02/05/2014 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Heads of Agreement (hoa) Panel Discussion | |
| SB148 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| * | SB 148 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 5, 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: HEADS OF AGREEMENT (HOA) PANEL DISCUSSION
- HEARD
SENATE BILL NO. 148
"An Act excluding certain land from the Kachemak Bay Critical
Habitat Area."
- MOVED SB 148 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: SB 148
SHORT TITLE: KACHEMAK BAY CRITICAL HABITAT AREA
SPONSOR(s): SENATOR(s) MICCICHE
01/31/14 (S) READ THE FIRST TIME - REFERRALS
01/31/14 (S) RES
02/03/14 (S) RES WAIVED PUBLIC HEARING NOTICE, RULE
23
02/05/14 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
DAVID VAN TUYL, Regional Manager
BP Exploration, Alaska, Inc.
POSITION STATEMENT: Commented on the Heads Of Agreement (HOA).
BILL MCMAHON, Sr. Commercial Advisor
Alaska Gas Development
ExxonMobil Production Company
POSITION STATEMENT: Commented on the Heads Of Agreement (HOA).
PAT FLOOD, Supervisor
North Slope Gas Development Team
ConocoPhillips Alaska
Anchorage, Alaska
POSITION STATEMENT: Commented on the Heads Of Agreement (HOA).
TONY PALMER, Vice President
Major Projects Development
TransCanada
President, TransCanada's Alaska Corporations
POSITION STATEMENT: Commented on the Heads Of Agreement (HOA)
and the Memorandum of Understanding (MOU).
DAN FAUSKE, President
Alaska Gasline Development Corp. (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Commented on the Heads Of Agreement (HOA).
SENATOR MICCICHE
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of SB 148.
CYNTHIA BIRKHIMER
Kachemak Bay Conservation Society (KBCS)
Homer, Alaska
POSITION STATEMENT: Supported SB 148 with some changes.
WALT WREDE, Manager
City of Homer
Homer, Alaska
POSITION STATEMENT: Strongly supported SB 148.
RANDY BATES, Director
Division of Habitat
Alaska Department of Fish and Game (ADF&G)
Juneau, Alaska
POSITION STATEMENT: Available to answer questions on SB 148.
ACTION NARRATIVE
3:30:41 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 Dyson, Micciche, French, and Chair Giessel.
^Presentation: Heads of Agreement (HOA) Panel Discussion
Presentation: Heads of Agreement (HOA) Panel Discussion
3:32:04 PM
CHAIR GIESSEL said today's topics would be the Heads of
Agreement (HOA) panel discussion and the Memorandum of
Understanding (MOU) with TransCanada. She said as a life-long
Alaskan she was here long before the companies they represent
were on the ground here and she appreciated what they had
brought to the state. She grew up in Fairbanks and it changed
significantly when oil began to be produced. Today all the
amenities Alaskans enjoy today come from their companies and its
employees' work.
She said they had been talking about developing gas for the last
several decades and it's becoming more and more on the agenda.
They often do polling about what the public thinks; she likes
reliable polling and sees huge support for an instate gas
pipeline. In 2012, 60 percent of the people said yes to an
instate pipeline; when asked if state funds should be used, 69
percent of the respondents said yes. Why one hadn't been built
yet is an interesting question, and the interesting answer is
that a majority of folks, 48 percent, said that failure of
leadership by state elected officials was the reason. Well, she
thought possibly some other factors came into play.
In 2013 the same questions were asked: 61 percent said yes to an
instate gasline; use of state funds for it, 67 percent said yes;
and if the state was getting closer to making a natural gas
pipeline a reality or is it still a pipedream: 43 percent said
it's getting closer, 44 percent said it will never happen in our
lifetime. She thought they had moved the dial with the HOA and
the MOU, and that's what they were going to discuss today.
3:34:29 PM
SENATOR FAIRCLOUGH joined the committee.
3:35:42 PM
DAVID VAN TUYL, Regional Manager, BP Exploration, Alaska, Inc.
said he had been working in Alaska for almost 30 years, the last
15 of which had been dedicated in various efforts to get
Alaska's gas to market including serving on the management
committee for the Denali pipeline effort, the joint effort
between BP and ConocoPhillips. He also serves on the management
committee of the AKLNG project, working with all the parties
before them today. He stated that the HOA and the project that
it enables is critically important and BP was grateful for the
legislature's consideration and were giving it their full time
and effort.
He said that executing the HOA was a very important step for BP;
BP Alaska President, Janet Weiss, was thrilled to sign it. The
HOA is supported all the way to the top of the house in BP.
Seven entities signed the HOA and that aligned effort, which
provides the roadmap for a way forward for the legislature to
consider three things that will advance the AKLNG project that
they call the "3-P's:"
-participation by the state as co-investor;
-percentage: the HOA provides for the producers to pay
production tax with gas and the legislature needs to determine
what that gross percentage is going to be (when added to state's
royalty taken in kind (RIK) that adds up to the participation
level);
-process: the HOA lays out a forward process by which terms will
be negotiated with the administration and ultimately brought
back to the legislature for its consideration in 2015.
3:39:58 PM
He said the HOA is important to BP, because of what it says and
signifies. It integrates the resources of all the parties in
front of them now who are united in making the possibility of
AKLNG project a reality. Along with the major North Slope
producers and TransCanada, the HOA parties include the Alaska
Gasline Development Corporation (AGDC) that was tasked by this
legislature with bringing gas to Alaskans. It signals a tangible
representation of the willingness and the ability of the state
and all the parties to work through some tough issues and to
find solutions to industry and the marketplace. Rolling up their
collective sleeves and finding constructive solutions is going
to be critical going forward together.
