Legislature(2017 - 2018)SENATE FINANCE 532
01/25/2018 09:00 AM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Update: Alaska Lng Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
SENATE FINANCE COMMITTEE
January 25, 2018
9:01 a.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha Von Imhof
Senator Bill Wielechowski
Senator Click Bishop
SENATE FINANCE
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice Chair
Senator Peter Micciche
Senator Natasha Von Imhof
Senator Donald Olson
Senator Gary Stevens
MEMBERS ABSENT
SENATE RESOURCES
Senator Bert Stedman
Senator Kevin Meyer
SENATE FINANCE
Senator Lyman Hoffman, Co-Chair
OTHER LEGISLATORS PRESENT
Senator Shelley Hughes
COMMITTEE CALENDAR
UPDATE: ALASKA LNG PROJECT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
KEITH MEYER, President
Alaska Gas Development Corporation (AGDC)
POSITION STATEMENT: Provided Update on AKLNG Project.
FRANK RICHARDS, Senior Vice President
Project Management
Alaska Gasline Development Corporation (AGDC)
POSITION STATEMENT: Provided Update on AKLNG Project.
ACTION NARRATIVE
9:01:13 AM
CHAIR CATHY GIESSEL called the joint meeting of the Senate
Resources Standing Committee and the Senate Finance Committee to
order at 9:01 a.m. Present at the call to order from the Senate
Resources Committee were: Senators Bishop, Coghill, Von Imhof,
Wielechowski, and Chair Giessel; from the Senate Finance
Committee: Senators Bishop, Micciche, Olson, Von Imhof, Stevens,
and Co-Chair Mackinnon.
^Update: Alaska LNG Project
Update: Alaska LNG Project
9:02:27 AM
CHAIR GIESSEL invited members from the Alaska Gas Development
Corporation (AGDC) to the table to provide an update on the
AKLNG Project.
9:02:59 AM
CO-CHAIR MACKINNON said that the legislature and the Finance
Committee play a very important role in development of this
project and the Senate Finance Committee is tasked with looking
at the finances of the state including any debt the state has or
is considering with regard to infrastructure and other
investments. Collaboration with the legislature is necessary for
a successful project, she stated.
KEITH MEYER, President, Alaska Gas Development Corporation
(AGDC), said they would start the presentation with the numbers;
they would also talk about the budget, the project cost, the
economics of the overall system, and provide a commercial and a
regulatory technical update.
9:04:05 AM
Capital Budget: (slide 3) Throughout 2017, AGDC implemented a
significant austerity program trying to extend allocated funds
as long as possible. As a result, the spend is $24 million for
the year versus a budget of $55 million. There was a total
expenditure for the year of $33.6 million versus a budget of $65
million including the operating component, allocated 60/40
ASAP/AKLNG.
9:05:19 AM
In FY18, (slide 4) AGDC will spend about $5 million/month, which
will bring total expenditures for January through June 2018 to
$67 million. They started the year with $72 million and will end
up at the end of June with $41 million. Their intention is to
have a lean burn rate and extend that through the end of FY19.
9:06:07 AM
CO-CHAIR MACKINNON said she wants to be clear: is AGDC spending
half their budget because only half the year is done or spending
50 percent less in the January through December period.
MR. MEYER replied that they underspent last year as the result
of a significant austerity program and they are underspending
this year's budget, as well. The savings comes mostly from doing
in-house contracting instead of outside contracting.
CO-CHAIR MACKINNON asked if it is 50 percent under, because that
is what he is showing, but only six months of his year has
lapsed.
MR. MEYER answered that January through December, 2017, their
year-to-date actuals were $24.7 million for capital expenditures
versus a budget of $55 million.
9:08:07 AM
CHAIR GIESSEL remarked that AGDC's capital expenditure for 2017
was $33.5 million and that is what was spent for two months of
work with three large company partners in pre-Front End
Engineering and Design (FEED), but at that time the project was
moving forward. It was hard for her to believes that he was
spending so little and accomplishing so much.
9:08:47 AM
MR. MEYER responded that to him that recognizes a number of
things: a significant amount of work was already done by the
prior project team, and the biggest expenditure was funding it.
When AGDC took over the project, a lot of the activities started
to be done in-house. Their team had just come off the Alaska
Stand Alone Project (ASAP) and were very capable. They took a
36,000-page brief and made it into a 100,000-page filing to the
Federal Energy Regulatory Commission (FERC). A lot of the
engineering work was done previously ($600 million was spent on
engineering and optimization). So, the work that was left -
commercialization and funding activities - is different. Their
intention is to move this project forward and de-risk it with as
little use of outside contracting as they can and live within
the allocated funding. Additional FEED work is still needed, and
they could use more funding, but the project can be kept on
track with their current schedule, which is to have a final
investment decision (FID) at the front end of 2019 and begin
construction at the back half of 2019 for an in-service date of
2024/25.
9:11:29 AM
CHAIR GIESSEL thanked him for his lengthy comments and noted
that competence is expressed when expenditures are commensurate
with that competence.
SENATOR WIELECHOWSKI asked how much the state is spending v.
partners, meaning the Chinese government, the Vietnamese
government, etc.
MR. MEYER answered that AGDC is 100 percent owner of the project
and doesn't currently have partners. However, later this year,
they may engage with partners both financial and strategic.
