Legislature(2015 - 2016)ANCH LIO AUDITORIUM

08/25/2016 01:00 PM RESOURCES

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
01:00:10 PM Start
01:03:22 PM Aklng Project Update: New Concept Plan for State-led Alaska Lng Pipeline
01:12:22 PM Legal Discussion of State Tax Exempt Status
02:12:53 PM Producer Partner Comments on Transition Issues
02:55:20 PM Enalytica: Nikos Tsafos
04:12:50 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Joint House & Senate Resources Committee Meeting TELECONFERENCED
AK LNG Project Update
New Concept Plan for State-led Pipeline from
Alaska Gasline Development Corporation (AGDC)
-- Testimony <Invitation Only> --
-- Teleconference <Listen Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         Anchorage LIO                                                                                        
                        August 25, 2016                                                                                         
                           1:00 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Cathy Giessel, Chair                                                                                                   
 Senator Peter Micciche - via teleconference                                                                                    
 Senator Bill Wielechowski - via teleconference                                                                                 
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Benjamin Nageak, Co-Chair                                                                                       
 Representative David Talerico, Co-Chair                                                                                        
 Representative Mike Hawker, Vice Chair - via teleconference                                                                    
 Representative Bob Herron                                                                                                      
 Representative Andy Josephson                                                                                                  
 Representative Paul Seaton                                                                                                     
 Representative Geran Tarr                                                                                                      
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Mia Costello, Vice Chair                                                                                               
 Senator John Coghill                                                                                                           
 Senator Bert Stedman                                                                                                           
 Senator Bill Stoltze                                                                                                           
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Craig Johnson                                                                                                   
 Representative Kurt Olson                                                                                                      
 Representative Mike Chenault                                                                                                   
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Mike Dunleavy                                                                                                           
Senator Anna MacKinnon                                                                                                          
Representative Dan Saddler                                                                                                      
Representative Liz Vasquez                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
NEW CONCEPT PLAN FOR STATE-LED ALASKA LNG PIPELINE:                                                                             
     Legal Discussion of State Tax-Exempt Status                                                                                
     Producer Partner Comments on Transition                                                                                    
     Comments from enalytica, Legislative Consultant                                                                            
                                                                                                                                
      - HEARD                                                                                                                   
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
See Resource Committee minutes from August 24, 2016.                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
CHARLES SCHUETZE, Attorney                                                                                                      
Manley & Brautigam                                                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented information on the possibility of                                                               
a federal tax exemption for an Alaska-owned LNG project.                                                                        
                                                                                                                                
ERIC WOHLFORTH, Attorney                                                                                                        
Jermaine, Dunnagan & Owens, P.C                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented information on the possibility of                                                               
tax-exempt financing for an Alaska-owned LNG project.                                                                           
                                                                                                                                
BILL MCMAHON, Commercial Advisor                                                                                                
ExxonMobil                                                                                                                      
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Commented on a state-led Alaska LNG project.                                                              
                                                                                                                                
DAVID VAN TUYL, Regional Manager                                                                                                
BP Alaska                                                                                                                       
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Commented on a state-led Alaska LNG project.                                                              
                                                                                                                                
DARREN MEZNARICH, Project Integration Manager                                                                                   
ConocoPhillips                                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Commented on a state-led Alaska LNG project.                                                            
                                                                                                                                
NIKOS TSAFOS, Legislative Consultant                                                                                            
enalytica                                                                                                                       
Washington, D.C.                                                                                                                
POSITION  STATEMENT:   Urged  a   careful  analysis   of  multiple                                                            
structures of AKLNG ownership, including the state-led option.                                                                  
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:00:10 PM                                                                                                                    
CHAIR CATHY  GIESSEL called  the joint meeting  of the  Senate and                                                            
House  Resources  Standing  Committees   to  order  at  1:00  p.m.                                                              
Committee  members present  at  the call  to  order were  Senators                                                              
Wielechowski,  Micciche,  and Chair  Giessel  and  Representatives                                                              
Seaton,  Herron,   Hawker,  Tarr,  Josephson,   Saddler,  Co-Chair                                                              
Talerico,  and Co-Chair  Nageak. Senators  Dunleavy and  MacKinnon                                                              
were also in attendance.                                                                                                        
                                                                                                                                
 ^AKLNG Project Update: New Concept Plan for State-Led Alaska LNG                                                           
                            Pipeline                                                                                        
AKLNG Project Update: New Concept Plan for State-Led Alaska LNG                                                             
                            Pipeline                                                                                        
                                                                                                                                
1:03:22 PM                                                                                                                    
CHAIR GIESSEL said  this is a continuation of  yesterday's meeting                                                              
about the  AKLNG [Alaska  Liquefied Natural  Gas] project  and the                                                              
AGDC [Alaska  Gasline Development  Corporation] new  concept plan.                                                              
She  noted that  there  were 170  phone  and internet  connections                                                              
during yesterday's meeting.                                                                                                     
                                                                                                                                
