Legislature(2013 - 2014)BUTROVICH 205

02/03/2014 03:30 PM Senate RESOURCES


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03:30:42 PM Start
03:30:57 PM Presentation: Gasline Key Themes
05:19:49 PM Presentation: Aklng Project Plan by Steve Butt, Senior Project Manager, Exxonmobil Corp.
05:55:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Gasline Key Themes TELECONFERENCED
Consultants: Janak Mayer and Nikos Tsafos
+ The Alaska LNG Project TELECONFERENCED
Steve Butt, Senior Project Manager
Uniform Rule 23 Waived
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        February 3, 2014                                                                                        
                           3:30 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator Fred Dyson, Vice Chair                                                                                                  
Senator Peter Micciche                                                                                                          
Senator Click Bishop                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Anna Fairclough                                                                                                         
Senator Hollis French                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION: GASLINE KEY THEMES                                                                                                
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PRESENTATION: AKLNG PROJECT PLAN BY STEVE BUTT, SENIOR PROJECT                                                                  
MANAGER, EXXONMOBIL CORP.                                                                                                       
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JANAK MAYER, Partner                                                                                                            
Enalytica                                                                                                                       
Legislative Consultant on Gas Commercialization                                                                                 
POSITION STATEMENT: Talked about key gasline themes related to                                                                
the in the HOA and the MOU with TransCanada.                                                                                    
                                                                                                                                
NIKOS TSAFOS, Partner                                                                                                           
Enalytica                                                                                                                       
Legislative Consultant on Gas Commercialization                                                                                 
POSITION STATEMENT: Talked about key gasline themes in the HOA                                                                
and MOU with TransCanada.                                                                                                       
                                                                                                                                
STEVE BUTT, Senior Project Manager                                                                                              
ExxonMobil Corp.                                                                                                                
POSITION STATEMENT: Presented an outline of the AKLNG project.                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:30:42 PM                                                                                                                    
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting to  order at 3:30  p.m. Present  at the call to                                                               
order  were  Senators  French, Micciche,  Fairclough,  and  Chair                                                               
Giessel. Senator McGuire joined the committee shortly after.                                                                    
                                                                                                                                
^Presentation: Gasline Key Themes                                                                                               
                Presentation: Gasline Key Themes                                                                            
                                                                                                                              
3:30:57 PM                                                                                                                    
CHAIR  GIESSEL announced  taking up  the presentation  on Gasline                                                               
Key Themes.                                                                                                                     
                                                                                                                                
3:31:41 PM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
                                                                                                                                
3:31:52 PM                                                                                                                    
JANAK    MAYER,   Partner,    Enalytica,   Consultant    on   Gas                                                               
Commercialization, introduced himself.                                                                                          
                                                                                                                                
3:33:06 PM                                                                                                                    
NIKOS TSAFOS, Consultant, Enalytica, introduced himself.                                                                        
                                                                                                                                
MR. TSAFOS said they wanted to  give them initial reaction to the                                                               
news that has  come out; this is  not meant to be  the final word                                                               
on these topics.                                                                                                                
                                                                                                                                
He  said they  structured  the presentation  on  two themes,  but                                                               
first he wanted  to comment on where they are  in the process. He                                                               
can  look at  Alaska developments  from the  Outside perspective,                                                               
and the message he wanted to  deliver was that a lot of different                                                               
things were  happening in Alaska  with gas  and oil and  with the                                                               
recent  developments  people are  now  noting  that something  is                                                               
actually happening.                                                                                                             
                                                                                                                                
3:35:43 PM                                                                                                                    
SENATOR BISHOP joined the committee.                                                                                            
                                                                                                                                
MR.  TSAFOS  said  he  would   talk  about  project  choices  and                                                               
commitments - what  exactly is being bolted down right  now - and                                                               
the  Memorandum  of  Understanding (MOU)  with  TransCanada  (the                                                               
midstream).                                                                                                                     
                                                                                                                                
3:38:35 PM                                                                                                                    
SENATOR DYSON joined the committee.                                                                                             
                                                                                                                                
MR. TSAFOS said  last year they said a lot  of natural gas market                                                               
fundamentals need  to happen  in parallel  before an  LNG project                                                               
could take  off, and he  wanted to  put the current  decisions in                                                               
the context of a project.                                                                                                       
                                                                                                                                
3:40:11 PM                                                                                                                    
He  explained that  his project  has seven  different components:                                                               
upstream (fiscal), midstream  (partnership and basic agreements),                                                               
liquefaction   (ownership    structure),   shipping,   marketing,                                                               
financing, and permitting.                                                                                                      
                                                                                                                                
The pre-FEED (Front  End Engineering and Design)  phase will last                                                               
12-18 months;  the FEED process  would last slightly  longer. The                                                               
final investment decision (FID)  for construction comes 3-4 years                                                               
from now.  He stated that  the real  money gets spent  after FID,                                                               
because that's when everything has  been sorted out. It's so much                                                               
money that frequently companies  partner with other companies and                                                               
governments to have enough.                                                                                                     
                                                                                                                                
3:41:45 PM                                                                                                                    
Most of  the estimated $45-65  billion for this project  will not                                                               
be  spent until  the  later part  of this  decade,  and that  the                                                               
decisions  in front  of them  deal with  the first  parts of  the                                                               
entire  chain that  amount to  usually  less than  10 percent  of                                                               
CAPEX.                                                                                                                          
                                                                                                                                
MR. TSAFOS said  there are two layers of decision  making: one is                                                               
you have some gas  and then you'll have to figure  out what to do                                                               
with it -  take it in value or  in kind; if you take  it in kind,                                                               
you will  have to market  it yourself or  get someone else  to do                                                               
it. The  state's intention seems  to be going towards  taking gas                                                               
in kind.                                                                                                                        
                                                                                                                                
3:43:49 PM                                                                                                                    
MR.  TSAFOS said  in examining  all the  LNG projects  around the                                                               
world they  found state participation  was all over the  place in                                                               
terms of  equity. On one  extreme the federal government  and the                                                               
State of Louisiana  are purely a taxing  authority and regulator;                                                               
they don't  have any equity  in the LNG  projects.  On  the other                                                               
extreme, Algeria  is 100  percent equity  owner of  the upstream,                                                               
the midstream, and  the liquefaction; it even has  some ships, as                                                               
well.                                                                                                                           
                                                                                                                                
So, he  thought a good  conversation for Alaskans would  be about                                                               
where they want to  be in this world. And it  seems that there is                                                               
clearly an  intention on the  equity side, but nothing  this year                                                               
settles where the  state will end up. It could  start with equity                                                               
and then  get rid  of it;  it could start  with the  intention of                                                               
being an active  marketer and change its mind, or  it could start                                                               
with the intention  of being a passive marketer  and still change                                                               
its mind.                                                                                                                       
                                                                                                                                
3:45:45 PM                                                                                                                    
He advised to think about these  deals as dynamic and over a long                                                               
period of time, say 40 years,  and advised that as states develop                                                               
more experience  they often opt to  take a more active  role. His                                                               
point was that where you start  is not necessarily the same place                                                               
where you end up.                                                                                                               
                                                                                                                                
SENATOR FRENCH asked  if there was any financial  benefit one way                                                               
or  the other  to  the  state for  marketing  its  gas or  having                                                               
another agency do it.                                                                                                           
                                                                                                                                
MR. TSAFOS  said he wanted them  to think of equity  as ownership                                                               
of an asset and the level  of engagement as a separate thing. You                                                               
don't want  to conflate the idea  of equity and having  to market                                                               
your own gas.                                                                                                                   
                                                                                                                                
SENATOR  FRENCH asked  if there  was a  financial benefit  to the                                                               
state one way over the other.                                                                                                   
                                                                                                                                
3:49:36 PM                                                                                                                    
MR. TSAFOS answered that it depends  on what kind of deal you get                                                               
if someone  else is marketing your  gas, and he was  not ready to                                                               
say which was better at this point.                                                                                             
                                                                                                                                
3:50:44 PM                                                                                                                    
He had seen  states participate in LNG  projects through national                                                               
oil companies, and because the  LNG business tends to be slightly                                                               
more complicated than the oil  business in many ways, states tend                                                               
to start off  as slightly more passive  participants in projects,                                                               
but then take more active  ownership as their expertise develops;                                                               
Alaska's Permanent  Fund is  an example  of how  investing models                                                               
change with  experience. There is  not a  right or wrong  way and                                                               
there are tradeoffs.  He wanted to highlight that  nothing so far                                                               
locks the state into any specific type of proposition.                                                                          
                                                                                                                                