SENATOR WIELECHOWSKI asked what those "partners" are called and
if they are spending any money on this project or if the State
of Alaska is spending everything.
MR. MEYER replied that those governments are "customers" and
typically customers don't fund a project. Funding comes with
ownership and they haven't engaged in that relationship yet.
However, funds are being expended by the customers as they spend
thousands of hours in traveling here, in meetings, and in AGDC's
data room.
He said that currently AGDC does not have the ability to receive
funds from third parties. That is one of the things they are
asking from the legislature this session.
SENATOR VON IMHOF said she looked ahead at slide 54 and it looks
like the AKLNG Project is entering into FEED shortly. The
previous FEED was going to require $2 billion/year from each of
the four partners and she was worried that AGDC is
underestimating the amount of funding needed to get through
2019, especially with an incredibly reduced staff. How are they
doing that?
MR. MEYER corrected that the estimate for FEED for the entire
project was $2 billion in total not per partner. And at some
point in time the project will have to spend that. They are
looking at a reduced expenditure to get a lump-sum, turn-key
rollover into FEED, but that funding has yet to be raised and
the expectation is that it will happen this calendar year.
AGDC's inability to raise and receive those funds will cause
delay in the project's schedule.
9:16:58 AM
SENATOR VON IMHOF asked if a finance director had been hired and
if he will be in charge of raising money.
MR. MEYER replied that they are days away from engaging a large
investment banker who would help with the funding. It is a firm
not a staff person.
SENATOR MICCICHE said legislators had been following this
project for so many years that they are getting hung up in the
old arrangement, but they are catching up. Did he understand
correctly that AGDC will not ask the legislature for any more
funding but is hoping to bring along a partner that has a
funding package with them at the next gate.
MR. MEYER said that was correct but reiterated that AGDC is
asking for receipt authority to receive those funds.
CO-CHAIR MACKINNON asked if they are asking to move money over
from ASAP so AGDC can use it for the AKLNG Project.
MR. MEYER replied he is asking for a re-allocation of $12
million in ASAP funding to the AGDC, because those activities
are winding down.
CO-CHAIR MACKINNON said that would be a conversation for another
day.
9:20:02 AM
MR. MEYER said slide 5 indicates that no additional funds are
requested for FY19 budget and again, he was asking for program
receipt authority to receive money from third parties and to
transfer funds from the ASAP to the AKLNG fund.
SENATOR MICCICHE said the legislature wants to be partners in
this project in whatever form it takes and asked how he would
feel if that receipt authority was compartmentalized as opposed
to a blanket receipt authority, so that the legislature would
have a vote in each phase of development.
MR. MEYER answered that it would be very detrimental. Before a
third-party funding source will invest hundreds of millions of
dollars, it will want to make sure the project will be
completed. They will resist investing in a project that could
get held up for a political reason or some other reason.
SENATOR MICCICHE said passing a blanket receipt authority to
AGDC removes the legislature from any further approval and hands
full authority to the administration for this project and asked
if he saw a way for that review to occur other than the one-time
passage of a bill that essentially relinquishes legislative
authority to support or not support the project if they see a
level of risk that is unacceptable for the state.
MR. MEYER replied that those risks can be addressed. He
envisions a structure in which the state will always have the
first option to invest, but if it didn't want to fund this
project those partners that have invested hundreds of millions
at that point would have the ability to go forward not using
state funding. This project will have to be approved anyway,
before that is finalized, and that would be a final check.
9:24:00 AM
SENATOR MICCICHE asked for a document explaining the stage
gates, because for this project to be successful the legislature
would have to be involved, and they want to understand where
they have a formal say in that process.
CHAIR GIESSEL said the legislature actually had off ramps
between each phase of the development in the previous project,
and that was the project that this legislature agreed to. The
legislature, as the board of directors for the State of Alaska
and as the ones with the appropriating authority, wants those
off ramps for this project.
CO-CHAIR MACKINNON explained that the reason for having a
separate fund for the ASAP was to backstop a big project failure
and to be able to provide off-takes and gas to Alaskans at a
particular price. Her concern with reallocating the $12 million
is that they are foregoing a backstop project. That last project
also included an opportunity for Alaskans to partake in this
project and she has seen nothing now that will allow that.
Alaskans should have some way to participate in the project,
like a check-off box on the Permanent Fund application.
MR. MEYER responded that work on the ASAP is concluding. That is
the backup plan and it is alive and well. It is their intent to
have a structure whereby Alaskans, municipalities, and Native
corporations can invest in the project.
CHAIR GIESSEL followed up saying that Lazard, a legislative
consultant, was engaged to comment on the investment
possibility, but that was contingent on reports coming from the
Department of Revenue (DOR) and Department of Natural Resources
(DNR), whom they hadn't heard from in quite a while.
9:28:40 AM
SENATOR WIELECHOWSKI said the way he sees it, AGDC is asking to
receive funds from potential partners and he wondered what they
are expecting in return, and would the legislature be privy to
the terms for receiving those funds and will that potentially
expose the state to some future liability?
MR. MEYER answered the legislature will be privy to those terms.
He explained that the state would be giving up some of its 100-
percent ownership of the project, and it is a good
infrastructure investment that links one of the world's largest
stranded gas resources with the world's largest LNG market on a
very long term stable basis. It will have a reasonable return
that will be attractive to infrastructure investors (pension
funds, insurance companies, pipeline companies, etc.). It will
not be attractive to large oil majors, because it will not clear
their hurdle rate.
