHE said he appreciated that answer.
SENATOR GIESSEL thanked the commissioners and Mr. Palmer. She
summarized that this is a complex process and there is no rush.
She wanted all their questions answered.
5:08:29 PM
Finding no further business to come before the committee, Chair
Giessel adjourned the Senate Resources Committee meeting at 5:08
p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES Memorandum of Understanding 20140127.pdf |
SRES 1/29/2014 3:30:00 PM |
|
| SRES MOU Presentation Rodell, Balash 20140129.pdf |
SRES 1/29/2014 3:30:00 PM |