MR. TSAFOS also stated that  LNG projects can dynamically change.                                                               
He  illustrated  with  the  Queensland  Curtis  (QC)  project  in                                                               
Australia saying  that it's  hard to imagine  it is  actually the                                                               
same  project  as it  started.  Today  it  is much  bigger,  very                                                               
different   ownership  of   resources,  different   ownership  of                                                               
liquefaction,  offtake completely  different, external  financing                                                               
from the Japan  Bank of International Corporation as  well as the                                                               
U.S. EX-IM Bank,  the ownership of the reserves  had changed, and                                                               
gas is being  sourced from another LNG project.  And this project                                                               
had not come alive yet! His point  was that Alaska is on the left                                                               
of  that FEED  and that  underscores  how little  is bolted  down                                                               
right now.  It's quite typical  for new  partners to come  in and                                                               
new contracts to  be signed even after FEED has  started and even                                                               
after FID has been taken.                                                                                                       
                                                                                                                                
3:55:09 PM                                                                                                                    
SENATOR MICCICHE said  he agreed with Mr.  Tsafos' explanation of                                                               
the project,  but it's important that  the legislature understand                                                               
the cost of the optionality in the MOU.                                                                                         
                                                                                                                                
MR. TSAFOS said in  any LNG project you have to  look at the fine                                                               
print, and the key thing in  assessing this is not just to assess                                                               
it for the  purposes of today, but to make  sure that the project                                                               
can adapt over time.                                                                                                            
                                                                                                                                
3:57:05 PM                                                                                                                    
SENATOR BISHOP  asked for an  example of  how the QC  project had                                                               
changed in six years.                                                                                                           
                                                                                                                                
MR. TSAFOS explained  that BG thought they had they  had a little                                                               
bit less  gas in the  beginning and bought Queensland  Curtis Gas                                                               
Company (QGC)  along with  a few other  companies. So,  they were                                                               
able to prove up and  feel more comfortable about their resource,                                                               
and, therefore, felt more comfortable expanding.                                                                                
                                                                                                                                
He explained also  that for many LNG projects one  of the ways to                                                               
share  risk is  by  having  the same  partners  along the  chain.                                                               
Chinese  National Offshore  Oil Corporation  (CNOOC) was  looking                                                               
globally   for more  gas and  found this  project; but  they also                                                               
wanted to become an investor,  because of returns on the upstream                                                               
and  the liquefaction,  and because  it also  provided a  greater                                                               
sense of security of supply.                                                                                                    
                                                                                                                                
Asian oil and  gas companies actually measure  very carefully how                                                               
much LNG comes  from projects that they are owners  in and target                                                               
them  for  security  of  supply.  Side  deals  (liquefaction  and                                                               
upstream) frequently  come together  with the  offtake agreement;                                                               
the same can be said for Tokyo gas.                                                                                             
                                                                                                                                
MR. TSAFOS said what really changed  beyond FID in the QC project                                                               
was the  ownership structure on Train  1 from 90/10 to  50/50 and                                                               
then the project sold a little  more gas to CNOOC; CNOOC also got                                                               
an option  for a third  train. He  reasoned that two  things were                                                               
probably going on: one is  everyone wants to partner with Chinese                                                               
oil companies,  because that's where  the growth is,  and because                                                               
BG  had a  number of  capital  commitments around  the world  and                                                               
needed  to raise  cash. The  idea is  in the  beginning when  the                                                               
project is a little bit riskier,  sometimes you have to take more                                                               
of the risk yourself, but  as you start constructing, people feel                                                               
more comfortable and that share can  be sold down to new partners                                                               
that maybe didn't want to come in  six months or a year ago. It's                                                               
mostly  about de-risking  the project  and  reallocating some  of                                                               
that  risk; it's  also about  connecting the  sales and  purchase                                                               
agreements  with some  burden-sharing on  the cost  structure. In                                                               
fact,  when  the   CNOOC  took  that  50   percent,  it  included                                                               
reimbursements for some  of the costs that BG had  taken up until                                                               
a certain point.  So, this was both strategic  and financial; and                                                               
that type of  deal where you see offtake together  with equity is                                                               
fairly  common. He  would  be surprised  if  that element  didn't                                                               
occur at some point in Alaska.                                                                                                  
                                                                                                                                
He explained that  a lot of times, these  national company buyers                                                               
bring  in additional  benefits;  for example,  having a  Japanese                                                               
equity owner  usually opens  up the  project for  state supported                                                               
financing.  The  Japan  Bank   of  International  Cooperation  is                                                               
probably the  largest third-party  financier for LNG  projects in                                                               
the world, and they generally tend  to give you money if you have                                                               
a Japanese company in the mix.                                                                                                  
                                                                                                                                
4:02:34 PM                                                                                                                    
Switching to  the MOU  and midstream (slide  5), Mr.  Tsafos said                                                               
there are  a large number  of ways  to structure a  pipeline, and                                                               
all sorts of  ways to approach the midstream have  been tried. It                                                               
seems  for the  most part,  there are  three possible  options: a                                                               
midstream  structured by  the producers,  the  producers and  the                                                               
State of  Alaska (SOA), or  you can  have the producers,  the SOA                                                               
and a  third party. If one  were to have the  last structure, you                                                               
could think  either about  leveraging the  AGIA process  or about                                                               
terminating the  AGIA process and  going through with a  new bid.                                                               
The path in the MOU leverages the AGIA process.                                                                                 
                                                                                                                                
MR. TSAFOS said  he would go through each option  in a systematic                                                               
way  and talk  about  the pros  and cons.  Before  doing that  he                                                               
wanted to list  what is important to the state  (in no particular                                                               
order of priority).                                                                                                             
                                                                                                                                
4:04:59 PM                                                                                                                    
1. Producer  and SOA  alignment to  minimize disputes  over where                                                               
value   is  allocated   and  has   tariffs  that   reflect  value                                                               
maximization across the entire project                                                                                          
2.  A   project  that   favors  expansions   enabling  additional                                                               
investment throughout Alaska                                                                                                    
3. Instate deliveries                                                                                                           
4. Pipeline  execution on time  and at the lowest  price possible                                                               
cost                                                                                                                            
5. Continuity  and momentum  that accelerates  current investment                                                               
interest and leverages work to date                                                                                             
                                                                                                                                
4:06:08 PM                                                                                                                    
MR. MAYER said he would analyze  what each option might look like                                                               
as measured by the five key criteria.                                                                                           
                                                                                                                                
First,  he  said a  midstream  component  for this  project  held                                                               
solely  by the  producers might  look like  a series  of problems                                                               
with less than  optimal solutions. SOA involvement is  key to the                                                               
question of alignment and the question  of how it draws its value                                                               
from the  project versus how  the producers do  it. Specifically,                                                               
from  a   producer's-only  perspective,   if  this  is   one  big                                                               
integrated project  that ends  up with  LNG being  delivered into                                                               
Asia, they are not sure where in the value chain value accrues.                                                                 
                                                                                                                                
But  if  you are  a  third-party  shipper of  gas  who  is not  a                                                               
shareholder in the  liquefaction chain - maybe the  SOA trying to                                                               
get  its own  gas  to market  or  trying to  get  gas to  Alaskan                                                               
residents -  you care a  lot about  what the pipeline  tariff is,                                                               
because  the higher  the tariff  the less  you are  able to  meet                                                               
those key  objectives. With  only the  producers involved  in the                                                               
pipeline you  get a  much greater  potential for  disputes around                                                               
the  question  of  value  and  where in  the  value  chain  value                                                               
accrues, what  the tariff should be,  et cetera. If the  state is                                                               
involved, that alignment begins to be addressed right away.                                                                     
                                                                                                                                
Similarly,  third  party  expansions   would  be  easier  if  the                                                               
resources didn't all belong to  the producers, because they would                                                               
be  most interested  in commercializing  their own  resources. It                                                               
also  wouldn't be  clear what  the  tariff would  be for  instate                                                               
deliveries,  because  of  the question  of  where  value  accrues                                                               
across the value chain and whether it would be optimal or not.                                                                  
                                                                                                                                
4:12:17 PM                                                                                                                    
Finally,  it seems  that  any  option that  doesn't  in some  way                                                               
involve TransCanada  specifically as  a partner, because  a bunch                                                               
of work  that has been  done to  date through the  Alaska Gasline                                                               
Inducement   Act   (AGIA)   process,   would   have   significant                                                               
uncertainties about time, money,  and litigation over terminating                                                               
the agreement.                                                                                                                  
                                                                                                                                