SENATOR WIELECHOWSKI said he knows the Finance Committee will
look at this much more closely, but he wants to make sure they
aren't giving up too much ownership for small amounts of money.
CO-CHAIR MACKINNON said the state isn't really giving up
ownership or the project will not receive a federal tax-exempt
status of the same magnitude.
MR. MEYER responded to the extent the state sells ownership in
the system, that share would lose the ability to have tax exempt
financing, but the sale would bring in funds to the owners of
the project. AGDC's tax-exempt status will largely be used to
raise funding for its investment in the project, which they
expect to be substantial at some point (their target is $11
billion of equity), and it has the ability to issue tax-exempt
bonds to raise that funding. They do not anticipate selling
shares of AGDC. A project company would be established that
would hold the pipeline and the LNG facility, and shares of that
entity is what would be sold. Today AGDC owns 100 percent.
9:33:03 AM
CO-CHAIR MACKINNON asked if the tax-exempt bond authority has a
cap.
MR. MEYER answered no.
CO-CHAIR MACKINNON asked for a legal opinion on how and in what
quantity AGDC has for issuing bonds, because she assumed the
financing market would look at what is backing the bonds.
MR. MEYER replied that he would use ownership in the system -
the gas pipeline, the LNG plant, and the underlying commercial
agreements that provide revenue for the services of that system
- as backing.
CO-CHAIR MACKINNON added that financing would be ultimately
backed by whoever purchases the gas supply.
MR. MEYER said that was correct.
9:34:16 AM
At ease
9:39:06 AM
CHAIR GIESSEL called the meeting back to order at 9:34.
MR. MEYER said slide 6 looks at 2018/19 funding needs of $700
million for class 3 work. That is what they would be seeking
from third-party sources. To be clear, they need the work
product more than the funding, and some of that work product
could come from in-kind contributions. If any of that gets
delayed, they risk slipping the schedule.
CHAIR GIESSEL asked him to explain a bit more about the in-kind
contributions.
MR. MEYER replied that a funder that is also an engineering
company might do that work product. However, they are currently
looking for funding in the form of cash to pay an engineering
company to do the work.
CHAIR GIESSEL asked if China has expressed an interest as they
had indicated they have engineering capabilities in the
Memorandum of Development (MOD). Is that what he is thinking
about?
MR. MEYER replied that is one potential, but other large
engineering companies take ownership interest in projects in
exchange for work, depending on the project's ability to fund
and their degree of confidence in the project.
CHAIR GIESSEL related that when the TransAlaska Pipeline System
(TAPS) was built, Alaskans "were pretty riled up" about all the
Lower "48ers" who came to work on it, and she couldn't imagine
how they would feel about engineers from China.
9:42:52 AM
CO-CHAIR MACKINNON said the previous partners contributed around
$600 million to the project and asked if Alaska owes them a
repayment. Do they still have some form of equity interest or
in-kind interest going forward with those expenditures they
made?
MR. MEYER replied that the state doesn't owe them anything. The
state's obligation was to take over the project and move it
forward using its funding capabilities and general ability to
develop a project. Everyone will get a significant benefit from
this project. They could, for instance, book reserves that are
currently not called reserves. "And so, we have their support in
developing this project down to a company, but no; we do not owe
them for the work done."
CO-CHAIR MACKINNON asked if AGDC would not have to purchase any
assets from those past partners.
MR. MEYER answered no, but AGDC has not acquired the land at
Nikiski that is owned by an LLC formed by the producer
companies. That purchase would require funding, but they are
considering a purchase option. So, it wouldn't be required
immediately but rather once they took FID on the project.
CO-CHAIR MACKINNON asked if the land acquisition is included in
his presentation figures.
MR. MEYER answered yes.
SENATOR VON IMHOF asked if they will approach the Permanent Fund
(PF) at any point for investment or a financial contribution.
MR. MEYER replied he does not anticipate that. The state has the
first option to invest and he didn't know where that would
necessarily come from. He views this as an attractive investment
and the Permanent Fund would have the same opportunity to invest
as anyone else. In fact, he would encourage them to look at it,
but he has no expectation that funding would come from that
source in particular.
SENATOR VON IMHOF said in other words he won't actively pursue
PF funding but will wait for its board to come to AGDC.
MR. MEYER replied that AGDC will actively pursue all third-party
investors. To him the Permanent Fund would be a third-party
investor. He didn't envision pursuing them in isolation nor
potentially at all. They know enough about the project and ought
to be interested enough to look at it. They are not thinking
internally that is where the funding will come from.
9:47:31 AM
SENATOR STEVENS asked him to clarify that the state owns all
engineering work and efforts of the past partners except for the
land.
MR. MEYER said that was correct, except for the Nikiski land and
a Department of Energy export license that is also held by the
same LLC that owns the land.
9:47:58 AM
MR. MEYER said the project's top priority is gas to Alaskans and
slides 7 and 8 broke down the economics. The pipeline in this
project is more than twice the current demand of all of Alaska,
500 mcf/day, with pricing in the mid-single digits ($5-6 mmbtu).