CHAIR GIESSEL  said that  the committee was  briefed by  Mr. Steve                                                              
Butt, project manager  for AKLNG, about the ongoing  Pre-FEED work                                                              
by the  producing partners and the  state. He emphasized  that now                                                              
is the  time to ask  questions, because there  is a spend  rate to                                                              
consider. Mr.  Butt pointed out that  early on $30 million  a year                                                              
was  spent on  the  project. It  is  now in  Pre-FEED,  and it  is                                                              
costing  $30 million  a month,  which  is divided  four ways,  she                                                              
explained.  The project  is at the  decision  point on whether  to                                                              
move into  the next  stage, which  will cost  $30 million  a week.                                                              
The state  is proposing  going it  alone. The actual  construction                                                              
will be  $30 million a  day, so this  is not a small  undertaking,                                                              
thus  the reason  for  these  frequent meetings.  The  consultants                                                              
from Wood Mackenzie  (WM) said the project has one  of the highest                                                              
costs in  the world and suggested  that AGDC could lower  costs by                                                              
getting a third  party to take on  the debt and the  risk, as well                                                              
as  accepting a  lower rate  of return.  The consultant  suggested                                                              
that  state ownership  could  possibly allow  for  a federal  tax-                                                              
exemption, and it  could remove all state taxes  from the project.                                                              
She quoted from  the WM presentation yesterday:  "Even the removal                                                              
of all  taxes on  pipeline and  plants is  insufficient to  reduce                                                              
the cost of supply below the current level of LNG prices."                                                                      
                                                                                                                                
CHAIR GIESSEL  said that the committee  then heard from  AGDC, and                                                              
they  have ideas  about seeking  funding  from foreign  utilities,                                                              
pension funds,  and other investors  who would be willing  to take                                                              
on the risk and  take a lower rate of return.  The AGDC is opening                                                              
an office  in Houston,  Texas, to  market the  project. She  noted                                                              
that committee members  had multiple questions, and  there was not                                                              
enough  time to  answer  them all.  She noted  a  document on  the                                                              
website  dated   August  23  containing   the  answers   to  eight                                                              
questions  to AGDC.  She will forward  more questions  to  AGDC as                                                              
they come in.                                                                                                                   
                                                                                                                                
1:06:36 PM                                                                                                                    
CHAIR  GIESSEL  noted  that  AGDC  said they  plan  to  solicit  a                                                              
project management  contractor (PMC) to  have on board by  the end                                                              
of 2016. The AGDC  also said, "We will develop  cost estimates for                                                              
the PMC  in future phases  of the projects."  She referred  to the                                                              
Lummus  Report, which  was contracted  by  the administration  but                                                              
not yet seen  by the committee. Former DNR [Department  of Natural                                                              
Resources]   Deputy  Commissioner   Marty  Rutherford   previously                                                              
referred  to  the  Lummus  Consultants  International,  which  was                                                              
contracted to  opine on the feasibility  and economics of  the gas                                                              
pipeline project.  The report was  supposed to be  completed eight                                                              
months ago.  Last Friday,  Chair Giessel  renewed the  request for                                                              
access to  that report,  and yesterday  DNR Commissioner  designee                                                              
Andy Mack responded  by sending a letter to Lummus  asking them to                                                              
complete  the  revisions  to  its   report  as  requested  by  the                                                              
administration.  "I appreciate  Mr. Mack's  attention to  this and                                                              
look forward to seeing that final work product," she said.                                                                      
                                                                                                                                
1:08:26 PM                                                                                                                    
CHAIR  GIESSEL said  this meeting  will begin  with two law  firms                                                              
that were asked  about the state's use of a federal  tax exemption                                                              
that  could  potentially reduce  the  cost  of  supply for  a  gas                                                              
pipeline   project.  She   noted   that  she   went  through   the                                                              
Legislative Budget  and Audit Committee chaired  by Representative                                                              
Hawker to secure the services of the two firms.                                                                                 
                                                                                                                                
1:09:07 PM                                                                                                                    
REPRESENTATIVE  HAWKER said  the administration  introduced  a new                                                              
direction a month  ago, which differs from SB 138.  He said he got                                                              
the impression  that the administration  "had a sure  thing-a very                                                              
distinct  process forward."  It was  determined there  was not  an                                                              
issue of  seeing the  concept document,  and once legislators  saw                                                              
the document,  it raised past  concerns regarding "the  tax status                                                              
of  both  AGDC and  whether  or  not  we could  see  a  tax-exempt                                                              
project under  that proposed  concept document."  To get  prepared                                                              
for this  meeting,  he approached  these two  law firms, and  both                                                              
have extensive  history  with tax  status in  Alaska and are  very                                                              
familiar with these  issues. He heard yesterday that  the board of                                                              
directors  is  considering  different options,  so,  although  the                                                              
gentlemen before  the committee  have done  an outstanding  job of                                                              
analyzing  the taxability  of projects  like this,  he expects  to                                                              
see  things  evolve  as  the  administration  provides  additional                                                              
specificity.                                                                                                                    
                                                                                                                                