4:13:02 PM                                                                                                                    
Alignment is  much better  with the three  producers and  the SOA                                                               
(slide 8).  Then the state  can ensure  that the approach  to the                                                               
whole project meets its objectives  as well as the producers' and                                                               
gets rid of the fundamental  questions of where the value accrues                                                               
across the value chain.                                                                                                         
                                                                                                                                
MR. MAYER explained that the  third party expansion issue is more                                                               
of a  question, because in  principle the  state can take  a more                                                               
active role  as a participant in  the midstream and seek  to have                                                               
its role  be the  vocal pro-expansion  voice in  this consortium.                                                               
The  question then  becomes one  of state  capacity and  how much                                                               
experience the  state has  in being  a pipeline  company; because                                                               
ultimately to have a truly  pro-expansion outlook to this project                                                               
you want an  entity at the table that isn't  just making money by                                                               
transporting molecules to market and  selling them, but is making                                                               
money through  the transportation  process, itself,  and actually                                                               
wants to  do the  business of  transportation of  molecules. It's                                                               
not clear  that the state by  itself has all the  capabilities of                                                               
an  independent  pipeline  company   that  a  dedicated  pipeline                                                               
company would bring.                                                                                                            
                                                                                                                                
MR. MAYER said  the SOA can use its equity  and total capacity to                                                               
carry  gas to  local markets  for instate  deliveries, and  while                                                               
there are three producers with  strong capabilities to execute on                                                               
the pipeline front, when it  comes to future expansions, it might                                                               
be under  such a model that  it's solely the SOA  that's carrying                                                               
either the future  expansion by itself or trying to  bring in new                                                               
partners. So,  that raises  the question  of if  the SOA,  as the                                                               
sole  independent  and  expansion  oriented  partner  in  such  a                                                               
project, has  the same capabilities  as a third  (pure midstream)                                                               
party might.                                                                                                                    
                                                                                                                                
4:16:21 PM                                                                                                                    
Finally, he said the same questions  exist around loss of data or                                                               
work  done to  date by  TransCanada or  of litigation  that would                                                               
apply to all of the non-leveraged AGIA options.                                                                                 
                                                                                                                                
The  third   option  of   producers,  SOA   and  a   third  party                                                               
(TransCanada) has  a lot of value  on all of the  key five points                                                               
Mr. Mayer said.  The same value seen before  on alignment because                                                               
of state  involvement, but greater  value when it comes  to third                                                               
party expansion, because  you have a company at the  table with a                                                               
substantial share  in this that  is not making value  by upstream                                                               
production or  by selling  molecules in  end markets,  but solely                                                               
making its money by the  molecules that it transports through the                                                               
pipe, and its key to  increasing profits is moving more molecules                                                               
through  the  pipe and  finding  more  people with  molecules  to                                                               
provide. This is  actually a key strength of bringing  in a third                                                               
party.                                                                                                                          
                                                                                                                                
Instate deliveries is  a strength of the pure  producers plus SOA                                                               
and the  SOA plus a  third party.  A pure midstream  company that                                                               
makes money  by moving  molecules through  the pipe  doesn't care                                                               
whether they are going to Asia or Fairbanks.                                                                                    
                                                                                                                                
If you're  the producer you  really are concerned about  how much                                                               
is spent on the project, because  you're not making your money by                                                               
moving molecules  through the pipe,  you're making your  money by                                                               
selling them  at the end  market. And the  more you spend  on the                                                               
project,  the more  expensive it  is to  move those  molecules to                                                               
market.  Having  a  midstream   company  that  is  strongly  pro-                                                               
expansion and producers that really  care about cost control is a                                                               
compelling combination.                                                                                                         
                                                                                                                                
4:20:14 PM                                                                                                                    
On  continuity  and  momentum,   Mr.  Mayer  said,  choosing  the                                                               
TransCanada  option  rather  than  another third  party  has  the                                                               
benefit of being able to maintain  and accelerate all of the work                                                               
that has  been done to  date as  well as maintaining  the general                                                               
sense  of momentum  people see  around this  project rather  than                                                               
pushing  back momentum  because of  needing to  reopen a  bidding                                                               
process,  taking  another two  years  and  possibly stalling  HOA                                                               
negotiations  and other  decisions while  those things  are being                                                               
resolved.                                                                                                                       
                                                                                                                                
4:21:21 PM                                                                                                                    
There is  uncertainty with this  option, however, because  one of                                                               
the overwhelming goals for the  SOA is having the lowest possible                                                               
tariff on  the pipeline.  One can compare  the terms,  which they                                                               
have done with other Federal  Energy Regulatory Commission (FERC)                                                               
regulated interstate  pipelines in  the U.S.,  but it  would seem                                                               
that the capital structure proposed -  the cost of equity and the                                                               
cost of  debt, the  weighted average  cost of  capital -  are all                                                               
sort  of  in  quite  a  comfortable  range.  Canada  has  a  more                                                               
aggressive regulatory approach to these  things and tends to have                                                               
a lower cost  of capital and lower tariffs, but  it's in the ball                                                               
park for the U.S.                                                                                                               
                                                                                                                                
However,  he said  that without  an open  bid process,  you never                                                               
really know what  the alternative is; it could be  that there are                                                               
other  highly  capable midstream  companies  that  could offer  a                                                               
better deal; it's also quite possible  that one could open up the                                                               
process to bidding and  take a lot of time to do  that and lose a                                                               
lot  of momentum  in  the process  and find  that  there isn't  a                                                               
better offer or that the existing  offer is no longer there and a                                                               
worse one is presented.                                                                                                         
                                                                                                                                
4:23:20 PM                                                                                                                    
SENATOR  MICCICHE  asked  if prioritizing  these  five  areas  of                                                               
importance would have been helpful in making these decisions.                                                                   
                                                                                                                                
MR. MAYER  answered that he would  be hard pressed to  demote one                                                               
over  another; they  are  all  core priorities  for  the SOA.  He                                                               
thought that individual legislators  needed to grapple with those                                                               
issues.                                                                                                                         
                                                                                                                                
4:25:19 PM                                                                                                                    
The last option  (slide 10) proposes that the  producers, the SOA                                                               
and  a third  party is  the best  approach, but  concludes rather                                                               
than  leveraging  what's been  done  for  AGIA  to launch  a  new                                                               
bidding process. It would be similar  in its strengths on many of                                                               
the key  aspects but could  lead to a  worse tariff and  slow the                                                               
process  down.  The  biggest  difference   in  this  scenario  is                                                               
momentum and what work  done to date can be kept  and how much it                                                               
would cost the state in terms of litigation.                                                                                    
                                                                                                                                
4:27:02 PM                                                                                                                    
He said the  state needs to weigh some key  questions in terms of                                                               
its interests in the MOU:                                                                                                       
-What compensation  the SOA would have  to pay to get  out of the                                                               
AGIA license?                                                                                                                   
-What intellectual property  would AKLNG retain of  work that has                                                               
been done to date?                                                                                                              
-What  would  happen  to  the   HOA  process  (momentum)  if  the                                                               
midstream were  uncertain in  various ways:  either because  of a                                                               
bid process or litigation?                                                                                                      
-What are  the odds that a  bidding process would open  up better                                                               
terms than  are currently  on the table  - particularly  when one                                                               
looks  at when  there has  been  an open  offer on  bids for  not                                                               
completely dissimilar projects?                                                                                                 
-Would a  better tariff (through  a competitive deal)  offset the                                                               
whole question of  absence of a dedicated  pro-expansion party in                                                               
the midstream from the negotiating  table as other key aspects of                                                               
the  project are  being  nailed  down. Would  that  be worth  the                                                               
reduced momentum, litigation and all the rest?                                                                                  
                                                                                                                                
4:29:10 PM                                                                                                                    
SENATOR  FRENCH asked  how much  the  SOA has  to participate  in                                                               
order to get alignment.                                                                                                         
                                                                                                                                
MR. TSAFOS  answered if you  consider equity as valuable  for the                                                               
purpose  of  alignment only,  there  wasn't  a clear  answer.  If                                                               
alignment  is  meant to  say  we're  in  this together,  we're  a                                                               
serious  player, we're  willing to  see this  through by  putting                                                               
some more  in, and willing  to demonstrate our commitment  to the                                                               
partners  and the  world, the  buyers and  the bankers;  he still                                                               
didn't  know  the  magic  number,  but he  felt  that  1  percent                                                               
wouldn't quite cut it. Think of  alignment as adding value to the                                                               
creation,  unlocking  the  project,  and  getting  gas  to  local                                                               
markets, he said.                                                                                                               
                                                                                                                                