3:41:20 PM
Finally, he said the HOA signifies the important initial step in
giving the AKLNG project the opportunity to compete in the world
market. It tells the market that the key players are united
behind a single project, and BP believes that the AKLNG project
can successfully compete. That excites them here in Juneau, in
Anchorage, and in their executive offices in Houston and London.
3:41:56 PM
SENATOR MCGUIRE joined the committee.
MR. VAN TUYL said there is a lot of work to do before they can
know with certainty that the AKLNG project will compete
successfully, but the HOA is a critical step in that direction.
BP is pleased with the administration's policy decision to
participate in the project as a co-investor, side by side with
them. That creates a really important commercial alignment that
will help also in solving the challenges going forward. It sends
an important signal to the world that the project has the
support of the host government, a critical element of success of
a major project like this. He hoped the legislature will agree
that the state should participate as a co-investor.
MR. VAN TUYL said that any one of them, even with their best
efforts, can't make this project a success, but all of them
working together cooperatively can. BP sees the HOA as that
first step on that journey, and he looked forward to work with
them in the coming weeks and months as they watch the future of
the AKLNG project unfold.
3:43:19 PM
BILL MCMAHON, Sr. Commercial Advisor, Alaska Gas Development,
ExxonMobil Production Company, said he had more than 31 years of
experience with ExxonMobil. He had time to work in gas
engineering and natural gas contracting; he had also worked in
their international organization, but for the last 20 years he
had been pursuing commercialization of Alaska natural gas.
This has included efforts to consider converting it to liquids
and moving it down the TAPS and pipelines to the North American
markets and LNG to the Far East. He had also been involved in
establishing fiscal regimes with the administration that would
encourage such a development.
ExxonMobil's assets in Alaska are a key part of their
international portfolio. They have been in Alaska for more than
50 years and to date have spent over $13 billion here developing
oil and natural gas resources. They are the operator of Pt.
Thomson and ExxonMobil is the largest working interest owner at
Prudhoe Bay, and the largest lease holder of natural gas in the
state.
He said they had been involved with all the past efforts to try
to commercialize natural gas and are excited about the promise
that AKLNG project brings. Within ExxonMobil this project was
recently moved to their ExxonMobil Development Company, and he
has moved there, too. It is the organization within the
corporation that is vested with the duty of developing
megaprojects: the design, the management of the risk,
construction, and startup of very large projects.
ExxonMobil is encouraged by the progress that has been made and
it has been a pleasure to work with folks here and the
administration; it is a significant milestone.
3:46:46 PM
PAT FLOOD, Supervisor, North Slope Gas Development Team,
ConocoPhillips, Anchorage, Alaska, said he had worked as an
engineer in the oil and gas business for more than 30 years and
his entire career has been devoted to developing gas and oil
resources in Alaska.
ConocoPhillips has been trying for many years to achieve an
economically viable plan to develop Alaska's vast gas resources.
They believe that with the HOA and the strength of the state
behind those efforts they have a path forward that could lead to
a commercially viable LNG project.
3:47:49 PM
They believe there are four key areas for legislative input to
continue advancing the project as envisioned in the HOA:
-the state must participate in the project;
-it needs to decide what share of the gas it will have, which
sets the state participation in the project;
-the legislature needs to define the production tax, a tax share
taken as gas molecules which with the existing royalty share
also taken as gas molecules provides the state's overall gas
share. This state gas share needs to be consistent with and
support the state participation share;
-the legislature also needs to give the administration tools to
confidentiality work through the arrangements and contracts
required to move the project ahead.
3:49:40 PM
TONY PALMER, Vice President, Major Projects Development,
TransCanada, also president, TransCanada's Alaska Corporations,
said they believe it is historic to have all of these parties in
front of the state with an aligned proposal. They have worked
very hard over the course of the past 40 years to advance
Alaska's gas to market and had never sat with all the parties
collectively in front of them today with a proposal.
He had already described the fundamental elements needed for a
successful project in the LNG business; they are in front of
them. He noted that there had been compromises by all the
parties; it is the nature of any agreement. Value must be
adjusted for all parties.
If sanctioned, he thought this project could compete vigorously
in the LNG market and succeed. The proposal asks the legislature
to go to the next step and establishes the risk and rewards for
all of the parties to do that. Beyond that there are decision
points and stage gates for every party, a norm for developing
major projects.
MR. PALMER said this project will provide optionality for the
state. But advancing the AGDC pipeline to the next stage was
also to provide optionality to the state so that Alaskans could
see gas delivered to themselves from the North Slope and in this
case, have the opportunity to commercialize the gas in
international markets and bring real value to Alaskans. The
dollars are very large if the project can succeed.
He said he took this proposal to his board of directors to get
approval to sign the agreements on behalf of TransCanada and he
looked forward to answering their questions and working with the
legislature over the next two or three months.
3:53:42 PM
DAN FAUSKE, President, Alaska Gasline Development Corp. (AGDC),
Anchorage, Alaska, thanked the people next to him and the
legislature for the passage of HB 4 last year that put them at
the table to begin with. It gave them the strength and power
they needed to help represent the state by being an entity that
could deal with confidentiality agreements in deference to DNR
and DOR.
He related that it reminded him of his former life as a chief
financial officer and treasurer of the North Slope Borough, the
head taxman on the North Slope, and he had years of negotiating
with oil companies on issues of valuation. He said you have to
have your thinking cap on in these meetings, because a lot of
issues are going on. This is a massive undertaking. They have a
project going forward and are pleased to hear the compliments
from the industry as to the success and advances they are
making.