^Legal discussion of State Tax Exempt Status                                                                                    
          Legal discussion of State Tax Exempt Status                                                                         
                                                                                                                                
1:12:22 PM                                                                                                                    
CHARLES SCHUETZE,  Attorney, Manley  & Brautigam, Anchorage,  said                                                              
he has been  asked about the  federal income tax issues  raised by                                                              
the concept  document and the Heads  of Agreement for  a potential                                                              
company  formed by  the  AGDC to  own,  develop,  and operate  the                                                              
AKLNG  project.  There  are  three  primary  ways  to  get  a  tax                                                              
exemption for  an entity that  the state  would own. One  would be                                                              
if the entity  were to qualify  as a political subdivision  of the                                                              
state.  Under  case  law  that   has  existed  for  "quite  a  few                                                              
decades,"  the   entity  is  required   to  have   been  conferred                                                              
sovereign powers.  (This is called  the Shamberg Rule).  That case                                                              
dealt  with  the  Port  of New  York  Authority,  and  the  Second                                                              
Circuit held  that [the Authority]  had two sovereign  powers: the                                                              
power of  eminent domain and certain  police powers. He  said AGDC                                                              
has been  granted those powers, so  it would appear to  qualify as                                                              
a political subdivision.                                                                                                        
                                                                                                                                
MR. SCHUETZE  said that  the [Internal  Revenue Service  (IRS)] is                                                              
starting  to be  concerned about  political  subdivisions for  the                                                              
purpose  of tax-exempt  bonds under  Sec. 103.  In February  2016,                                                              
the  IRS issued  proposed regulations  defining  what a  political                                                              
subdivision  would  be  for  that   purpose.  He  noted  that  the                                                              
regulations  are not  final,  but they  give  an idea  of how  the                                                              
government  might look  at a  private letter  ruling request.  The                                                              
proposed  regulations would  add a  new subsection  to say  that a                                                              
political  subdivision  for  purposes  of Sec.  103  requires  the                                                              
entity to  not only have  one or more  sovereign powers,  it would                                                              
also have  to have  a governmental  purpose and be  governmentally                                                              
controlled,  and it  involves  showing that  there  is no  private                                                              
benefit,  he  added. That  could  pertain  to some  options  being                                                              
proposed for owning  an interest in an LNG project.  The other way                                                              
an entity  can be treated  as tax exempt is  if it is  an integral                                                              
part of  the state, and  that generally  means that the  entity is                                                              
wholly  owned by  the state  under [26  CFR] 301.7701-1(a)(3).  He                                                              
said that regulation can be relied on as authority.                                                                             
                                                                                                                                
1:16:41 PM                                                                                                                    
MR.  SCHUETZE  said that  private  letter  rulings  tend to  go  a                                                              
little further  to see  if there is  sufficient state  control and                                                              
whether  the state  has made a  financial commitment  to fund  the                                                              
entity. Both  have been established  for AGDC, but "it  is another                                                              
question as to  other planning options." Finally,  an entity could                                                              
qualify for  tax exemptions under  Section 115(1) of the  IRS code                                                              
if  the  income   is  derived  from  any   essential  governmental                                                              
function  and  accrues  to  the  state or  any  of  its  political                                                              
subdivisions.  For ruling  purposes, he  said, the  IRS also  asks                                                              
for  confirmation  that  private  interests  will  not  materially                                                              
benefit.                                                                                                                        
                                                                                                                                
MR. SCHUETZE  said the  AGDC concept  document raises  certain tax                                                              
issues  of  its  own.  It states  that  AGDC  would  organize  the                                                              
company  that would  own, commercialize,  finance, design,  build,                                                              
and operate  the project. It does  not state what kind  of company                                                              
AGDC would  organize to own  and operate that project.  Currently,                                                              
AS 31.25.120  empowers it to  form subsidiary corporations  for an                                                              
LNG  project.  If an  entity  is  going  to  own and  operate  the                                                              
project, it is  probably not going to be a  corporation. Typically                                                              
oil and gas  development ventures in  the US are organized  as tax                                                              
partnerships  or  maybe co-tenancies  in  order to  provide  flow-                                                              
through tax treatment  to the owners of all the  tax attributes of                                                              
the venture.  They don't have to  be organized that way,  he said,                                                              
but they  tend to because the  investors usually want  the benefit                                                              
of the tax deductions that are thrown off by the venture.                                                                       
                                                                                                                                
1:18:58 PM                                                                                                                    
MR. SCHUETZE said  it is likely that AGDC would  be thinking about                                                              
if  it owns  an  interest in  the  LNG project,  it  would own  it                                                              
through a subsidiary  corporation. If it is wholly  owned, then it                                                              
would likely be  tax exempt to the state, but the  actual interest                                                              
in the  operating entity  itself would be  something other  than a                                                              
corporation.                                                                                                                    
                                                                                                                                