He said the  state might get alignment with  20-25 percent equity                                                               
share today, but  you might not have to risk  it now, because you                                                               
can start off and as the  project gains momentum it could be sold                                                               
down  without  risking  either   alignment  or  momentum  of  the                                                               
project. He really thought the equity  needed to be thought of as                                                               
serving  multiple purposes,  not just  alignment. One  percent is                                                               
better  than zero,  because it  brings you  to the  table and  51                                                               
percent is too much  in the sense of being a  majority owner in a                                                               
project.  But   some  states  do   that,  so  there   is  nothing                                                               
unprecedented about it.                                                                                                         
                                                                                                                                
4:33:21 PM                                                                                                                    
MR. MAYER said part of the  alignment question is the between how                                                               
companies  generate  value from  this  project  and how  the  SOA                                                               
generates it. We're all in it  together. The vision of an initial                                                               
structure of  the state's  share of  gas at  20-25 percent  and a                                                               
corresponding  equity stake  has  a certain  compelling logic  in                                                               
terms  of the  degree of  alignment  that it  creates that  other                                                               
approaches would not create; and it  goes beyond just the sort of                                                               
"we  have some  skin  in the  game" that  a  smaller stake  might                                                               
entail.                                                                                                                         
                                                                                                                                
4:36:20 PM                                                                                                                    
SENATOR  FRENCH said  he was  starting  to wonder  about some  of                                                               
their economic  analysis of the  downside, because the  state was                                                               
giving up the  power to tax this project in  exchange for a piece                                                               
of it in order  to make it happen, and this  piece should pay the                                                               
same as the taxation, or more,  because it's riskier.  What could                                                               
go wrong?  How big of  a commitment could  the state be  asked to                                                               
make in the middle of the project?                                                                                              
                                                                                                                                
MR.  TSAFOS said  there  are  two risks  before  the first  cargo                                                               
leaves the port:  delays and cost overruns. Their  survey of most                                                               
of the LNG  projects that have come on line  over the last decade                                                               
revealed a  range of  6-9 months  early to  2-2.5 years  late and                                                               
cost  overruns that  range from  being on  budget to  being 20-40                                                               
percent over  budget. Companies  have recognized  the uncertainty                                                               
of construction costs, which is  why they quoted publicly a range                                                               
of $45-$65  billion for this  project; $65 billion is  the higher                                                               
end of an estimate rather than an overrun.                                                                                      
                                                                                                                                
4:39:05 PM                                                                                                                    
After that there  are risks of lower utilization,  and looking at                                                               
projects historically  they tend to  operate at 85-90  percent of                                                               
their nameplate capacity.  This one is 15-18 million  tons due to                                                               
weather, so one  of the risks could  be at any given  time it may                                                               
be at  85-90 percent and  have years  of being at  60-70 percent,                                                               
because something happened and the plant had to be shut down.                                                                   
                                                                                                                                
Other risks  are less relevant  for Alaska: he said  domestic gas                                                               
diversion   happens   in  a   lot   of   places  where   powerful                                                               
constituencies ask for  gas and it gets diverted  from the export                                                               
market, but  his sense was that  Alaska would be hard  pressed to                                                               
find that LNG demand any time soon.                                                                                             
                                                                                                                                
MR.  TSAFOS explained  that  market risk  is  another factor  for                                                               
Alaska. In  the past,  market risk could  manifest itself  by the                                                               
inability to  produce or an inability  to get a lower  price. But                                                               
in general, Mr. Tsafos said,  LNG projects don't lose money. They                                                               
may  be   suboptimal  investments,  because  once   you  put  the                                                               
infrastructure in,  the cash generated  is generally  much higher                                                               
than the  operating costs, but it's  hard to be cash  negative at                                                               
any  given time.  You  may  decide that  you  didn't invest  your                                                               
capital wisely, but for the  most part, your exposure isn't until                                                               
the  project   comes  on  line.   Even  in  projects   that  have                                                               
experienced  severe cost  overruns,  the impact  is really  lower                                                               
return on investment rather than being cash negative.                                                                           
                                                                                                                                
4:41:43 PM                                                                                                                    
MS. TSAFOS said there are  a number of commercial arrangements in                                                               
which  the state  could limit  its exposure:  one is  using an  S                                                               
curve. Imagine  the price  of gas  being linked  to the  price of                                                               
oil: the  S curve says  well, the price of  gas is linked  to the                                                               
price of  oil, but if  you get above  a certain point,  you won't                                                               
keep increasing the price of gas in  the same way. In order to do                                                               
that, the  downside has some  protection. So, you could  think of                                                               
this as having  a balanced portfolio with a little  bit of bonds,                                                               
some equities, and maybe some  emerging market equities. The same                                                               
can be  done for  the LNG  project, too. The  SOA can  have 20-25                                                               
percent of 15-18  million tons; it doesn't take a  lot of upside,                                                               
but it  would protect  on the  downside by  having at  least some                                                               
revenue coming in.  A second stream of gas has  a little bit more                                                               
risk exposure and maybe 10-20  percent is fully market dependent.                                                               
If  the market  is great,  we'll make  a killing;  if the  market                                                               
tanks, that cost will be absorbed.  For sure, nothing in front of                                                               
them  today  precludes the  state  from  picking that  investment                                                               
philosophy, which can be changed  over time. BG in the Queensland                                                               
Curtis project, back  in 2008, marketed almost all of  its LNG in                                                               
the  spot  market  and  were getting  great  returns.  Then  they                                                               
realized that  the market was  changing, so they locked  all this                                                               
gas down into  short and medium term  contracts. Nothing prevents                                                               
the  state from  being able  to adapt  to the  circumstances, and                                                               
there are  a number  of contractual ways,  especially if  you are                                                               
willing to  forgo some upside,  to protect the downside.  He said                                                               
that most LNG  projects have state partners and  states like some                                                               
kind of predictability.                                                                                                         
                                                                                                                                
MR. MAYER  added that  it's important to  think about  the reward                                                               
part of  the equation, and  where in the overall  valuation chain                                                               
one maintains ownership  of the gas is important  to the rewards.                                                               
Under the  HOA, the  state has  a lot of  options: if  it doesn't                                                               
come  up with  successful  negotiations around  gas  in kind  and                                                               
decides to take  it in value at the wellhead,  it could decide to                                                               
not want the exposure of being  an LNG producer and marketing gas                                                               
to Asia  and negotiate with the  producers to buy the  gas, or it                                                               
could ship it through  the pipeline and make LNG out  of it - but                                                               
not wanting to  go through the expense and  difficulty of finding                                                               
out  what is  involved in  building an  LNG marketing  operation,                                                               
could contract out to different parties to sell our LNG.                                                                        
                                                                                                                                
Maybe over  time what the  state decides could change,  Mr. Mayer                                                               
explained.  The  key   thing  to  remember  is   that  where  you                                                               
participate in  that value chain  certainly shapes the  risk that                                                               
you  take, but  it  also dramatically  shapes  the rewards,  too.                                                               
Equatorial LNG  Guinea, the upstream resource  holder, gets about                                                               
$.25 mmcf/gas; the  LNG producer makes it for $2.85  and that gas                                                               
is  sold  into Japan  for  $14-18/mmbtu.  So, there  is  enormous                                                               
variation in the value of gas  (both on the risk and the reward),                                                               
and  having 25  percent of  a resource  at the  wellhead is  very                                                               
different than having 25 percent of a resource landed in Japan.                                                                 
                                                                                                                                
4:47:49 PM                                                                                                                    
SENATOR MICCICHE  said our biggest  risk is in  not understanding                                                               
the  impacts of  an  agreement, and  asked if  the  state had  no                                                               
additional burden under  the AGIA agreement what  would change on                                                               
the producer/state alignment.                                                                                                   
                                                                                                                                
MR. MAYER answered  that it becomes a question of  how one trades                                                               
off the possibility (by no means  a certainty) of a better tariff                                                               
through  a  competitive  process  versus  the  question  of  both                                                               
momentum  and having  a  pure midstream  company  that makes  its                                                               
money by  moving gas through the  pipeline at the table  over the                                                               
6-18 months when the commercial agreements are being signed.                                                                    
                                                                                                                                
SENATOR  MICCICHE said  the state  might still  have a  different                                                               
third party.                                                                                                                    
                                                                                                                                
MR. MAYER  said it would take  some time for that  third party to                                                               
come to the table,  maybe two years. It would mean  a delay of 6-                                                               
24 months  in the process and  other parts envisioned by  the HOA                                                               
would take longer, or those parts  are able to move in tandem but                                                               
they are  moving only with  the SOA  without that third  party at                                                               
the table.                                                                                                                      
                                                                                                                                