MR. FAUSKE said one of the greatest things that AGDC brings to
the table is the leverage: they are at the table, they have a
project going forward (ASAP) already, and they own assets that
bring meaning to the project. This project makes sense and he
urged them to move quickly but use caution and employ great
study. He said AGDC's mandate was to continue moving the ASAP
project forward and if it could be blended into what is going on
here, so much the better.
3:57:39 PM
CHAIR GIESSEL opened questions by the committee.
3:58:02 PM
SENATOR FRENCH said this is exciting and a fantastic opportunity
and thanked them for meeting him in his office. He knew there
were compromises and serious negotiations, and asked each of
them what they gave up.
3:59:18 PM
MR. VAN TUYL answered first that at any time you get these
parties together in a room there is an argument, but he wanted
to emphasize that they worked through their differences by
listening to one another and allowing their views to be shaped
to accommodate the view of others.
One issue was the manner in which the project would be regulated
and, specifically how expansions would work. They came up with a
pretty good template in Article 6, Appendix A, which guides how
expansions work. No one party gets to have their way without
ensuring that the other parties aren't impacted. Appendix A also
is biased toward making sure the project is expandable under
certain conditions it sets out.
MR. MCMAHON said for BP it was how much detail went into the HOA
and how much would be saved for later discussions. When pressed,
they came up the 3-P's as being the three key things they wanted
to achieve with the state:
-getting authority to participate in the project;
-setting the overall percentage of state gas share and state
participation;
-setting up a process to put together project enabling
contracts.
4:02:31 PM
MR. FLOOD said for ConocoPhillips it was more about eliciting an
understanding and coming to terms. One of the things they
grappled with was the state acting in its proprietary capacity
and also acting in its other capacity as a regulator. It is a
consideration throughout the document. The state needs a certain
amount of access to information, but they want to make sure that
the state in its proprietary capacity is acting in its proper
roll. It's unusual for ConocoPhillips to find themselves in that
position, because they aren't typically in commercial agreements
with the State of Alaska. They had to find new territory and a
way how to go forward.
4:01:21 PM
MR. PALMER said some parties want to enjoy the sausage and
others want to see how the sausage was made. There were
compromises made by all parties and that is the nature of any
good agreement. TransCanada made compromises with regards to
expansions, which they are in favor of. An agreement was made
between all of the parties that can work going forward. That
structure was negotiated by all of the parties for an extensive
period of time, but they came up with a structure that could
work for the existing parties that are the initial customers on
the project and work for expansions by these parties as well as
new third parties that may find gas in Alaska or actually have
gas today that are not part of this group.
Some of the terms in the MOU are actually more beneficial for
the state than what was passed in the Alaska Gasline Inducement
Act (AGIA) statute some six years ago in terms of the return on
equity, he said.
4:06:05 PM
MR. FAUSKE said AGDC probably made concessions of time knowing
in HB 4 getting gas to Alaska was their number one priority;
that had to be balanced between arguments based on what is good
for the shareholders. If the process they are working on is
successful ASAP will go away, and he wanted to them to know that
the state was well represented and that his staff was not being
driven off of its mission financially or time wise.
4:08:08 PM
CHAIR GIESSEL noted former Senator Drue Pearce in the audience
as well as the commissioners of DNR and DOR.
4:08:35 PM
CHAIR GIESSEL asked Mr. Fauske to describe more about the
subsidiary that will be formed under AGDC and how that fits in
with this project.
MR. FAUSKE explained that they were originally involved in the
midstream, and then the discussion turned more towards having
them involved in downstream or liquefaction. One of the concerns
they had was that they were not granted that authority under the
enabling legislation. It was then determined that a subsidiary
could be created to handle it. The bill gets into far more
detail about the functions.
4:09:16 PM
SENATOR MCGUIRE said the subsidiary maintains some of AGDC's
powers and yet AGDC continues on with its separate mission, and
noting that there was no mixing of monies, asked if there was a
conflict.
CHAIR GIESSEL apologized saying they would discuss that later,
because they were on the HOA and the MOU right now.
4:10:12 PM
SENATOR FRENCH said the HOA looks to enabling legislation to
make it come to fruition sets out a lot of principles, but the
MOU says there are no commitments, and he wanted to hear from
Mr. Fauske and Mr. Palmer about how the legal status of the MOU
and how binding it is; he wasn't sure it had the same "exit
ramps" as the HOA.
4:11:17 PM
MR. FAUSKE said he is not a signatory to the MOU, so he couldn't
give a good answer.
MR. PALMER said he wasn't a lawyer, but had done a number of
agreements and could respond. They believe the MOU is in exactly
the same position: they are seeking the sanction of the
legislature to make it a valid document to go forward. If the
legislature does not sanction the MOU, then it, in effect, will
become null and void.
SENATOR FRENCH asked the mechanism for sanction. Would SB 138 be
the same enabling legislation for the MOU?
MR. PALMER answered yes; the enabling legislation will empower
the administration to move forward under the MOU, and it is
stages so that the MOU terms would ultimately be turned into a
precedent agreement (PA) later this summer that the legislature
would approve and ultimately turn into a firm transportation
services agreement, which would come back to the legislature in
2015 for approval.
4:13:25 PM
SENATOR FRENCH said if they approve the HOA it still has off
ramps and wanted to know how the MOU process goes forward and
what things would have to happen in order for it to come into
effect.