1:20:28 PM                                                                                                                    
MR.  SCHUETZE said  applying  the test  of  whether the  operating                                                              
entity would be  a political subdivision and if  there is interest                                                              
in  getting a  private letter  ruling, which  most investors  will                                                              
want, then  it will be  important to look  at the IRS  position on                                                              
issuing private  letter rulings.  The proposed  regulation  by the                                                              
Treasury says that  a tax exempt political subdivision  would need                                                              
sovereign powers as  well as a governmental purpose,  and it would                                                              
need  to  be  governmentally  controlled.  The  organization  that                                                              
would own,  develop, and operate the  project may be able  to show                                                              
that it  has public  purposes-the statute  tries to address  that,                                                              
he said.  It would  hopefully be  able to  show that it  exercises                                                              
its powers for  the benefit of Alaskans: for  their well-being and                                                              
prosperity and  for the improvement  of their social  and economic                                                              
conditions. However,  it will be  harder to show that  the project                                                              
does  not  provide  more  than   an  incidental  private  benefit,                                                              
considering AGDC  may have  one or more  third parties  as owners.                                                              
The document talks  about producer parties, he  said. The proposed                                                              
regulation also requires  that a state or local  governmental unit                                                              
exercise control  over the organization. Control is  defined as an                                                              
ongoing  right  or power  to  direct  significant actions  of  the                                                              
entity, including  the right or power  to elect a majority  of the                                                              
governing body  of the entity  in periodic elections.  The concept                                                              
document states that  one or more of the producer  parties will be                                                              
invited to  become members of  the organization that  operates the                                                              
project.  Control will  become much  harder to  establish at  that                                                              
point, he said.  For example, the document states  that the annual                                                              
work  program  budget  has  to  be  unanimously  approved  by  the                                                              
parties each  year, which gives all  a veto over work  program and                                                              
budget.  It is  not something  that the  State of  Alaska will  be                                                              
controlling indirectly or directly.                                                                                             
                                                                                                                                
REPRESENTATIVE VASQUEZ joined the committee.                                                                                    
                                                                                                                                
1:24:04 PM                                                                                                                    
MR. SCHUETZE said  the concept document does not  assure that AGDC                                                              
would control  the organization, as  it provides for  a management                                                              
committee, and  if each member  pays its  fair share of  the fees,                                                              
each would  be able to participate  on the committee.  Section 5.4                                                              
requires that the  organization that owns, develops,  and operates                                                              
the project  shall  conduct all  operations. It  does not  say the                                                              
state  controls   the  project  through  AGDC.   Conceivably,  the                                                              
operating entity  might try to be  treated as an integral  part of                                                              
the  state. Favorable  private letter  rulings from  the past  ask                                                              
for sufficient  state control over  the entity and that  the state                                                              
has made  a financial  commitment  to fund the  entity. The  state                                                              
may  be able  to show  it  has made  a  financial commitment,  but                                                              
under  the concept  document,  state control  over  the entity  is                                                              
uncertain.  Mr.  Schuetze  turned  to the  option  of  the  entity                                                              
becoming tax  exempt under Section 115  of the IRS code,  and that                                                              
requires that private  interests do not materially  participate in                                                              
the organization  and do not benefit more than  incidentally. This                                                              
comes from  Revenue Ruling 90-74,  which the IRS  frequently cites                                                              
when  it  issues  rulings under  Section  115.  Additionally,  the                                                              
entity must be exercising an essential governmental function.                                                                   
                                                                                                                                
1:26:37 PM                                                                                                                    
MR.  SCHUETZE  concluded  that  unless  AGDC  or  a  wholly  owned                                                              
subsidiary  owns the entire  project for  the project's  lifetime,                                                              
the  operating entity  will likely  be subject  to federal  income                                                              
tax. If  AGDC or  its wholly  owned subsidiary  qualify for  a tax                                                              
exemption either  as a political subdivision, as  an integral part                                                              
of the  state, or under  Section 115, the  interest itself  of the                                                              
state indirectly  through AGDC may  be exempt from  federal income                                                              
taxation. He said  there is an issue as to whether  the government                                                              
would be willing  to issue a ruling under Section  115 on that. If                                                              
the ruling  request were  only under 115(2),  it may  be possible,                                                              
but  it depends  how the  IRS is  going to  assert its  non-ruling                                                              
position,  because this  year, in  Revenue  Procedure 2016-3,  the                                                              
government  indicated  that  it  would  decline  to  issue  a  tax                                                              
exemption  ruling  in a  situation  where  less  than all  of  the                                                              
income from  an entity  is being  earned by  a subdivision  of the                                                              
government.                                                                                                                     
                                                                                                                                
1:28:21 PM                                                                                                                    
MR. SCHUETZE  added that  if AGDC or  its wholly owned  subsidiary                                                              
own a  discreet portion  of the  project for  the lifetime  of the                                                              
project, it appears  that that discrete portion  could qualify, as                                                              
long as the standards  are met. That would likely  leave the other                                                              
parts of the project subject to federal income taxation.                                                                        
                                                                                                                                