4:50:15 PM                                                                                                                    
SENATOR BISHOP  asked who has  the best track record  globally on                                                               
marketing gas.                                                                                                                  
                                                                                                                                
MR.  TSAFOS   answered  that  he  was   uncertain,  because  most                                                               
companies can make a killing in  any given year, so one must look                                                               
at their  record over  time. Having  a good price  for gas  is an                                                               
indication of  good marketing strategy,  but a  portfolio usually                                                               
has  a range  of pricing.  No one  company stands  out; seven  or                                                               
eight companies  are extremely competent  LNG marketers  that can                                                               
get  sustainably  good  value  for   their  gas,  but  even  they                                                               
sometimes  sign bad  deals, in  retrospect, because  at the  time                                                               
they signed  them the market  conditions were such and  then they                                                               
changed.  He thought  the state  would  have lots  of options  to                                                               
choose from  and said that  a good  price is more  important than                                                               
who signed it.                                                                                                                  
                                                                                                                                
4:54:08 PM                                                                                                                    
SENATOR  FAIRCLOUGH  said  legislators receive  information  from                                                               
global experts,  but they have  to agree as  a group on  what the                                                               
variables  are  inside  the  project  and  that  she  valued  the                                                               
conversation  about continuity  and  momentum. It  seemed to  her                                                               
that execution was  another gate to go through. Do  we agree that                                                               
these five  ideas encapsulate  all of  the different  opinions on                                                               
what is most  important for Alaska in  considering moving forward                                                               
with  a huge  investment that  has potential  risk and  potential                                                               
upside?                                                                                                                         
                                                                                                                                
CHAIR  GIESSEL followed  up on  that theme  saying the  state did                                                               
have a bid process several years ago - for AGIA.                                                                                
                                                                                                                                
MR.  TSAFOS said  there were  four parties:  TransCanada was  the                                                               
fifth, but  at the end  of the day TransCanada's  application was                                                               
the only one that had a measure of completeness.                                                                                
                                                                                                                                
CHAIR  GIESSEL asked  him with  his  knowledge of  who the  other                                                               
companies  were and  supposing  they were  to  raise their  hands                                                               
again in  interest, is  there a  best company  in the  world that                                                               
builds pipelines in Arctic conditions  across mountain ranges and                                                               
comes in on time and in budget?                                                                                                 
                                                                                                                                
MR. TSAFOS  said part of  the answer  is lack of  comparable data                                                               
points  - not  a  lot of  people have  built  800 mile  pipelines                                                               
across similar  territory. Shell  built the 500-mile  Sakhalin in                                                               
Russia;  it stands  out  in  their table  of  cost overruns.  IHS                                                               
Energy  puts  out  a  list  of the  50  largest  publicly  traded                                                               
companies in the world and does  a segmentation of each aspect of                                                               
the  oil and  gas  business.  So, they  looked  at the  midstream                                                               
infrastructure aspect  where TransCanada was fourth.  One company                                                               
was at the top at about  $60 billion and three companies below at                                                               
the $30-40 billion  market cap. So, TransCanada  is definitely in                                                               
the top five.                                                                                                                   
                                                                                                                                
4:59:21 PM                                                                                                                    
However, he pointed out that none  of the companies in the top 15                                                               
have  shown an  interest in  building  a pipeline  in Alaska.  He                                                               
couldn't say why not, but  generally they look at risk/reward and                                                               
likely completion, and  this could look like a  tough pipeline to                                                               
build.  What would  you get  going to  a bid  process? He  didn't                                                               
know, but  if you look at  the past, none of  the other companies                                                               
had  been associated  with Alaska.  He  reiterated the  questions                                                               
about  how momentum  and  litigation would  be  reflected in  the                                                               
tariff if the state would open the process to bidding.                                                                          
                                                                                                                                
5:03:28 PM                                                                                                                    
SENATOR   MICCICHE  said   it  is   important  to   clarify  that                                                               
TransCanada is an  incredible company, but their  experience on a                                                               
pipeline  of  this  size  and  pressure  is  non-existent.  Their                                                               
execution record is  incredible, but the one question  he had was                                                               
there are new  entrants into this area of expertise  (in the last                                                               
10 large scale  projects) that if it weren't for  AGIA, the state                                                               
might be looking at as competitors.                                                                                             
                                                                                                                                
MR. TSAFOS  said there are  large pipelines associated  with LNG,                                                               
but if  you focus on  compatibility of  not just diameter  but of                                                               
terrain and everything else, he  couldn't think of an LNG project                                                               
that has an infrastructure under  construction that is comparable                                                               
to  what  will happen  in  Alaska  with  the exception  of  maybe                                                               
Sakhalin in Russia. A lot of  pipelines are being built right now                                                               
in Australia,  but the climate  there is fairly  different. There                                                               
have been technical advancements,  but for building big pipelines                                                               
in this terrain  for an LNG project there is  a pretty short list                                                               
of companies.                                                                                                                   
                                                                                                                                
5:08:05 PM                                                                                                                    
CHAIR GIESSEL thanked them for the presentation.                                                                                
                                                                                                                                
5:08:17 PM                                                                                                                    
At ease from 5:08 to 5:19 p.m.                                                                                                  
                                                                                                                                
^Presentation: AKLNG  Project Plan by Steve  Butt, Senior Project                                                               
Manager, ExxonMobil Corp.                                                                                                       
 Presentation: AKLNG Project Plan by Steve Butt, Senior Project                                                             
                   Manager, ExxonMobil Corp.                                                                                
                                                                                                                              
5:19:49 PM                                                                                                                    
CHAIR GIESSEL called the Senate  Resources Committee meeting back                                                               
to order  at 5:19 p.m. and  welcomed Steve Butt to  the committee                                                               
to present the Alaska LNG project (AKLNG).                                                                                      
                                                                                                                                
STEVE  BUTT, Senior  Project Manager,  ExxonMobil Corp.,  said he                                                               
had his  first introduction to  the Alaskan gas business  in 1984                                                               
when he  worked briefly for SOHIO  in Mukluk. Since then,  he has                                                               
had about 30  years of project experience, primarily  in the U.S.                                                               
He had also been the  operations manager in Venezuela, Equatorial                                                               
Guinea  where  they  built  significant  infrastructure,  Angola,                                                               
Nigeria, Cameroon, West Africa,  Qatar (production vice president                                                               
responsible for bringing  four of the world's  largest LNG trains                                                               
on line  and general manager  of the world's largest  gas plant).                                                               
He came back to Alaska a  couple of years ago and started working                                                               
with a  "great group of people"  representing BP, ConocoPhillips,                                                               
ExxonMobil and TransCanada in the  AKLNG project with the goal of                                                               
figuring out  the best way  to commercialize the North  Slope gas                                                               
resources through the use of the LNG process.                                                                                   
                                                                                                                                
5:21:13 PM                                                                                                                    
He wanted to  put forth one principal as  background: through the                                                               
last couple of years working with  the project team he used three                                                               
ideas to  test what they  were doing: alignment,  risk reduction,                                                               
and cost  reduction, what he  called the "Arch of  Success." This                                                               
is  the most  important framework  in  which to  think about  the                                                               
project.   Success  in   this  project   comes  from   maximizing                                                               
alignment. This is  a unique opportunity where  all the principle                                                               
resource owners  in Alaska,  including the  state, are  trying to                                                               
come together  to put this forward,  a level that has  never been                                                               
achieved before.                                                                                                                
                                                                                                                                
There are still  a lot of risks: A regulatory  framework that has                                                               
never been  tested on  a project  this large,  a market  that has                                                               
never  been  tested  on  this   project,  and  a  high  level  of                                                               
uncertainty around  costs and other  issues. His job was  to work                                                               
with the team  and drive them down, to make  sure they understand                                                               
what the  uncertainties are and  mitigate them.  Working together                                                               
in aligned  fashion to reduce  risks is all about  reducing costs                                                               
of supply,  the guiding metric the  companies use to decide  if a                                                               
project can really survive.                                                                                                     
                                                                                                                                
He said  gas is  a commodity  and buyers  want a  cheap commodity                                                               
that they can  trust, because they are going to  put their entire                                                               
economy at  risk to  the LNG  that they  buy. Their  children and                                                               
their  grandchildren are  going to  use that  LNG over  long term                                                               
contracts and  they want  to know  that the  project is  going to                                                               
deliver LNG  to their doorstep every  two days or three  days for                                                               
the next  35 years. That's  a huge  commitment, but it  all comes                                                               
down to  their confidence  in the project:  if have  they reduced                                                               
the risks  and built  enough alignment that  they can  deliver at                                                               
low enough cost, because those markets go up and down.                                                                          
                                                                                                                                