MR. PALMER clarified that if the MOU is approved by the
legislature with the HOA, they move to a PA negotiated between
the administration and TransCanada; that PA will move them
through the next stage of the process, ultimately to the firm
transportation service agreement, which will come back to this
body. He said there are specific off-ramps established for both
the state and TransCanada already in the MOU through the pre-
FEED process, the FEED process, and ultimately the rest of the
process.
SENATOR FRENCH said he could take that answer off line, not
wanting to take up too much committee time.
4:14:55 PM
SENATOR MICCICHE asked for a quick overview of Article 4,
because it was important for the public to hear there are ways
out of the MOU.
MR. PALMER explained that Appendix C in the MOU, a clause that
has "termination events," which he said gives the state the
right at any time to give 90 days' notice to TransCanada to
terminate prior to the FEED. If all parties agree to move into
final investment decision (FID) then there are also off-ramps
specifically for the state to withdraw within 60 days from the
date when one or more of the producers or the transporter
withdraws from the AKLNG project, or at any time if the shipper
(the state) or the ANS producers on their behalf is unable to
sign agreements to sell all of its royalty or tax gas on terms
acceptable to the state.
At FID, for any reason, the state has an off-ramp. At the bottom
of page 8 there are some off-ramps for TransCanada and then on
the top of page 9 there are additional off ramps for either
party if the terms of the FEED agreements or definitive
agreements are not acceptable to the state or TransCanada. Then
there is an off-ramp for regulatory approvals within 90 days and
at FID if all the rights-of-ways, easements, and land leases
have not been secured. There are additional off-ramps post-MOU
sanctioning. Another clause talks about the right for the state
to acquire TransCanada's position in the project.
CHAIR GIESSEL asked if that meant buying the work TransCanada
had done previously.
MR. PALMER answered yes. There is a mechanism for the state to
reimburse TransCanada for its portion of the cost it had
expended plus an AFUDC 7.1 percent rate, which is less than
TransCanada's equity rate (and this project at the development
stage is being financed with equity). Reimbursement of those
dollars to TransCanada would mean the state is stepping into its
shoes.
4:18:21 PM
SENATOR BISHOP joined the meeting.
CHAIR GIESSEL asked him to clarify the FID when the "big money
gets spent." Is that the build it point?
MR. PALMER answered yes. If they walk through the stages
contemplated in the HOA and other documents, they propose to go
into the pre-FEED stage; the next stage is FEED stage; that also
ramps up the dollars. The FID is that point at which all of the
companies and the state (AGDC) would be making a decision to
actually construct the project and spend the multiple tens of
billions of dollars to put the pipeline in the ground, put the
liquefaction plant in the ground and build the GTP, and
ultimately go into service several years after.
4:19:50 PM
SENATOR DYSON asked if TransCanada's data that it has acquired
as a result of its field work under the AGIA license will be
brought to the table under this new agreement.
MR. PALMER answered yes.
SENATOR DYSON asked if that information would be available to
all the participants including the state as the project goes
forward without having to reimburse TransCanada for that work.
MR. PALMER answered yes, that is the proposal under the HOA and
the MOU. That information will be available to the project going
forward at no cost.
SENATOR DYSON said he is beginning to understand that the
state's power to tax is limited to the total amount of the
state's financial participation in the project.
4:22:04 PM
MR. MCMAHON replied that it's just the other way around, and
explained that the legislature decides what level of taxation
through the production tax; and that gets coupled with the
royalty share (which is not modified) and will set total gas
share; that in turn would set the state participation in the
project. State participation in the project is not a cap of
taxes; it is an outcome from the tax rate.
4:22:45 PM
SENATOR DYSON asked if the legislature decided to change the
production tax part of the agreement if the state would be
forced to change its financial investment position in the
agreement.
MR. MCMAHON replied yes; that would be the result. One of the
things they will talk about in developing the project-enabling
contracts is how that would be handled.
SENATOR DYSON asked if there is precedence for that on this
continent.
MR. FLOOD replied that the HOA contemplates that the state's
participation and the state's gas share would be the same. The
state's gas share would be composed of the existing royalty
share with some modification of net profit leases or sliding
scale leases and the production tax. The state would not be
forced to do anything; it just wouldn't be consistent with the
existing HOA.
SENATOR DYSON supposed if royalty share is 12.5 percent and the
state decides that their production tax portion is 12.5 percent
(equaling 25 percent) then the state would get 25 percent of the
gas input into the process as its share and becomes a de facto
producer. But the agreement requires that the state cannot
change the production tax share or if they did, that would
change their ownership of gas requiring that their investment in
the project would retain the alignment. So, if the state went to
a total of 30 percent it would have to have 30 percent of the
investment capital?
MR. VAN TUYL said that was correct; part of the reason for
wanting to ensure that the state's portion is set is because
they are talking about entering into an LNG project which will
be underpinned by a number of things including long term sales
and purchase agreements. Every party will want to know their set
portion that they can actually sell. Changing that up and down
through time is problematic in placing long term contracts. The
HOA also envisions other elements of state take such as revenues
brought in through property taxes and state corporate income
tax.
4:28:25 PM
SENATOR FAIRCLOUGH asked if BP (and the companies) sees any
other values in having the state as a partner aside from the
ownership equity interest and the taxations so that the tax
doesn't fluctuate.
MR. VAN TUYL replied that BP believes state participation is
absolutely critical to the success of this project, the reason
being that nothing aligns like equity. With the state actually
being a co-investor in the project taking its royalty share in
kind and tax as gas molecules, the state and the producers will
have an unprecedented level of alignment. Issues coming down the
pike will be seen in a similar light, because they will be
commercially motivated in a similar way, so they are more likely
to find mutually agreeable solutions. That kind of structure is
seen in a lot of mega-LNG projects around the world that have
host government support.