CHAIR GIESSEL  asked him to explain  a private letter  ruling, its                                                              
importance, how long it might take, and any associated costs.                                                                   
                                                                                                                                
MR.   SCHUETZE   answered   that  private   letter   rulings   are                                                              
administrative  grace from  the [US Department  of] Treasury.  The                                                              
rulings are  issued on  specific transactions  where the  taxpayer                                                              
asks to be  treated as having specific tax  characteristics. These                                                              
cannot be  hypothetical, there  has to  be a specific  transaction                                                              
that  has been  negotiated  and is  presented  to the  government.                                                              
There is  a $28,300  fee for a  ruling like this.  If a  ruling is                                                              
substantially  identical to another,  the cost  is $2,700  for the                                                              
added one.  He gave the example  of AGDC, the state, and  a wholly                                                              
owned subsidiary all asking for the same ruling.                                                                                
                                                                                                                                
1:31:04 PM                                                                                                                    
MR. SCHUETZE  added that attorneys  will charge for  preparing the                                                              
ruling  request. The  IRS can revoke  a private  letter ruling  if                                                              
facts were  misrepresented or  if the  government made  a mistake,                                                              
but that  is not  common. Generally,  it  is the  only way to  get                                                              
certainty,  and   it  is  often  required  as   part  of  business                                                              
transactions when a major commitment is being made, he said.                                                                    
                                                                                                                                
1:32:04 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  asked if  the three  contingencies  are                                                              
disjunctive tests or if AGDC must pass through every hurdle.                                                                    
                                                                                                                                
MR. SCHUETZE said they are disjunctive.                                                                                         
                                                                                                                                
REPRESENTATIVE  JOSEPHSON suggested  that Mr.  Schuetze would  not                                                              
advise that  AGDC police  powers be  weakened. "If anything,  they                                                              
need to be robust and strong." Is that true?                                                                                    
                                                                                                                                
MR. SCHUETZE agreed.                                                                                                            
                                                                                                                                
1:33:29 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  said it seems  as if Mr.  Schuetze comes                                                              
close to  recommending that Title 31  be amended to make  it clear                                                              
that there was less separation between AGDC and the state.                                                                      
                                                                                                                                
MR. SCHUETZE  noted that the state  has a lot of issues,  and many                                                              
are not tax related,  including whether the state  would be liable                                                              
for the  operations  of AGDC. The  Shamberg test  is satisfied  if                                                              
there is  substantial sovereign  powers, he  said. The  next thing                                                              
to  look at  is the  ruling position  of the  IRS as  well as  the                                                              
proposed  regulations where  the IRS would  consider whether  AGDC                                                              
has governmental  control and a  governmental purpose.  That would                                                              
be the  primary focus,  he said. To  show a political  subdivision                                                              
and get  a ruling,  Alaska would  have to  look very carefully  at                                                              
the proposed regulation.                                                                                                        
                                                                                                                                
1:35:50 PM                                                                                                                    
REPRESENTATIVE   JOSEPHSON  referred   to  other  partners,   like                                                              
ConocoPhillips  and  BP,  and asked  if  those  complications  are                                                              
dispensed with  if the sovereign  immunity provision  is overcome.                                                              
"We don't need to  worry about the second and third  parts of your                                                              
memorandum?"  If  the tests  are  disjunctive,  and if  the  state                                                              
could get a ruling  relative to the question  of implied statutory                                                              
immunity, then would the tax exemption be enjoyed?                                                                              
                                                                                                                                
MR.  SCHUETZE said  the question  is if  AGDC would  get a  ruling                                                              
under implied  statutory immunity.  For instance, when  the Alaska                                                              
Gasline  Port Authority  applied  for a  ruling in  1999 based  on                                                              
being  a political  subdivision, the  IRS issued  a ruling  saying                                                              
that they  would be  tax exempt  based on  the representations  in                                                              
the request, but  it was not under being a  political subdivision.                                                              
The IRS  said it was  for purposes of  Section 103. He  added, "So                                                              
the  very fact  that you  ask  for a  ruling  … does  not, by  any                                                              
means,  guarantee  you'll get  that  ruling from  the  government.                                                              
They may grant  you a ruling that  says that the entity  is exempt                                                              
from federal taxation, but it may be for another reason."                                                                       
                                                                                                                                
1:38:19 PM                                                                                                                    
REPRESENTATIVE  SADDLER  said Mr.  Schuetze  gave several  reasons                                                              
how the  state could  get a  tax exemption  for this project,  and                                                              
they are very  complicated. One thing that piqued  his interest is                                                              
that the  AKLNG project  must remain wholly  state owned  in order                                                              
to be  tax exempt. One  of the precepts  for these types  of mega-                                                              
projects is  that financing  is aided by  carving out  and selling                                                              
elements of it,  which is a way  to help pay some costs  and share                                                              
the risk. If  the status of the  LNG project changed such  that it                                                              
did  not  enjoy  a  federal  tax   exemption,  would  there  be  a                                                              
retroactive penalty from the beginning?                                                                                         
                                                                                                                                