He  invited  the  committee  to  test  him  against  those  three                                                               
concepts: alignment, risk reduction and cost of supply.                                                                         
                                                                                                                                
5:23:26 PM                                                                                                                    
                Overview of the Project Design:                                                                             
                                                                                                                                
MR. BUTT  said they  have an integrated  design; they  know where                                                               
the gas  would be treated, how  it would be transported,  and how                                                               
it would be liquefied. The  Nikiski industrial area is their lead                                                               
site; they  were in Kenai  last week and it  is a great  place to                                                               
work. Kenai has a long history  of LNG manufacturing and they are                                                               
getting a good  reception from the land owners,  a very important                                                               
point, because  to go to  the DOE and  get an export  permit they                                                               
have to  demonstrate that they  have the  land that they  need to                                                               
build  the plant.  It is  a  critical uncertainty  that they  are                                                               
working on right  now; and once that is resolved  they will go to                                                               
the next one on permitting.                                                                                                     
                                                                                                                                
They have  moved forward  on their summer  field season  and were                                                               
able to get  some information north of  Livengood for permitting,                                                               
which is a big help.                                                                                                            
                                                                                                                                
MR. BUTT said they had  confirmed their ability to integrate into                                                               
Prudhoe  Bay, which  differentiates  this  project from  previous                                                               
projects  that worked  gas  in  Alaska. This  is  not a  pipeline                                                               
project, so  some of  the FERC  regulatory firewalls  required in                                                               
the pipeline  don't apply  here. Phrases  like "open  season" are                                                               
really misnomers in this project.                                                                                               
                                                                                                                                
Most  importantly  they  have  some great  progress  on  the  gas                                                               
treatment plant  (GTP), sealifts,  and logistics. A  project this                                                               
big is  all about  managing those little  tiny things  that drive                                                               
the big  costs. If you get  them all right, then  you can deliver                                                               
in a lost  cost manner. In Qatar, for instance,  all those trains                                                               
were delivered on or head of  schedule and on or ahead of budget.                                                               
The companies  involved in  this project have  a long  history of                                                               
successfully  developing LNG.  When you  look at  LNG and  who is                                                               
doing what,  it is important  to understand who is  helping drive                                                               
the decisions, and if they are  working in a manner that is going                                                               
to be successful.                                                                                                               
                                                                                                                                
5:25:22 PM                                                                                                                    
MR. BUTT said this project will  have huge benefits to the state;                                                               
a  $45-65 billion  investment in  Alaska,  9,000-15,000 jobs  for                                                               
construction and  another 1,000  for the long  term. The  oil and                                                               
gas industry  creates a  lot of other  jobs beside  the operating                                                               
jobs: those  1,000 folks need to  eat, places to stay,  they need                                                               
to buy lunch.  Folks use multipliers on the order  of 7-9 for the                                                               
oil and gas industry.                                                                                                           
                                                                                                                                
More importantly, the LNG is  unique in that it generates revenue                                                               
for the state. As it's designed  with the state as a participant,                                                               
the state  has the opportunity to  take its share of  the revenue                                                               
commensurate with  its share of  the investment and  that creates                                                               
alignment which  over the decades will  bring significant revenue                                                               
to the state. This gas also provides natural gas for Alaskans.                                                                  
                                                                                                                                
MR. BUTT  said they  have a  really good  start on  their safety,                                                               
health, and  environmental work.  About 150  people in  the field                                                               
worked  almost 100,000  hours  in the  2013  summer field  season                                                               
incident free and were able  to measure and quantify the systems;                                                               
they understand every  ecosystem they touch so that  in the event                                                               
the project is built they can assure there is no damage.                                                                        
                                                                                                                                
Megaprojects are  often defined  as any  project over  $1 billion                                                               
and  now  they  are  sometimes  defined as  a  project  over  $10                                                               
billion. By  any metric this  is one of the  largest megaprojects                                                               
ever and  those will  be some  of their  big challenges.  In some                                                               
ways it's  really five megaprojects,  each one working  with each                                                               
other. It  so big, it  creates its own  weather, and if  they are                                                               
not careful,  it competes with itself.  You don't want to  have a                                                               
challenge with  welders on part  A working  at odds with  part B.                                                               
So,  the work  has to  be planned  carefully match  the resources                                                               
needed along with the right craft skills.                                                                                       
                                                                                                                                
They  also   have  to  look   through  some   complex  commercial                                                               
arrangements, so the  right framework is in place  to deliver the                                                               
gas, and  mitigate socio-economic impacts. They  opened an office                                                               
in Kenai trying to understand the  community and be a good member                                                               
of it.                                                                                                                          
                                                                                                                                
MR. BUTT said  no one has ever permitted an  800-mile pipeline in                                                               
the post NEPA era in the U.S., or  done an LNG plant this big, or                                                               
a GTP this big, and they must do  all three. They must be done in                                                               
a  coordinated  manner  under  a  single  review  process,  which                                                               
ostensibly  would be  coordinated  through FERC.  FERC will  help                                                               
them by  coordinating all  the other  federal and  state agencies                                                               
that  will  be  involved  in the  pipeline:  hazardous  materials                                                               
safety administration, Coast Guard, seaways, the EPA and so on.                                                                 
                                                                                                                                
All of those permits are a  challenge that creates risk; they pay                                                               
very close attention to them, so they can be managed.                                                                           
                                                                                                                                
5:29:13 PM                                                                                                                    
They want  to finish their studies  this year and move  into pre-                                                               
FEED.  They   want  enough  clarity   from  the   legislature  to                                                               
understand the participants,  the equity and the  process. One of                                                               
their  BP colleagues  said they  need  help with  the three  P's:                                                               
participants,  project  equity,  and  process.  As  they  provide                                                               
information  to   the  legislature,  their  help   is  needed  to                                                               
understand those P's  so they can move into pre-FEED,  a level of                                                               
project integration not seen in Alaska.                                                                                         
                                                                                                                                
He showed a schematic of what  the AKLNG project would look like:                                                               
starting  on the  North Slope,  the oil  and gas  fields will  be                                                               
integrated  with  Pt.  Thomson,  the  "anchor  tenants,"  because                                                               
that's where a majority of the  gas is. There are other fields on                                                               
the North  Slope with gas but  the majority is there.  He likened                                                               
it to  a real estate  mall that has  the big anchor  tenants, but                                                               
also has  room for plenty  of other folks.  But you have  to have                                                               
anchor tenants, so  that when the mall is built,  folks will come                                                               
to it.                                                                                                                          
                                                                                                                                
From a high  level overview, the pipeline runs  across the Brooks                                                               
Range  through discontinuous  permafrost over  the Alaska  Range,                                                               
across the Cook  Inlet into the eastern Cook Inlet  area with the                                                               
lead plant site in Nikiski.                                                                                                     
                                                                                                                                
5:31:25 PM                                                                                                                    
Looking at each  of the pieces, he said, Pt.  Thomson is about 60                                                               
miles east of Prudhoe Bay; about  25 percent of the gas is there.                                                               
About  $1.8  billion has  been  invested  there  to date  and  $4                                                               
billion  will be  invested to  get  the condensate  on stream  no                                                               
later than  early 2016. That work  is going really well;  the ice                                                               
roads  and air  field  are in,  the  camp is  in  place, all  the                                                               
supports for  the pipeline are  in, and  they are working  on the                                                               
pipeline right now between Pt. Thomson and Badami.                                                                              
                                                                                                                                
The other  big anchor  tenant is  Prudhoe Bay;  it is  THE anchor                                                               
tenant, because  it is  the largest oil  field in  North American                                                               
and has  a tremendous amount  of associated  gas with it,  but it                                                               
had  to  be  managed  very  carefully, because  oil  and  gas  go                                                               
together.   In  thinking   about   this   project's  costs,   the                                                               
integration  of Prudhoe  Bay as  an oil  field underpinning  this                                                               
investment  is   very  important.   This  project  has   tons  of                                                               
challenges: it's got to have  the gas treated and transported. No                                                               
other project has an 800-mile  pipeline between the field and the                                                               
plant.  The one  in  Qatar is  26 miles;  the  one in  Equatorial                                                               
Guinea is  10 miles. Normally you  can site the plant  very close                                                               
to the source.  Here, given the reality of  the Arctic conditions                                                               
and  the fact  that you  can't ship  in the  winter, you  have to                                                               
build this pipeline. You also have to deal with  12 percent COat                                                                
                                                              2                                                                 
Prudhoe  Bay.  Those  challenges  have  to  be  offset  by  other                                                               
advantages and one  of them is the  existing infrastructure where                                                               
all  the  compression   is  already  in  place   at  Prudhoe  Bay                                                               
supporting the oil field.                                                                                                       
                                                                                                                                