4:30:31 PM
MR. FLOOD, expanding on alignment, said that LNG projects are
built on a long chain of contracts and ultimately rely on the
confidence of the markets that they would be serving with the
gas. Having the state as a supportive, cooperative partner is an
ideal situation for that. It's hard to imagine moving this
project forward in an atmosphere of conflict.
SENATOR FAIRCLOUGH asked if it might be a reduction of risk to
their shareholders to have the state as a partner.
4:31:51 PM
MR. MCMAHON responded that the advantage to ExxonMobil would be
that the state's investment in the project would match their
economic interest in the project. So, ExxonMobil would have the
advantage of only needing to raise the capital to match the gas
that they take. Lower investment brings lower risk, and that
would be an advantage that state investment brings.
4:32:25 PM
SENATOR FAIRCLOUGH said, as a counter to that, she would ask the
administration to be prepared to describe what advantages the
state sees in having the proposed partners.
She said some people may not know that TransCanada and its
shareholders have actually invested under the AGIA license in
the project already and asked if Mr. Palmer if he could let
Alaskans know how much money they had invested.
MR. PALMER said he would leave out TransCanada's previous 30
years' investment in pursuit of this project, but today they
with ExxonMobil had invested approximately $130 million of
unreimbursed dollars in the AGIA project. The state has invested
some $300 million. That is all equity investment but they have
been unsuccessful in bringing that project to fruition,
principally because of the shale gas revolution in North
America. In the event this project proposal is sanctioned the
information that was developed under that initiative would be
contributed and available for this project going forward at no
additional cost to the state.
4:35:34 PM
SENATOR FAIRCLOUGH asked how TransCanada makes money for its
shareholders.
MR. PALMER answered it's TransCanada's business to attract
customers across North America; they own some 40,000 miles of
pipe in Canada, the U.S., and Mexico; that has been their
business for almost 60 years. They own no natural gas or oil
that moves through those pipes. So, what they see in the MOU is
the first stage moving towards an ultimately affirmed
transportation agreement (TA) which sets out how TransCanada's
obligations to their customer (the state) and what their rights
are. The way they make money is by investing equity; they don't
make a profit on the debt side of the equation.
TransCanada brings their skill sets to the table and earns a
return on the equity and also achieves a return on the capital
over the life of the project. He said it's quite similar to a
railway that doesn't own the product that it moves and to their
competitors across North America and internationally. Their
business is all about bringing their areas of expertise to the
table to obtain permits and ultimately build, own, and operate
pipelines for parties that are their customers.
MR. PALMER said the dollars for TransCanada's shareholders are
based on low business risk at modest returns. The 25 percent
equity proposal once this project is in service is a relatively
low equity ratio compared to pipelines in in Canada that have 40
percent equity.
SENATOR FAIRCLOUGH said one of the challenges Alaskans have had
in moving oil in TAPS is the notion that because the big three
have ownership interests that it has been difficult for other
smaller companies to gain access into that line. She said it
sounds like they would be pro-expansion, because they make more
money with more gas in the line, so that would be a benefit to
the state.
MR. PALMER answered yes; their business is not only to own the
initial investment in a project (equivalent to the state's share
in this case for the pipeline and GTP), but clearly they are
aligned fundamentally with the state to want to expand, and by
expanding they get to invest in a project that they are
confident in; and their shareholders like that sort of
investment.
He said the expansion terms allow expansions subject to not
having a negative effect either physically or financially on the
other parties. But those same rights lie with each of the
producers; if they wish to expand for their own gas or compete
for new parties' gas they can do that, as well.
4:40:30 PM
SENATOR MICCICHE said Mr. Palmer's first answer made it sound
like TransCanada primarily makes its money through repayment of
capital, but probably the most significant way they make revenue
is by shipping gas on a per-unit, per-distance basis.
MR. PALMER replied that TransCanada makes money by transporting
gas for its customers, but this project is not driven on a per
unit volume of gas flowing the system; it's based on a
contracted quantity. So, the state in this case would be
contracting with TransCanada to move its 20 or 25 percent
(several hundred million cubic feet a day); they would have the
right to move that volume of gas through the pipeline every day
and the TransCanada would have the obligation to provide them
with that service every day.
If an additional one unit moved through that same pipeline,
there is no change in TransCanada's earnings on the base system.
In the event of an expansion and TransCanada can invest more
dollars, that is attractive to them. That's how they would earn
more money.
SENATOR MICCICHE said he was asking a question that he wanted
Alaskans to hear the answers to in a way they will understand.
Since there are three different prices for off take points, is
there somewhat of a per-distance basis?
MR. PALMER answered yes. It's a volumetric distance structure
and the administration's consultants had in state deliveries at
less than $4: less so at Nenana, a little more as you move to
Big Lake, and then the highest number for the farthest distance,
which is to the LNG plant in Nikiski.
4:43:13 PM
SENATOR MICCICHE said they keep talking about this relationship
in terms of a marriage, but really until they get to an FID they
are sort of dating. As he struggles with why TransCanada makes
sense, one of the things that is clearly on the plus side is
that they have a significant investment in this project to date;
the state has, too, of about $330 million.
MR. PALMER agreed.
SENATOR MICCICHE said he would like to take advantage of that,
but if the state were to end that relationship would it have to
compensate TransCanada somewhat for the unreimbursed amount?
MR. PALMER replied that the definition of "development costs" on
page 9 in Appendix C of the MOU says that those costs are post-
January 1, 2014. So, that would meant that TransCanada is in
effect conveying to the SOA, if the MOU is sanctioned, the work
that has been established to date.