One benefit of a gas pipeline, unlike a crude line, is that
natural gas can be used right off the pipe to feed a community
or a mining project. It could yield a potential savings of about
$1,000 per household in the greater gas-consuming area of
Alaska. That number is even greater in Fairbanks that would be
displacing oil, but it does not reflect remote communities that
might have to get LNG by truck, barge, or ISO container.
9:50:00 AM
CO-CHAIR MACKINNON remarked that the cost of a feeder line will
not reduce the cost of rural generation for anchor tenants, like
schools, that are funded by the state, and asked how he
calculated the $1000 for Southcentral households.
MR. MEYER replied that the estimate took natural gas consumption
and estimated savings per mmbtu and divided that by the number
of households. It's not necessarily the homeowner gas bill, but
rather the homeowner's energy bill.
CHAIR GIESSEL asked if the number of takeoff points to
communities in SB 138 - she thought it was four - had been
increased.
MR. MEYER said when he stepped into the project, language said
"up to five offtakes." Once AGDC stepped in, it said "at least
five." He believes the more offtakes the better - unlike an oil
line - and that this gas pipeline will be a trunk line from
which branches will grow. It might be a bit of a struggle to get
to five, but once the gasline comes in and people start to
realize how close it is, all of a sudden projects (for instance,
mining) will start to factor that into their numbers and there
will be an interconnect. He said before the project was looked
at as an LNG project with a pipeline and he is looking at it as
a pipeline project with an LNG plant.
CHAIR GIESSEL said small communities can't support the cost of
an offtake and asked who would pay for these offtake points.
MR. MEYER replied that should be a rolled-in cost to the system
because it's much cheaper to do it that way, and it is a
relatively minor cost in the scheme of the project. It's a valve
and a meter station. It wouldn't be fair to have a small
community bare the entire cost when spreading it across the
entire system would be a relatively small burden.
CHAIR GIESSEL said the conversion of households from heating
fuel to gas is another expense and asked if AGDC had included
that in their calculations and if AGDC would fund that, as well.
MR. MEYER answered no; they are a wholesale supplier not a
distributer and as such, they would supply the interconnection
and laterals. Distribution companies will do the conversions.
9:55:46 AM
SENATOR BISHOP asked if parts of SB 138 are still in effect.
MR. MEYER replied yes; the entire thing is in effect.
SENATOR BISHOP said that SB 138 has a provision saying 20
percent of the gross revenues from the project goes into an
energy fund to help finance some of the rural gas hookups.
MR. MEYER said he is correct.
9:57:25 AM
SENATOR VON IMHOF said wrapping these offtakes into the project
costs might make the outside investors pause if their capital is
going towards a good-will cause and won't necessarily yield a
return, especially in this time of razor-thin margins.
MR. MEYER said no; why the state is doing this project will be
an accepted part of the system. That's what he tells the
potential partners: that's just the deal.
SENATOR VON IMHOF said she gets that but hopes enough investors
accept that as part of the deal. Any sophisticated investors
will want to see a line item accounting of how their money will
be spent: commercial gas versus the communities' gas.
MR. MEYER responded that the cost of an interconnect is $1
million if it is done while the line is under construction. So,
even 10 of those is not a backbreaking number given the total
cost of the system. A city like Fairbanks have very little gas
now; it is a growth market. That has to be accepted.
9:59:53 AM
SENATOR MICCICHE asked how one sells 20 percent excess capacity
for which there is currently no market and if that is a point of
contention for investors at this point.
MR. MEYER replied that how it gets paid for is a future
discussion. Right now, they are looking at the economics of the
system being underpinned by the export market, and the instate
market will be a future benefit that one could assign with a
probability factor. If it has zero probability, then it is a
leaner return project, but if one believes there will be some
instate growth, that is additional upside.
SENATOR MICCICHE asked if expansion is typical for future excess
potential as opposed to existing excess capacity.
MR. MEYER answered yes, adding that this pipeline will use
looping as a future upside.
10:02:39 AM
He said slide 9 compares the old cost structure with the new.
The old structure had three producer partners and the state that
was expected to contribute 25 percent of the capital. It would
also get 25 percent capacity and be 25 percent owner of the
system. Under the new structure, the state has 25 percent of the
equity (75 percent of that is debt), the capacity allocation is
25 percent, and the ownership is 100 percent.
MR. MEYER said slide 10 broke down the cost estimates for the
project: $600 million was spent collectively over the last two
and half years on engineering optimization and project
management. The resulting procurement and construction estimate
for the entire system (GTP, pipeline, and LNG facility) is $27.9
billion. Owner's costs are on top of that, the top one being
paying the project team that oversees the large contractors that
are actually building it. The number used was $3.4 billion ($1
million/day for 9.5 years). In addition to that, FEED will cost
$764 million; insurance, staffing-up the operating organization
and getting them all trained and ready to operate, start up
costs, and others cost will cost a total of $2.1 billion
resulting in a total cost of $6.2 billion (for the owner).
Together, construction and owner's costs total $34.1 billion.
SENATOR VON IMHOF asked how slide 10 arrives at $27.9 billion
for construction costs and he will break that down in terms of
labor, materials, LNG plant, and offshoots. Does this include
the local bridges and culverts that will have to be built
throughout the system and who provided the estimate?
MR. MEYER answered this number is a result of the $600 million
work product performed by the previous team under ExxonMobil's
leadership. It includes everything, even bridges and culverts.