As long as  the oil business stays healthy, you  have that can be                                                               
leveraged  to  underpin  the gas  business,  a  really  important                                                               
advantage. If one doesn't have  a healthy oil business that moves                                                               
from  the  advantage  column over  to  the  disadvantage  column,                                                               
because that health has to be recreated.                                                                                        
                                                                                                                                
After the gas is gotten out of  Prudhoe Bay and Pt. Thomson it is                                                               
brought into a facility that gets  it ready to transport, and one                                                               
of the key things they have  done is understand how the gas would                                                               
be  readied  to  move  to  market.  The  market  only  wants  the                                                               
hydrocarbon gas  that they can  use for utility, because  that is                                                               
what  heats  homes and  creates  electricity  and all  the  other                                                               
benefits of energy.                                                                                                             
                                                                                                                                
Prudhoe Bay  gas has  about 12  percent CO   and Pt.  Thomson has                                                               
                                          2                                                                                     
about 4 percent.  So, Pt. Thomson reservoir pressure  is a little                                                               
bit higher, about  10,000 psi and Prudhoe  Bay reservoir pressure                                                               
is a  little bit  lower at  3,200 psi.  So, you  have to  look at                                                               
those two  systems and  then design a  gas treatment  plant (GTP)                                                               
that will work for both.                                                                                                        
                                                                                                                                
5:34:54 PM                                                                                                                    
He showed the GTP design: the 130  ft. high X 28 ft. towers would                                                               
treat  the gas  such  that  the impurities  can  be stripped  out                                                               
through  the "Amine  process." The  plate steel  in the  walls is                                                               
about 8-12 inches  thick; the gas is moved up  and the liquids go                                                               
down, so that  the impurities are carried off.  The importance of                                                               
that is  that the only  thing that goes  in the pipeline  is very                                                               
dry hydrocarbon gas; that means there  is no water and very small                                                               
traces of hydrocarbon liquids, like  propane and butane, but it's                                                               
inconsequential. This is because in  Prudhoe Bay the gas has been                                                               
getting cycled for  30 years. That means the operator  has done a                                                               
great  job of  taking  the  gas out  of  the  ground, taking  the                                                               
liquids out, putting it in TAPS,  and then putting it back in the                                                               
ground.                                                                                                                         
                                                                                                                                
MR. BUTT  state that  the Prudhoe Bay  reservoir had  been cycled                                                               
three  times.  In  doing  so,  they have  stripped  most  of  the                                                               
hydrocarbon  liquids normally  associated with  gas, so  this gas                                                               
stream  is almost  all  methane with  a little  bit  of ethane  -                                                               
another important point,  because there is enough  ethane in this                                                               
to make  - a rich gas,  a rich LNG  stream at 1100 Btus  that the                                                               
Asian market really likes.                                                                                                      
                                                                                                                                
So one of the  things they were able to design  early on with the                                                               
benefit of  an integrated  system is  how to  make an  "LNG spec"                                                               
that people  will want  to buy.  And they could  put gas  in that                                                               
pipeline  without  any  impurities  or  contaminants  that  might                                                               
represent corrosive risks and move that gas down a pipeline.                                                                    
                                                                                                                                
He said  this is designed as  a 42-inch system to  move about 3.3                                                               
billion cubic feet off the North  Slope. They are looking hard at                                                               
the  materials; the  type of  material is  important, because  it                                                               
defines the  amount of steel  in the line  and the type  of steel                                                               
needed,  and that  tells you  who can  make it  and what  it will                                                               
cost. So,  one of the  things they have  to study in  pre-FEED is                                                               
the material  in that  pipeline design.  Those are  the questions                                                               
and  those are  all  uncertainties: little  questions that  drive                                                               
huge value, because  the system is so big that  any little change                                                               
you make  is hundreds of  millions of dollars of  decisions. They                                                               
go from  the really  big questions and  keep grinding  them down,                                                               
and finally get to such a  high level of certainty that investors                                                               
are ready to make a decision.                                                                                                   
                                                                                                                                
SENATOR  FRENCH  asked  the  maximum throughput  for  a  42  inch                                                               
pipeline.                                                                                                                       
                                                                                                                                
MR. BUTT replied  this 42 inch system has a  designed pressure of                                                               
about 2100 psi - so the standard  spec of ANC-600 can be used. It                                                               
has  eight compression  stations and  is  designed so  it can  be                                                               
expanded another 25-30 percent. Gas  is compressible; you can put                                                               
as  much  gas as  you  want  into any  system  as  long you  have                                                               
integrity in the wall to hold  it and you have enough pressure to                                                               
put  it there.  It's a  question of  steel and  pressure, and  it                                                               
comes down to how much money it will cost to add compression.                                                                   
                                                                                                                                
He said he sensed that everyone  wants more gas now, but you want                                                               
to have 20 years  of plateaus, so that when you  go to the market                                                               
to sell  LNG you  will be  able to  provide it  for a  long time.                                                               
Buyers want  to know  it's there  for years  and years,  like the                                                               
ConocoPhillips plant in Kenai that  successfully delivered LNG to                                                               
Japan  for 40  years. That's  what  they want,  because they  put                                                               
their entire economy at risk to get it.                                                                                         
                                                                                                                                
He explained that  you don't want to move too  much gas too fast,                                                               
so you balance  that plateau. This system was  balanced out about                                                               
20 years  based on  the resources  known at  Prudhoe Bay  and Pt.                                                               
Thomson, but if more is brought  in the line can be expanded, and                                                               
that capability is there on a unilateral basis.                                                                                 
                                                                                                                                
5:39:19 PM                                                                                                                    
MR.  BUTT  said  their  design  has  five  off-takes  points  for                                                               
Alaskans,  a  roughly  250-450 mmcf/day  average  for  summer  to                                                               
winter. Seasonal  swing is important,  because the system  has to                                                               
be built  to operate on  the coldest day  of the year.  The other                                                               
364 days they  just try to balance it: the  volumes are lower and                                                               
they try  to liquefy all the  gas moving through the  system that                                                               
isn't delivered to  Alaskans. And because they have  been able to                                                               
work together  with an  integrated view, they  have been  able to                                                               
balance that system:  horsepower in the plant  with idle capacity                                                               
in the  summer so they  always have the  ability to move  the gas                                                               
and liquefy it.                                                                                                                 
                                                                                                                                
5:40:19 PM                                                                                                                    
He  said  this  integration  is  unique.  In  previous  projects,                                                               
because of the  firewall, those decisions couldn't  be made; only                                                               
what was in the pipe is what  could be seen, because it was about                                                               
delivering from point  A to point B. This  integrated system sees                                                               
the  resources,  knows  what's  in  the  ground,  and  having  an                                                               
integrated  process  model   that  understands  the  composition,                                                               
pressure, temperature of  the gas at every point will  help it be                                                               
built  to be  as efficient  as possible.  That was  impossible in                                                               
previous  efforts,  because  under  FERC rules  they  had  to  be                                                               
firewalled off.                                                                                                                 
                                                                                                                                
5:41:07 PM                                                                                                                    
Once you  get it down  to the eastern  Cook Inlet, you  build the                                                               
liquefaction facility; the whole reason  being is that liquid gas                                                               
is very small,  dense, and easy to move. Mr.  Butt explained that                                                               
if  you could  build a  pipeline across  the ocean  to the  Asian                                                               
market  and touch  every single  market, you  might consider  it,                                                               
because  a pipeline  is a  very stable  delivery source.  But the                                                               
costs and challenges of building  a pipeline across the ocean are                                                               
daunting  and all  the markets  can't  be touched.  An LNG  plant                                                               
allows flexibility  to ship to  any market  that can buy  it. All                                                               
that is done is  take this really cold LNG at -260  F and warm it                                                               
up and it gets used as  gas. It's no different than pipeline gas,                                                               
but it's  delivered in a liquid  form, because it's so  much more                                                               
efficient. It would take 600 ships  to deliver the same volume of                                                               
gas that you  haven't liquefied; if you liquefy it  you only need                                                               
one. So, the  amount of shipping and infrastructure  goes down by                                                               
a factor  of 600,  and that  is why you  put the  investment into                                                               
building a plant.  Theirs is designed for 5-MT  trains of average                                                               
size  and those  provide  15-18  million tons  of  LNG per  year.                                                               
Three storage tanks are needed to  store it before shipping and a                                                               
jetty with two birthing facilities.                                                                                             
                                                                                                                                