MR.  SCHUETZE asked  if Representative  Saddler  is talking  about                                                              
getting a ruling first.                                                                                                         
                                                                                                                                
REPRESENTATIVE  SADDLER  said  he  does not  know  the  regulatory                                                              
process but  assumes it would be  getting a private  letter ruling                                                              
first.  To retain the  status, Mr.  Schuetze  made the point  that                                                              
the project had to remain wholly owned.                                                                                         
                                                                                                                                
MR.  SCHUETZE  reworded  Representative  Saddler's  scenario:  The                                                              
state starts  out owning, directly  or indirectly, the  entire LNG                                                              
project,  and at  some point  in the future,  as  laid out in  the                                                              
plan, the state  will sell off parts of the venture.  Mr. Schuetze                                                              
said  he  suspects  that  the government  would  view  that  as  a                                                              
negative  factor  in considering  its  ruling.  Revenue  Procedure                                                              
2016-3 states  that the  government would  not rule under  Section                                                              
115 as to  whether some but not  all of the income from  an entity                                                              
is from exercising  an essential governmental function.  "They may                                                              
think that that  applies to this example that you  gave." There is                                                              
a vaguer statement  in that procedure, he said,  about not issuing                                                              
rulings  where the  project  is designed  primarily  to avoid  the                                                              
tax. He noted  that all business transactions try  to limit taxes,                                                              
so this is in  the eye of the beholder, but  it indicates possible                                                              
skepticism   in   granting   a   favorable   ruling   under   that                                                              
circumstance.  He stated  that there  is no way  of knowing  until                                                              
the facts are presented to the government.                                                                                      
                                                                                                                                
REPRESENTATIVE  SADDLER  asked Mr.  Schuetze  to characterize  how                                                              
difficult it  is to obtain  a private ruling.  Also, is  an entity                                                              
locked into the terms presented in the ruling request?                                                                          
                                                                                                                                
1:42:27 PM                                                                                                                    
MR. SCHUETZE explained  that every private letter  ruling is based                                                              
upon the  representations of the  requestor. If things  materially                                                              
change, a second ruling could be requested.                                                                                     
                                                                                                                                
REPRESENTATIVE SADDLER  asked how durable and reliable  the ruling                                                              
would be for the life of the project.                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON  asked  about  the  definition  of  private                                                              
benefit and if it  only applies to ownership and  not to investors                                                              
or things like shipping commitments.                                                                                            
                                                                                                                                
MR.  SCHUETZE  said it  refers  to  "no  more than  an  incidental                                                              
private  benefit. It's  really  quite wide  open."  They are  just                                                              
looking at  whether distinct, private  parties, as opposed  to the                                                              
population  as a whole,  might have  some particular benefit  from                                                              
the project, he explained.                                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON  said if the North Slope  producers are able                                                              
to monetize their gas, will that be a private benefit?                                                                          
                                                                                                                                
MR. SCHUETZE  stated that  if it  is a  matter of Alaska,  through                                                              
AGDC, investing in  a project to make money for the  state, it may                                                              
be satisfactory.  Everyone who lives in Alaska  would benefit from                                                              
the state generating  more revenue. But, if it is  an entity where                                                              
the state  owns an interest and  there are private  parties owning                                                              
interest,  "then it  becomes a  very  real concern  that there  is                                                              
more than  an incidental benefit-if  you're talking about  the tax                                                              
status of that entity, itself, that's operating the venture."                                                                   
                                                                                                                                
1:45:45 PM                                                                                                                    
REPRESENTATIVE  SEATON surmised  that it is  the ownership  of the                                                              
pipeline and  the money  generated from  it and the  liquefaction,                                                              
and not that  Alaska has 25 percent  of the gas and  three or four                                                              
other parties have  the rest of the gas. He questioned  if private                                                              
entities shipping  their gas down  through the pipeline  would not                                                              
influence the tax  exempt status for the state if  it owned all of                                                              
the pipeline, and  if producers monetizing their gas  would not be                                                              
considered  a  private  benefit.  Getting the  answer  in  writing                                                              
would  be   fine,  but  if   monetizing  the  producers'   gas  is                                                              
considered a private benefit on this project, that is key.                                                                      
                                                                                                                                
1:46:33 PM                                                                                                                    
CHAIR GIESSEL said  the witness is not the IRS  and cannot provide                                                              
a  ruling.  As  professionals,  the attorneys  are  not  going  to                                                              
mislead the committee. She introduced the next witness.                                                                         
                                                                                                                                