Some of the information drifts into confidentiality and he
wasn't showing that slide.
CHAIR GIESSEL asked him to provide that slide to her and she
would distribute it to members.
SENATOR VON IMHOF said she hopes this committee could also see
the updated 2019/20 figures that will be blessed by the
construction company that he selects.
MR. MEYER said yes.
SENATOR BISHOP asked if the $6.2 billion on page 11 was just the
cost to manage the project or did he envision including a
company like Alyeska Pipeline in this number.
MR. MEYER replied that this cost includes staffing-up the
operating organization and training them and goes through the
construction phase.
CO-CHAIR MACKINNON said the state's partners were paying 75
percent of the $600 million on the previous project and asked
for the date that accumulated through and the total-in for the
state up to now.
MR. MEYER replied that the $600 million was spent by the team
essentially through 2017.
CO-CHAIR MACKINNON said that explains some of her confusion on
the first slide; he is using a calendar year (CY) to talk about
things and she was used to looking at fiscal years (FY). She
asked if he was using FY or CY for the 2017 spend of $600
million.
10:10:39 AM
FRANK RICHARDS, Senior Vice President, Project Management,
Alaska Gasline Development Corporation (AGDC), answered AGDC
made its final payment of their portion - approximately one-
quarter of that $600 million - in January of 2017.
CO-CHAIR MACKINNON noted that AGDC's portion amounted to $150
million and asked if that includes the TransCanada buyout and
other iterations of this project and other small project costs.
MR. RICHARDS replied the $600 million was the dollar amount to
advance the AKLNG Project under the Joint Venture Agreement
(JVA). The cost of the instate natural gas pipeline (ASAP) is
separate from that. The cost of the payout to TransCanada was
also separate.
CO-CHAIR MACKINNON wanted an all-in number.
MR. RICHARDS said he will provide the total spend for the
committee.
10:12:59 AM
SENATOR COGHILL said slide 11 assumes that the state is the
owner and asked if that $6.2 billion is a bargained figure with
potential buyers and if the state is supposed to carry that
entirely.
MR. MEYER clarified that this estimate was developed under the
previous structure and much of it would have been paid to the
project manager. AGDC anticipates a new project manager (through
the construction phase) and the to the extent the state is an
owner, it would have to come up with its share. At this point
the state's share is 25 percent with 75 percent of that being
debt.
SENATOR COGHILL asked if that would be true of the construction
and the owner's costs.
MR. MEYER said yes.
SENATOR COGHILL asked if the 75 percent debt figure is $34
billion.
MR. MEYER said yes but wait; we're not to the end, yet.
SENATOR COGHILL commented that there comes a point at which the
state serves the lender and he wanted to know where that tipping
point is.
10:15:32 AM
MR. MEYER said slide 12 explained that the major cost components
were subject to a probabilistic simulation of potential risks
that resulted in a potential downside exposure to the state of
$7.7 billion (specific variability by item is confidential)
above the $34 billion. With all that stuff going wrong, the
project management team and owner's costs also increase by $1.6
billion for a total contingency of $9.3 billion over and above
the construction cost estimate.
SENATOR BISHOP said he was glad he provided the risk
contingency.
CO-CHAIR MACKINNON asked if the contingency costs would be
financed ahead of time.
MR. MEYER answered that $43.4 billion is the total number and
equity and debt sources for the entire amount will be lined up
with the understanding that the contingency might not
materialize. They are really looking at commitments to fund an
anticipated construction draw schedule and may find that all the
contingency isn't needed.
CO-CHAIR MACKINNON asked if he is running into any federal
arbitrage problems borrowing that much debt as a non-profit
entity on a portion of the financing - because the borrower's
money is going to be tied up and he will expect a rate of return
on that $9 billion that they hope won't be needed.
MR. MEYER responded that this will be a for-profit non-taxed
entity. If they were to go to the current municipal bond market
it would be strained, so he doesn't expect that it will all come
from there. They would go to a large active project debt market
for a syndicated project finance package for both the debt and
equity side. Everyone expects some contingency to be in the
number and it will be scrutinized.
10:20:59 AM
CO-CHAIR MACKINNON said she misspoke on nonprofit; it's a
government entity that is borrowing money and when Senate
Finance works with debt managers there is a rule of arbitrage
for bonding. They are audited and if they are making money on
money they are borrowing, there is a problem on the government
side of the house. She assumed the state is proposing to borrow
a large amount of money including the contingency, which is
sitting on the borrower's side of the account. The contingency
is a lot of money to be sitting on the sidelines and the state
is getting charged interest if it is sitting there on its
behalf.
MR. MEYER agreed that the contingency number is substantial and
part of why he thinks the total number is a "comfortable
number." With respect to the arbitrage rules, he does not
anticipate borrowing money at a municipal bond rate and lend it
to the project at a higher rate, which would fall into that
category. They intend to use their tax-free municipal bonding
authority to at least raise AGDC's portion of its equity and
potentially more if they want less leverage on the project
entity. Right now, they are looking at the project entity
borrowing 75 percent of the total cost of the project, which
would include this contingency, but not necessarily borrowing it
in advance.
10:23:50 AM
SENATOR MICCICHE said he appreciates the 30 percent contingency
as being a wise move. He mused that every overrun problem one
can find has occurred in Australia and probably the most
significant is the labor shortage that the Lower 48 is starting
to experience, as well, in the oil and gas and pipeline sectors.