5:43:26 PM                                                                                                                    
The annual  LNG output is  the same as about  40 years of  gas to                                                               
Alaskans, because there  is so much resource;  Alaskans use about                                                               
a tenth of the 3.5 bcf put into the system.                                                                                     
                                                                                                                                
5:43:44 PM                                                                                                                    
SENATOR MICCICHE asked the storage capacity of the three tanks.                                                                 
                                                                                                                                
MR. BUTT answered they are three-160s.                                                                                          
                                                                                                                                
He  summarized  that  ExxonMobil's   activities  at  Prudhoe  Bay                                                               
continues  to work  on the  integration; he  said it  is such  an                                                               
important  difference  between  this   project  and  other  ones.                                                               
Because of  integration, they know how  the CO  reinjection would                                                               
                                              2                                                                                 
be managed. At 500 mmcf/day, CO  reinjection is really important;                                                               
                               2                                                                                                
it's 4 tcf  over the life of the project.  More CO  has to be re-                                                               
                                                  2                                                                             
injected than Alaskans  use every day. So, you want  to work with                                                               
the Prudhoe Bay operator to make sure all that CO  gets used well                                                               
                                                 2                                                                              
and the Prudhoe Bay operator has thought that through.                                                                          
                                                                                                                                
He summarized that  they had looked at how the  power grids would                                                               
be looped and integrated. At  Pt. Thomson, you're always thinking                                                               
about how to  manage the 10,000 psi; it's 10,000  pounds on every                                                               
square inch  of that pipe.  So, to handle  that load the  pipe in                                                               
that line  (a recycle line on  the high pressure side)  has to be                                                               
four inches  thick, and because it  is so thick you  have to have                                                               
special welding capabilities,  which they are working  on and the                                                               
design has to be well thought through.                                                                                          
                                                                                                                                
His point was  that by integrating everything  can be understood.                                                               
It  delivers benefits  at the  GTP because  by understanding  the                                                               
whole  system,  it  has  been redesigned.  Both  Denali  and  APP                                                               
thought they need  four GTP trains based on the  public data, and                                                               
that's because Prudhoe Bay  has 12 percent CO.  But understanding                                                               
                                             2                                                                                  
the composition better and taking  a sharper pencil to the design                                                               
of, for  instance, those really  big 130 ft. towers:  inside them                                                               
is a  bunch of packing beads  that allows that gas  and liquid to                                                               
mix. You  want them to  touch each other  and when they  do that,                                                               
the liquids strips out the impurities  in the gas. So, the better                                                               
you can cause them to talk to  each other, the better that can be                                                               
integrated,  the  better  it  can  be  co-mingled  and  the  more                                                               
efficient they are.  So, they were able to  improve their packing                                                               
technology in  those towers and  went from four to  three trains,                                                               
saving a  lot of money. But  more importantly, it means  that the                                                               
system  in  the north  with  three  trains  for treating  is  now                                                               
balanced  with the  system in  the  south with  three trains  for                                                               
liquefaction. So,  for operations  and maintenance over  the next                                                               
35 years,  the system is a  much better balance. Getting  back to                                                               
the three important things, he  said, this reduces costs, reduces                                                               
risks and helps them move the project forward.                                                                                  
                                                                                                                                
5:47:39 PM                                                                                                                    
SENATOR BISHOP asked how many sealifts to bring this on.                                                                        
                                                                                                                                
MR. BUTT answered  the APP design had four  sealift seasons using                                                               
120 different  modules up  to 85  tons each.  The GTP  is 250,000                                                               
tons -  or 140,000 F-150s or  200,000 Subaru's; it all  has to be                                                               
moved. The original plan was to  do it over four trains and three                                                               
sealifts; now they  are thinking three trains  and four sealifts.                                                               
What they  did is split out  the trains and pulled  the utilities                                                               
forward, which  means building  the utilities  in the  first year                                                               
and  then bringing  up  the trains  one at  a  time. That  allows                                                               
balancing the  start up  with the plants;  so, again,  the system                                                               
has been balanced.                                                                                                              
                                                                                                                                
5:49:19 PM                                                                                                                    
SENATOR MICCICHE said  he didn't have any  experience in dilution                                                               
of  CO   and asked  if the  cost  of handling  it would  increase                                                               
      2,                                                                                                                        
because it's going  to be a higher proportion of  gas through the                                                               
years.                                                                                                                          
                                                                                                                                
MR. BUTT  answered the way the  Prudhoe Bay operator is  going to                                                               
manage  the  higher  vapor  pressure  liquids  is  by  using  the                                                               
miscible injection  system that is  used on TAPS. That  system is                                                               
designed  to handle  up  to 25  percent  CO.  So,  you flush  gas                                                               
                                           2                                                                                    
through that  system to reduce  the CO  to about 12  percent, and                                                               
                                      2                                                                                         
then come backwards  and re-inject that gas until you  come up to                                                               
25 percent. As you go from  east to west and see the CO  rates go                                                               
                                                       2                                                                        
up, you shut  in the wells and just keep  moving. The Prudhoe Bay                                                               
operator has  done an  outstanding job  of thinking  this through                                                               
and has  come up with  some great ideas.  If given a  couple more                                                               
years  to work  it, they  would come  up with  stuff that's  even                                                               
better, because they are a smart bunch.                                                                                         
                                                                                                                                
The challenge is  how to move through some of  the more difficult                                                               
areas:  Antigun  Pass  is  tall  and  challenging,  because  it's                                                               
already  got  a  pipeline;  the  Denali  National  Park  area  is                                                               
particularly challenging  with Glitter Gulch that  doesn't have a                                                               
lot  of room  for pipelines.  There are  three different  ways of                                                               
moving the pipeline through Denali  and all have questions of how                                                               
closely the  terrain can  be followed and  where to  use bridges;                                                               
the other challenge is how to  cross the Cook Inlet and the Yukon                                                               
River. They are pretty sure the  Yukon gets crossed with a bridge                                                               
and  they  are working  on  the  Cook  Inlet  right now.  It's  a                                                               
question of  where and how  to cross  the Susitna; one  option is                                                               
just stay on  the west side; the other options  involve moving it                                                               
to the  east, but  they just  don't know right  now. That  is the                                                               
work they are trying to finish over the next few weeks.                                                                         
                                                                                                                                
5:51:34 PM                                                                                                                    
It's really  exciting to have  a fully integrated team  of people                                                               
from  all  the  companies  looking at  this  route;  six  primary                                                               
engineers are working on it and  between them they have 200 years                                                               
of experience.  He was  sure they  would come  up with  some good                                                               
ideas.                                                                                                                          
                                                                                                                                
On the LNG plant, he said  sea states, currents, ice and managing                                                               
larger LNG carriers  in the Inlet because of the  presence of ice                                                               
are being monitored.  They have looked at  ice monitoring systems                                                               
and think  with some  intrinsically safe design  they can  put in                                                               
caissons  to manage  any ice  flow and  protect the  LNG carriers                                                               
when they are  moored. They will also have a  set of fairly large                                                               
tugs to support the LNG carriers when they move.                                                                                
                                                                                                                                
They have  finished the  environmental work  and with  that said,                                                               
they have  some things left to  do in the 2014  summer season. He                                                               
concluded that if  they can keep alignment  and integration, this                                                               
project can  see and  do things  that its  predecessors couldn't.                                                               
The challenge  is to  keep understanding  the risks  and reducing                                                               
them,  so that  cost of  supply can  be minimized.  That is  what                                                               
makes  a project  successful; you  measure their  impact on  your                                                               
ability to deliver LNG at  the lowest possible cost, because that                                                               
is  what makes  it competitive  and it's  also what  secures your                                                               
margin.  If you  can't  get  all those  hundreds  of factors  and                                                               
elements aligned to  support the lowest possible  cost of supply,                                                               
you need to keep working it; that's the challenge.                                                                              
                                                                                                                                
CHAIR  GIESSEL  asked  what his  role  would  be,  theoretically,                                                               
should this project go forward in the AKLNG project.                                                                            
                                                                                                                                
MR. BUTT replied  that right now he works as  the project manager                                                               
under what  is called the  Concept Selection Agreement; it  has a                                                               
lead party and he works for  that on behalf of the whole project.                                                               
The next  phase would be to  move into a joint  venture agreement                                                               
that defines  a lead party,  and that  lead party would  define a                                                               
person to fulfill  the same role he has, which  is a lead project                                                               
manager role. He will keep doing it if asked.                                                                                   
                                                                                                                                
5:55:41 PM                                                                                                                    
Finding no further  questions, Chair Giessel thanked  him for the                                                               
presentation  and   adjourned  the  Senate   Resources  Committee                                                               
meeting 5:55 p.m.