1:47:37 PM                                                                                                                    
ERIC  WOHLFORTH,  Attorney,  Jermaine,   Dunnagan  &  Owens,  P.C,                                                              
Anchorage, said he  has practiced public finance law  for "so long                                                              
you  wouldn't believe  it-it's actually  60 years  this year."  He                                                              
said he  was asked about tax-exempt  financing where  the interest                                                              
is  exempt from  federal income  taxes.  As currently  configured,                                                              
tax-exempt  financing of the  gas pipeline  is not possible  under                                                              
general  tax  law.  With  the  use   of  the  line  by  the  three                                                              
producers, the  interest on  Alaska or AGDC  bonds to  finance the                                                              
project could  not be  exempt, he explained.  Bonds issued  by the                                                              
Alaska  Railroad Corporation  (ARRC) under  special permission  in                                                              
the  Federal Railroad  Transfer Act  may possibly  be tax  exempt.                                                              
Obligations  issued  by  the  state  would  be  "private  activity                                                              
bonds,"  and under  Section 103  of the tax  code, the  tax-exempt                                                              
interest  exclusion does  apply.  Section 141(b)  sets up  private                                                              
business tests  to define "private  activity bond" and  is defined                                                              
under  "private business  tests," which  are twofold:  One is  the                                                              
"private  business  use  test,"  and the  other  is  the  "private                                                              
security or  payment test." He explained  that both tests  must be                                                              
passed for the exemption.                                                                                                       
                                                                                                                                
1:50:27 PM                                                                                                                    
MR. WOHLFORTH  said  the private  business use  test is passed  if                                                              
more than 10  percent of the proceeds  of the issue is  to be used                                                              
for  private business.  An  issue meets  the  private security  or                                                              
payment test if  the payment of principal or  interest is directly                                                              
or  indirectly secured  by or  payable from  property or  payments                                                              
used for  a private business  use. For  this project, an  issue of                                                              
Alaska  or AGDC  bonds might  finance  the entire  pipeline to  be                                                              
used  by the  state  for  its share  of  royalty  gas  and by  the                                                              
producers  for their  share. Producers  using over  10 percent  of                                                              
the pipeline capacity  meets the private use test,  which denies a                                                              
tax exemption.  Likewise, payments for  such use by  the producers                                                              
would meet the security or payment test.                                                                                        
                                                                                                                                
1:51:32 PM                                                                                                                    
MR. WOHLFORTH  said one might ask  why $1.4 billion of  bonds were                                                              
financed on  a tax-exempt  basis for the  TAPS marine  terminal in                                                              
the 1970s. At  the time, he explained, they were  qualified bonds,                                                              
and they  are called  exempt facility bonds.  In 1977,  those were                                                              
facilities for  providing local  energy or gas. Additionally,  the                                                              
docks  and  wharves  were  a  permitted   purpose  for  tax-exempt                                                              
financing even  though privately  owned. That exemption  went away                                                              
with the Tax Reform Act of 1986.                                                                                                
                                                                                                                                
1:52:52 PM                                                                                                                    
MR. WOHLFORTH  said the federal  transfer legislation  endowed the                                                              
railroad  with unique  tax provisions  unencumbered  by the  above                                                              
restrictions.  Recognizing   this,  the  state  gave   ARRC  state                                                              
financing  authority  of  gas pipelines  in  2003.  However,  tax-                                                              
exempt financing  for this purpose  would likely require  a ruling                                                              
by the  IRS, and it  would be very  difficult, if not  impossible,                                                              
to obtain  such a ruling. The  IRS has been dedicated  to limiting                                                              
tax-exempt  financing.   According  to  the   Congressional  Joint                                                              
Committee on  Taxation, the tax-exempt  bond subsidy  is generally                                                              
considered  to be inefficient,  because the  forgone tax  revenues                                                              
often  exceed  the  value  of  the  subsidy  to  the  governmental                                                              
issuers, "even though,  in our estimation, it may  be essential to                                                              
the vitality and  continuance of state and local  governments." He                                                              
said,  "In  our view,  both  the  intent  and  the letter  of  the                                                              
authorizing  state law  and that  project must  be congruent  with                                                              
federal tax  law, regulations, and  rulings for a  positive ruling                                                              
result."  Rulings  are  typically  given  only  when  there  is  a                                                              
measure  of  certainty  on financing  arrangements.  Every  ruling                                                              
request must contain  a full description of all  facts relevant to                                                              
the transaction.  The IRS is  not bound by  a ruling if  there are                                                              
undisclosed  facts, and any  substantial  change in the  financing                                                              
arrangement  jeopardizes  the  exemption.   He  explained  that  a                                                              
ruling request  for such  a large and  complex project  would take                                                              
time to  prepare, and the  IRS response may  take a year  or more.                                                              
He  opined  that  there  is "only  a  possibility"  that  the  IRS                                                              
response would be positive.                                                                                                     
                                                                                                                                