He expects that could be a problem for this project, too. He
asked what it would take for legislators to review the variables
that went into the contingency number and to understand how much
weight was placed on a potential labor shortage.
MR. MEYER replied that he would need a signed confidentiality
agreement that just focuses on this and he encouraged everyone
to do that.
SENATOR MICCICHE asked if he had a high degree of confidence in
the labor estimate, specifically.
MR. MEYER answered yes; part of his confidence comes from the
rigor that went into the development of the contingency diagram
of major cost items.
CHAIR GIESSEL asked who did this contingency estimate.
MR. MEYER replied that it was led by the ExxonMobil management
team.
MR. RICHARDS added that the contingency work was done through
the project management team and it included inputs from all the
partners following a process that was developed by
ConocoPhillips in work efforts on other large projects that were
going on at the time. It was vetted through subject matter
experts of all those companies.
CHAIR GIESSEL asked if this kind of information ever needs to be
updated.
MR. RICHARDS answered no; they go through a very similar
analysis working towards defining the project more through
advanced engineering.
SENATOR MICCICHE commented that the "save our salmon initiative"
looms before them and the associated costs on a project of this
size with this length of interaction with wetlands would be
substantial. "Is that something that is baked into this or is
that something that has to be updated if the initiative ends up
being successful?"
MR. RICHARDS replied that the regulatory environment and the
processes that any major project must go through were
considerations and included in the contingency.
SENATOR MICCICHE asked Mr. Richards if he was saying the effects
of the salmon initiative being successful are baked into a 30-
percent contingency when every other project has been around 30
percent or higher in the last several years.
MR. RICHARDS replied he was not saying the salmon initiative,
specifically, was incorporated into this contingency, but he was
identifying that the environmental permitting risk was included.
When this estimate was developed, the salmon initiative was not
in effect.
MR. MEYER added that slide 13 is a summary of the total project
cost of $43.4 billion, and he was "reasonably" comfortable with
it. Risks could happen like earthquake, war, and new regulations
that are "tail risk events." All their numbers with respect to
customers, financing, offerings, and pricing are all based
around this $43.4 billion figure.
10:30:13 AM
SENATOR COGHILL said he heard him say the FID will be coming up
in a year or so and asked if he will use these numbers for the
loan guarantees and project engineering description.
MR. MEYER replied that FID would happen in the front half of
2019. Before that decision is made, they need to get the
estimate, contractors willing to provide a reasonable degree of
risk around the estimate, lending and equity commitments, and
customer commitments that underpin the revenues in order to
start construction in the second half of 2019 and keep on that
in-service target.
SENATOR COGHILL said he wanted to know the entanglement of the
debt for the project that hasn't been fully described yet.
10:31:49 AM
MR. MEYER said AGDC engaged Fluor to develop a "zero-based
estimate" of the project to identify where the potential savings
may exist and to adjust for inflation since the original
estimate. They identified a potential savings of about $2
billion. And, AGDC has received informal inputs from a major
contractor that they would perform the project management for
significantly less than $3.4 billion (used in the base
estimate). Those reductions are not reflected in their capital
cost number that they will use to get financing and on which to
base customer pricing.
10:32:42 AM
SENATOR VON IMHOF asked how much the Fluor contract was and what
were the savings they found. She also wanted to know who the
major contractor was who said they would manage the project for
less.
MR. MEYER answered that the major contractor didn't want to be
identified and it is an informal number; there is no commitment
or agreement. The point of the bullet was to give some
recognition that paying someone $3.4 billion to manage large
contractors for the project is a number that can probably be
reduced. It is a "comfortable" number and doesn't include $1.6
billion of contingencies thrown into the owner's cost. He added
that AGDC will not manage this whole project; they will engage a
large construction management firm.
CO-CHAIR MACKINNON said she wanted greater detail on Senator Von
Imhof's question about a major contractor: was it an Alaska
contractor or an out-of-state contractor, or an international
contractor?
MR. MEYER replied that it was an out-of-state, U.S. contractor.
Alaska does not have a contractor that could manage a project of
this size.
10:35:10 AM
MR. RICHARDS also addressed Senator Von Imhof's questions saying
AGDC engaged Fluor to conduct a zero-based execution similar to
what other large major international oil companies are now doing
as they review their internal processes of project development.
They want to make sure and have an independent review of what he
described as a belt, suspenders, Velcro, and duct tape approach
to the components of the project: the gas treatment plant (GTP)
execution, the pipeline and compressor station execution, and
the LNG plant and marine terminal execution. The third portion
of that effort is under way in Houston. This represents the
outcome of the first two levels of review of the GTP and
pipeline.
They also asked Fluor to do a strategic country sourcing review.
ExxonMobil and the project management team had a sourcing
strategy built and AGDC wanted to provide an update to make sure
they could capture what may be cost savings due to economic
conditions with large oil and gas production and offshore
developments and focused on four countries: US, Japan, Korea,
China. The goal was to look at sourcing of materials and
equipment that would be necessary for the project from raw
materials all the way through to fabrication. They found some
"good savings" available to the project that they would like to
incorporate as they advance through FEED.
CHAIR GIESSEL reminded him that Senator Von Imhof had a question
about the cost of the Fluor review.