SENATOR MICCICHE said that was an important clarification and a
significant value.
4:46:34 PM
SENATOR FRENCH said on page 2, Exhibit B, of the MOU has
conditions on the state with respect to transferring its
interest in a limited partnership, and the way he is reading
that was the state can't sell its ownership interest to a
competitor of TransCanada's. He asked if the reverse was true.
MR. PALMER said he didn't think there was such a restriction on
TransCanada. The rationale for TransCanada to seek to limit the
state is that they don't want to contribute assets to a project
only to discover that a competitor has moved in and is being a
partner without having gone through that same process. The state
could bring in a buyer of its LNG through that structure; the
restriction is specifically to someone that competes with
TransCanada in the pipeline business in North America.
4:48:35 PM
CHAIR GIESSEL asked about Exhibit C, section 6, bullet 6, on
page 2, that says TransCanada is funding basically the
construction of the pipeline and the state then will buy
interest in that (reimbursing them 25 percent), and asked if
bullet 6 was referring to 12 percent interest.
MR. PALMER explained that TransCanada will invest in its share
of the project and his colleagues will invest in their share of
the pipeline and the GTP; in the case of liquefaction, AGDC's
vehicle will own the state's share with the producers
(TransCanada will not be a participant). But for the pipeline
and the GTP, if the state settles on the 20-25 percent in front
of them, TransCanada would fund and own 20-25 percent of the
pipeline and the GTP. Using $45 billion for the cost of the
project, the pipeline and GTP are something on the order of half
that battle. Taking 25 percent just because the math is easy of
$22 billion, TransCanada would be investing $5.5 billion. Of
that $5.5 billion, once in operation, 75 percent of it would be
debt and 25 percent would be equity. Twenty-five percent of $5.5
billion is just under $1.4 billion of equity that would be
invested. It's on that $1.4 billion they would receive, as part
of the tolls they charge the state, a 12 percent return,
declining over time as the project depreciates.
The clause on the top of the next page for debt, for the
remainder of the $5.5 billion, the $4.1 billion in round
numbers, will have a 5 percent interest rate all adjusted for
U.S. 30-year treasuries. Both the interest rate and the equity
are adjusted over time for the U.S. treasuries until FID.
So, TransCanada's charges to its customer, the SOA, will be made
up of a number of components, most of them capital related:
depreciation to recover TransCanada's capital ($5.5 billion over
the life of the project). If that project has a 25-year
contract, they will recover that $5.5 billion over 25 years.
Secondly, they will earn a return on the equity component as it
diminishes and the debt which they also will fund over the life
of the project.
Next they will have to pay incomes taxes on the equity; there
will also be property taxes and operations and maintenance costs
to operate this project that will also be charged to customers.
Those will be accumulated into a "toll" or a "tariff." All of
those components go forward to ultimately make up the charges
they will make to the state. This is how they ultimately charge
their customers for a project like this.
MR. PALMER reiterated: TransCanada invests its dollars and
doesn't make a return on the operating costs or the taxes (which
flow through to the customer); they don't intend on making a
return on the debt; they intend to make a return on the equity
component (the $1.4 billion); that's how their shareholders are
reimbursed.
4:54:14 PM
SENATOR FAIRCLOUGH said she wanted to return to the subject that
TransCanada might one day sell its interests to one or all three
of the major producers and not stay in the game to protect
expansion or other interests that Alaska might have. She asked
in 30,000 miles of pipe in Mexico, the U.S., and Canada how they
typically retain control of the pipe or what their interest
looks like as that goes forward in their business model.
MR. PALMER said TransCanada likes to own 100 percent of the
pipelines it invests in. It doesn't always, but if they have a
smaller position in a pipeline over time, if it's an attractive
investment, they generally like to be a buyer if there are other
sellers of their share. But obviously, TransCanada's
shareholders like this type of investment; that's why they
retain parties like himself and others in the company to seek
out and find opportunities.
He had told them they compete for LNG projects on the B.C.
Coast; they have competed for oil pipelines and gas pipelines;
that's what they do every day. Their shareholders like them to
have modest business risk and a modest return and they seek to
invest in a company that has opportunities just like this. In
fact, watching TransCanada's position going forward, they seek
out energy infrastructure investment opportunities across North
America very focused on gas pipelines, oil pipelines, storage,
and power generation. Those are the only four types of
investment they are pursuing actively. So, if this project
proceeds, they get to invest their $1.4 billion worth of equity,
and if they earn their return on that, that's an attractive
investment for TransCanada and a fair and competitive proposal
for the customer, as well.
SENATOR FAIRCLOUGH asked if Alaskans should have confidence that
TransCanada would be more likely to seek additional ownership
interests versus selling ownership interest.
MR. PALMER replied, depending on the attractiveness of the
project and if it's succeeding and LNG is being successfully
sold into the Asian market and there are profits for all
concerned, yes; you would expect that TransCanada would be
highly attracted to an opportunity to obtain a higher share. And
they have invested in a number of companies where they
originally had a smaller share, and ultimately have tried to
raise the percentage ownership in other pipelines across North
America in the last 60 years.
4:58:09 PM
CHAIR GIESSEL said they started out talking about Alaskan's
focus on instate gas and whether they believed it would happen
and asked if Alaska is any closer to making a natural gas
pipeline a reality or is it still a pipeline dream that will
never happen; 44 percent in the 2013 survey said it would never
happen. What would convince them that this project is more
likely to happen?