MR. RICHARDS replied that the Fluor review cost about $300,000.
SENATOR BISHOP said that Fluor is a very reputable contractor
and had built all the pump stations in the TAPS, so they have
Arctic experience. He would be nervous if someone offered to
manage the project for less than $3.4 billion because the lower
bidder isn't always the best bidder.
SENATOR WIELECHOWSKI asked if AGDC is bound by any procurement
rules or can it sole-source work to anyone they choose.
MR. RICHARDS answered that the legislation that created AGDC as
well as the refinements in SB 138 granted them the ability to
work outside of the State of Alaska procurement code. The normal
process is to seek competitive bids, so they followed the intent
of getting good quality for the work effort by doing due
diligence and as Senator Bishop just said, working with those
reputable companies that have shown they have the experience of
developing, constructing, and working in the Arctic.
CHAIR GIESSEL underscored Senator Bishop's earlier comment that
getting a bargain basement project manager is probably not a
good idea when working in Arctic conditions on a green field
project.
10:40:18 AM
MR. MEYER said slide 15 was about their capital structure of 75
percent debt and 25 percent equity. Using the total project cost
of $43.4 billion, that breaks down into a $32 billion debt and
$11 billion equity requirement. Slide 16 had the operations and
maintenance (O&M) number of $850 million, which would increase
to about $900-plus by the time it goes into service. All those
dollars stay within Alaska.
10:41:22 AM
CO-CHAIR MACKINNON asked where he got the inflation number,
because it is lower than they have seen in places like the
Permanent Fund Corporation.
MR. MEYER replied it is just a base assumption of 2 percent
meant to mimic labor inflation, but it could be higher. They are
using $950 million for O&M.
CO-CHAIR MACKINNON pointed out that the Permanent Fund
Corporation uses an inflation number of 2.25 percent. She asked
who he thought would operate the pipeline.
MR. MEYER answered that they envision potentially an operating
company being established to operate the system for a transition
period. That team may be augmented by an outside operator
similar to way the TAPS is set up. He did not envision handing
it over to an outside company.
CO-CHAIR MACKINNON said so, the short answer would be an
umbrella corporation or operator under AGDC.
MR. MEYER replied not necessarily under AGDC but under the
project company. AGDC will be an owner of the project company
and it will not be the operator of the system. That would be a
separate operating group that would be charged with operating
the entire system and its components.
CO-CHAIR MACKINNON said the first bullet shows $365 million
opex/capex for the LNG facility, but it excludes the marine tugs
and the carrier-related costs and asked who he envisioned
picking up those costs.
MR. MEYER replied those are typically a customer cost. AGDC
would like to have discussions with some of the large customers
about providing the shipping, but AGDC would not be a shipping
company or own ships. They could be involved as a charter party,
however, but that would be a cost pass-through. The customer
picks up those downstream costs. This system ends at the jetty
and the loading flange between the facility and the ship.
CO-CHAIR MACKINNON said that is an opportunity for an outside
investor to take on and see an equity return.
MR. MEYER agreed that shipping is an opportunity.
10:46:13 AM
CO-CHAIR MACKINNON asked if the slide 17 graph compares with the
timelines of the previous project.
MR. MEYER replied this is somewhat of an accelerated timeline
but recognizing that some of the later timelines of the previous
project did not have calendar years; it used year one, year two
and year three that was triggered on an FID or FEED date. The
current schedule uses calendar years and schedules that have the
system in service in 2025/26/27/28 depending upon when FID is
taken. So, this profile fits the previous plan, but its start
date is a specific calendar year now as opposed to a year-one
occurring after an FID event.
CO-CHAIR MACKINNON said three trains were originally anticipated
in the Nikiski area and asked if all three trains come on line
at once or have a phased approach and is that different than the
previous project.
MR. MEYER replied this project assumes a simultaneous build of
all three trains, but they come on line one year apart.
Train one comes in service at third quarter 2024, train two in
third quarter 2025, and train three in third quarter 2026. That
is the original schedule, as well, and lines up with a number of
critical path items, most notably the sealifts up North.
CO-CHAIR MACKINNON asked if that phasing is built into the
financing so that Alaska starts taking gas when it starts to
monetize Alaska's gas abroad.
MR. MEYER answered yes.
SENATOR VON IMHOF said she appreciated slide 17 depicting the
draw level, because the next conversation they have is they know
how much cash outlay is needed in each year. The next thing to
obtain would be institutional investors who will "heavily
evaluate" the risks versus reward of this project and compare it
to other projects they could potentially invest in all over the
world. She wanted to see his own risk/reward evaluation and how
this project compares to others and why institutional investors
will decide to come here in 2022/23 to the tune of $9 billion.
The legislature needs to know the likelihood of being able to
attract those specific dollars and what returns they are
expecting.
10:50:49 AM
CO-CHAIR MACKINNON said Alaska already has a GTP on the North
Slope; it's just not state owned or operated. Is there a gas
treatment facility up there now for injections?
MR. MEYER responded that there is a gas conditioning facility,
but its main function is to separate gas from the oil and
liquids and then push the gas back into ground at about 8
bcf/day, more than twice what this project needs. He thought it
was the largest one in the world.
CO-CHAIR MACKINNON said she wondered if they could lease that
plant on the North Slope to defer or extend out some of the
investment up front.
MR. MEYER responded that unfortunately they are different
functions. The main function of the AKLNG "AMINE" plant would be
to remove CO2 from the gas because it solidifies when cryogenic
and clogs up the pipe. They will take gas off the existing gas
conditioning facility after the oil and liquids have been pulled
out and before it gets injected into the ground, and then
further treat that gas by removing CO2 and hydrogen sulfide.
CHAIR GIESSEL agreed with Senator Von Imhof that slide 17 is an
important slide, but in a different way. It presents an
accelerated timeline of a 2019 FID and the legislature has been
taught many times that "speed kills when managing megaprojects."
Back on slide 14, the comment was made that Fluor's estimates
were not done to a FEED level, and she wanted to know if the
project is in FEED right now and if so, why weren't those
estimates to FEED level? Some of the key requirements for a FEED
decision, are the land in Nikiski that hasn't yet been procured,
an export license that we don't have, and the financial advisor
still has not been hired by AGDC to get a second opinion on all
these numbers. She reminded members that when they cross the FID
into construction, the project will be spending $30 million a
day.
SENATOR BISHOP asked if the GTP permitting is going according to
schedule.
MR. RICHARDS answered they provided Federal Energy Regulatory
Commission (FERC) an application for a section 3 permit in April
2017, and they have asked for additional data in preparation of
a draft Environmental Impact Statement (EIS) and have yet to
publish their schedule. The work is being concluded on the ASAP
that uses the same sites for the GTP and the gas conditioning
facility as the AKLNG project. They have done the environmental
review and the boring analysis and looked at the materials for
filling. That is all going forward.
10:56:05 AM
MR. MEYER clarified that the GTP, the pipeline, and the LNG
facility are all in the one application in front of FERC now.
and that the start of the construction schedule is what they
consider aggressive as opposed to the schedule itself. Slide 17
was about the construction draw schedule and slide 18 was about
the debt draw schedule using an assumption of 20-year term at 5
percent interest. That results in a debt service payment of $3.5
billion/year. Once they go into service, that includes some
capitalized interest during construction.
The last bullet is a "debt for capacity" proposal where the
customer helps secure the debt and that is what they have
proposed to some of the larger Asian buyers. In that case, the
cost of the debt and the term is passed through to the customer.
CO-CHAIR MACKINNON asked the average cost of debt for projects
of similar size or similar industry worldwide.
MR. MEYER answered that 5 percent is on the high side of what
other projects have been able to achieve; 3-5 percent is the
range they are using.
CO-CHAIR MACKINNON asked if the slide should be modified to say
3-5 percent return, so they can try to anticipate something
lower.
MR. MEYER said what they are trying to do now is develop numbers
for their customer proposals that are all achievable and that is
why they are staying with the $43.4 billion. To the extent those
numbers can be bettered, that will improve the equity return for
the project. Right now, they are trying to balance customer,
financial markets, operating a system, and an acceptable net
back to the state. If they use "comfortable numbers" on all
those, the eventual outcome will be achievable and potentially
improved upon.
CO-CHAIR MACKINNON said she understands being conservative when
speaking in front of the legislature. She has also watched China
work inside of a market and if we have to take 5 percent for a
variety of reasons, that is one thing, but to offer it up in a
market that is not paying 5 percent on much right now is not
putting Alaska in a good bargaining position.
11:00:27 AM
Her question is: in past projects, they were looking at
financing in the U.S. and there was some federal backing of the
debt. Had they done a comparison of working with U.S. bankers or
are our eyes are on the East and that is the partnership we want
to go into - both because they need our supply and they want to
earn a rate of return.
11:01:24 AM
MR. MEYER clarified that the debt financing will be a
competitive process. They are going to engage an investment
banker to help with it and make sure it is very competitive
given the risks of the project. They are using a number that is
achievable, but he doesn't call it an offer. To the extent the
cost of the debt can be bettered, that improves the return on
the equity for the equity owner, which the state intends to be a
significant piece of.
MR. RICHARDS responded that he thought Senator MacKinnon was
referring to some of the loan guarantee language that was in the
Alaska Natural Gas Pipeline Act of 2004. At that time, the
envisioned project was the overland route that would lead from
Prudhoe Bay into Canada and ultimately to the American mid-west
markets. That statute had loan guarantees by the U.S. government
of $18 billion. It had an inflation component, as well, that
would equate to $23 billion now. AGDC has been in conversations
with the Alaska delegation about potentially working with them
on including that language in the current project. Right now,
that statute prohibits, because the project doesn't include an
instate-only LNG project. They have also had discussions with
the U.S. Import/Export Bank, a financing entity that has
previously provided low-cost funding to American projects
overseas. They are very interested and want more follow-up in
terms of the country (i.e. the U.S.) sourcing of equipment,
materials, and labor. That was part of the impetus to have the
Fluor study on best country sourcing done.
11:05:11 AM
CHAIR GIESSEL said they need to suspend this discussion on slide
18 as several members had other meetings pending. She adjourned
the Joint Senate Resources and Finance Committee meeting at
11:05 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Senate Resources - Hearing Agenda - 1 - 25 - 2018.pdf |
SRES 1/25/2018 9:00:00 AM |
AK LNG |
| Sen Res Sen Fin - Presentation by AGDC - 1 - 25 - 18.pdf |
SRES 1/25/2018 9:00:00 AM |
AK LNG |