MR. VAN TUYL answered they are all at a place they have never
been before and have an agreement to prove it; it has signatures
representing seven different entities and the senior management
of the three producers are all behind this project. Back in 2012
the three CEOs wrote a letter to the governor talking about this
project and its potential for finally getting to the dream of
monetizing Alaska's gas. They are at a place they have never
been before and there is a lot of work to do, but because they
have this HOA they have demonstrated the ability to work through
tough problems and solve them. And they are confident they can
continue to do that and give Alaska gas a chance to compete; BP
believes Alaska gas can compete.
MR. MCMAHON echoed Mr. Van Tuyl's comments. ExxonMobil is
personally excited about having this group of players together;
it's a strong team. They have never had this kind of alignment
before.
5:00:51 PM
MR. FLOOD said a couple of years ago ConocoPhillips and all
these companies got together and saw that the North American
market was not the likely market, but saw promise in another
market, and they have been working on that market for years now.
Couple that with an administration in a relationship that has
grown over the years. They have learned how to put a project
forward that they can cooperate on and actually get done. The
time is right; the relationships are good, and as long as the
state is behind them, they are in very good shape with this
project.
MR. PALMER said in addition to what colleagues have already
stated that as a student of the LNG business (TransCanada has no
LNG for sale), they have looked very carefully as a corporation
as to whether or not they should participate in this Alaska
project as they do for any other investment.
Fundamentals are required to succeed in the business:
-Access to supply: With the sovereign being the state owning the
gas and the corporations holding leases on the bulk of North
Slope gas that is clearly available for this LNG project.
-A capable pipeline company is needed to obtain the permits and
to move that gas 800 miles across those mountains in Arctic
conditions. TransCanada, with these colleagues, provide that.
-Must have liquefaction capability; it should not be your first
liquefaction plant. The gentlemen next to him represent
corporations that have built liquefaction plants. So, they
actually have done it before and can do it again here. Mr. Butt
and his team clearly know how to do that.
-You have Asian markets which are quite different from the North
American transparent market where there are thousands of
players. In North America you can sign on to a computer screen
and find out the gas price day by day and hour by hour;
thousands of people buy and sell gas. That is not the case in
the Asian markets. In fact, you have relatively closed markets
with one or two handfuls of parties that you must deal with.
These three corporations do that every day; they sell LNG into
those markets every day; very few parties in the world actually
to do that. Many state-owned entities do that, but there are
very few counterparts to these corporations that do it. This
project is holding three of those parties that sell LNG into the
Asian markets every day.
- Credit worthiness is needed to support a project in the $50-
billion range. Most corporations or states do not want to bet
their entire financial capacity on a single project. Most
corporations want to have some diversity, but they need to be
substantive enough to backstop this project as it goes forward.
You clearly have that with the portfolio of the state, the four
companies and AGDC.
-You must be competitive on a cost and price basis; but relative
to the other worldwide LNG projects that are being proposed,
this project can be competitive on a price basis. In fact, in
many cases that's not the differentiating factor. The
differentiating factor for successful LNG projects is if they
have resolved the outstanding issues that are within the control
of the parties.
5:05:45 PM
MR. FAUSKE said they now have an opportunity to weigh this deal
versus the risk profile that the state is willing to take based
on the rate of return that it anticipates and how it coincides
with the hurdle rates at other factories that the industry must
have. He was encouraged by the work that was going on, because
there is an absolute willingness to do it. This is a great step
forward.
The other advantage they have is that the state owns AGDC, not
as big a project, but its original outlay was to bring gas to
Alaskans with some type of commercial activity on the outset.
The two need to be weighed against each other to determine what
is in the best interests of the state, but they beauty of it is
that they have choices. He thought it was an absolute opportune
time for the state.
CHAIR GIESSEL thanked everyone saying they wanted to hear "from
you" their perspectives on how this came together and what can
be anticipated going forward.
5:09:09 PM
At ease from 5:09 to 5:19 p.m.
SB 148-KACHEMAK BAY CRITICAL HABITAT AREA
5:19:49 PM
CHAIR GIESSEL announced SB 148 to be up for consideration.
SENATOR MICCICHE, sponsor of SB 148, explained that this bill
amends AS 16.20.590 by exempting the Homer Port and Harbor and a
small area that is planned for future harbor and deep water dock
expansion from the Kachemak Bay Critical Habitat Area (KBCHA).
It cleans up the language of the management plan that says the
plan does not apply to municipal harbors within the critical
boundary area. However, the statutory boundary excluded the
harbor, so they listed the statutory boundary.
Amending the boundary allows normal maintenance work in the
harbor without requiring expensive and potentially time-
consuming permitting from Alaska Department of Fish and Game
(ADF&G). He said that this permitting would not be necessary if
the management plan and the statutory boundary matched, which
they will through this action.
5:21:39 PM
Homer projects impacted by permitting requirements in the past
have been ramp replacement, float replacement, Pioneer Dock
construction, and deep water dock fender replacement.
SENATOR MICCICHE said the primary reason they are asking for
this - because the Homer Harbor provides a secure
environmentally responsible place to store and maintain vessels
that support the oil and gas industry in Cook Inlet.
He said SB 148 is important to his district and to Homer, but
also important to Southcentral Alaska and the Interior in places
like Fairbanks, because it helps provide a safe harbor to
support the natural gas exploration and production in north Cook
Inlet. It certainly gives an increased potential to distribute
natural gas to rural Alaskans outside of that area.
5:22:38 PM
CHAIR GIESSEL noted a zero fiscal note and a copy of the
management plan that said drilling rig storage will not be
allowed in Kachemak Bay Critical Habitat Area, possibly the
section he wanted to correct.
SENATOR MICCICHE said that was correct, and he added that he had
checked with the agencies and local NGO's to make sure they
supported it and he heard that they recognize the harbor as a
safe location for this type of activity and were not opposing
the bill.
5:23:55 PM
CYNTHIA BIRKHIMER, Kachemak Bay Conservation Society (KBCS),
Homer, Alaska, said they understand the reason for this request,
and it appears that including these areas within the critical
habitat area (CHA) could have been a simple oversight. They
support this action on its face, but have some concerns about
details of the wording. Concerns are about the size of area
requested to be removed and she asked that it specifically
exclude any and all oil and gas, mineral exploration, and
development activities from within the confines of the newly
removed land. They ask that this area be specifically designated
within the bill to allow harbor industry-specific operations
such as vessel moorage, storage, and freight transfer.
She believed this could be the first action to remove designated
lands from within a CHA in the state and was concerned that it
will set a precedent for this type of undesignated land actions
especially with regard to resource development interests within
the boundaries of a CHA.
MS. BIRKHIMER said at the present time the Parnell
administration is openly working to undermine the existing
management process of state CHAs, game refuges, and wildlife
sanctuaries through the application of Administrative Order (AO)
266. This action looks suspect and could make the KBCHA
vulnerable to future incursions. Their concerns are for the long
term protection of the local area encompassed by the KBCHA, and
to this end she requested specific sections of the City Homer
resolution 14-005 be incorporated into the wording of SB 148 as
follows:
5:27:10 PM
Lines 62-65:
Whereas, the City of Homer has deep appreciation for
the Critical Habitat Designation and the adopted
Management Plan because it protects the resources
which provide the very foundation of the local
economy, lifestyle and quality of life; and
Line 74-75: Whereas, the City stipulates it does not
propose or support any other amendments to the
Kachemak Bay Critical Habitat Are or Plan as part of
this request.
SENATOR FAIRCLOUGH asked if she was speaking on behalf of the
organization, which means they have taken a formal vote, and how
many members her organization has.
5:28:27 PM
MS. BIRKHIMER said she represents KBCS has 100 members and the
board has seven members.
5:29:11 PM
WALT WREDE, Manager, City of Homer, Homer, Alaska, said he
strongly supported SB 148. He said they have a resolution from
the City Council which was adopted unanimously. This bill is
simple; it just carves the port and harbor area out of the CHA
where it was never intended to be. This has caused a conflict
between the CHA plan and the statutes.
Passing this has a number of benefits: it resolves a conflict
with statute and the CHA plan with respect to municipal lands
and the port and harbor area. It will make permitting easier are
the regulatory environment much better for ADF&G allowing them
to solve some of the ambiguities they are faced with now.
He said this legislation would solve some long standing problems
they have been dealing with for decades including a requirement
in the plan that any vessel that anchors over 14 days needs to
get a permit from the ADF&G. The port of Homer is very busy and
this is a very impractical requirement.
They have also seen a lot of permitting delays and extra costs
as a result of being included in the CHA; sometimes this
includes even routine maintenance like replacing and repairing
floats in the harbor.
5:31:19 PM
Finally, Mr. Wrede said, what really brought this to light was
whether or not the department could permit oil and gas drilling
rigs to be docked at the deep water dock for routine
maintenance, repair. They want to allow that, because Homer is
an ice-free, deep-water port that has many resources that could
be of service to the industry, and oil and gas drilling is
ramping up quite a bit in the Cook Inlet. From an environmental
point of view this is the safest place for those vessels to be
when they need to be tied up and repaired.
5:32:14 PM
RANDY BATES, Director, Division of Habitat, Alaska Department of
Fish and Game (ADF&G), said he would answer questions on SB 148.
CHAIR GIESSEL asked how many permits the department processes
for the vessels that are docked there for over 14 days.
MR. BATES replied that within the last five years they have
processed a total of 150 permits for the KBCHA; 29 of them have
been within the area described in SB 148.
CHAIR GIESSEL, finding no further discussion, closed public
testimony.
5:34:42 PM
SENATOR DYSON moved to report SB 148 from committee to the next
committee of referral with attached fiscal notes and individual
recommendations. There were no objections and it was so ordered.
5:34:46 PM
CHAIR GIESSEL announced the next meeting's agenda and adjourned
the meeting at 5:34 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 148 vs A.pdf |
HRLS 2/18/2014 5:00:00 PM SRES 2/5/2014 3:30:00 PM |
SB 148 |
| SB 148 Sponsor Statement.PDF |
SRES 2/5/2014 3:30:00 PM |
SB 148 |
| SB 148 Fiscal Note.pdf |
HRLS 2/18/2014 5:00:00 PM SRES 2/5/2014 3:30:00 PM |
SB 148 |
| SB 148 Map Proposed Exclusion to the Kachemak Bay Critical Habitat Area DNR.pdf |
HRLS 2/18/2014 5:00:00 PM SRES 2/5/2014 3:30:00 PM |
SB 148 |
| SB 148 Kachemak Bay and Fox River Flats Critical Habitat Area 199312.pdf |
SRES 2/5/2014 3:30:00 PM |
SB 148 |
| SB 148 Supp Resolution City of Homer 14-005 20140113.pdf |
HRLS 2/18/2014 5:00:00 PM SRES 2/5/2014 3:30:00 PM |
SB 148 |
| SB 148 Written Testimony CynthiaBirkhimer 20140205.pdf |
SRES 2/5/2014 3:30:00 PM |
SB 148 |