1:55:44 PM                                                                                                                    
MR. WOHLFORTH  said attorneys have  been working on the  ARRC tax-                                                              
exempt financing  issue since  the transfer  legislation  in 1982.                                                              
It  is  possible  that congressional  intent  was  to  give  broad                                                              
authority to  the ARRC.  The transfer  legislation states  that it                                                              
is  "intended  to   confer  upon  the  state-owned   railroad  all                                                              
business   opportunities   available  to   comparable   railroads,                                                              
including  contract  rate  agreements…."   Historically,  railroad                                                              
holding companies  have financed  and operated both  railroads and                                                              
pipelines.  He  said  the  problem   is  that  when  the  railroad                                                              
received  tax-exempt   financing  permission,  it   was  simply  a                                                              
railroad.  Other railroad  holding  companies operated  pipelines,                                                              
but the ARRC  was neither a holding  company nor did it  operate a                                                              
pipeline  at that  time,  and  the IRS  could  cite  this fact  in                                                              
ascertaining the intent  of Congress. "In our opinion,  the IRS is                                                              
ultimately unlikely  to find authority  for a very  large pipeline                                                              
financing to have been within the ambit of this language."                                                                      
                                                                                                                                
1:59:14 PM                                                                                                                    
CHAIR GIESSEL  said [the committee]  hears a lot about  using ARRC                                                              
bonding authority.                                                                                                              
                                                                                                                                
1:59:39 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON put forth  that there  is no  doubt that                                                              
the state  and the  industry would benefit  from a tax  exemption.                                                              
(Mr. Wohlforth agreed.)  Regarding the use of  ARRC bonding, "what                                                              
do you  think about  the other memorandum  from Mr.  Schuetze that                                                              
discusses  the implied  statutory  immunity?" Is  that a  separate                                                              
argument that could stand on its own and could be effective?                                                                    
                                                                                                                                
2:00:40 PM                                                                                                                    
MR. WOHLFORTH said  the law to issue tax-exempt bonds  and the law                                                              
regarding  other  tax  exemptions   have  some  commonality,  but,                                                              
essentially,  the project  either qualifies  under Section  103 or                                                              
there is  specific permission under  the railroad  legislation. He                                                              
said he  is not referring  to the tax  exemption of the  income as                                                              
Mr. Schuetze presented;  "I'm talking solely about  whether or not                                                              
interest on  bonds could  be tax exempt."  Some comments  apply to                                                              
both,  he  said,  particularly   if  a  tax-exempt  deal  suddenly                                                              
changes character. Bonds  may have to be called at  that point and                                                              
can be a huge financial event.                                                                                                  
                                                                                                                                
REPRESENTATIVE  HAWKER asked Mr.  Schuetze if  he would  reach the                                                              
same conclusions  if project owners  with the State of  Alaska are                                                              
institutional investors and are not the producer parties.                                                                       
                                                                                                                                
MR.  SCHUETZE  said  his  memo  would  pertain  to  other  private                                                              
backers as well.                                                                                                                
                                                                                                                                
REPRESENTATIVE SADDLER  asked if it would be futile  to apply [for                                                              
a ruling] based on the ARRC bond authority.                                                                                     
                                                                                                                                
MR.  WOHLFORTH said  there  is always  a  possibility,  but he  is                                                              
providing his  best judgement. Other  bond attorneys might  have a                                                              
more positive outlook, he said.                                                                                                 
                                                                                                                                
REPRESENTATIVE SADDLER  asked how much  it would cost to  make the                                                              
application to the IRS.                                                                                                         
                                                                                                                                
MR. WOHLFORTH  said the real money  goes to the  attorneys. "We're                                                              
talking  in   the  nature  of   $100,000  plus,  and   maybe  even                                                              
$200,000."                                                                                                                      
                                                                                                                                
2:04:51 PM                                                                                                                    
SENATOR MACKINNON  thanked Mr. Wohlforth for participating  as co-                                                              
chair  on a  fiscal  policy  subcommittee  "some years  ago."  She                                                              
said,  "It  seems  like our  worst  fears  during  that  committee                                                              
process  as we served  together  have come true  for Alaska."  She                                                              
noted  that   Mr.  Schuetze   said  AGPA   [Alaska  Gasline   Port                                                              
Authority] had received a private letter.                                                                                       
                                                                                                                                
MR. SCHUETZE said the number is "2000 20001708."                                                                                
                                                                                                                                
MR. WOHLFORTH  said it is  not to be  relied on as  precedent, but                                                              
everybody does anyway.                                                                                                          
                                                                                                                                
SENATOR MACKINNON  said she  asked because  the governor  believes                                                              
that  there is  hope  in the  AGPA proposal,  and  the letter  may                                                              
still be  relevant. She  said she has  heard the soundbite:  "It's                                                              
our  oil. It's  our gas."  She said  she was  smiling during  this                                                              
conversation, because  the state will be penalized  for not taking                                                              
its  oil through  the pipeline,  because "the  premise of  getting                                                              
our fair  share that has  been argued,  at least, in  the previous                                                              
election  cycle,  was  that  it's our  oil."  This  legal  opinion                                                              
today, however,  is that state cannot  get a tax exemption  on the                                                              
state's oil  or gas, because a  private entity might  benefit more                                                              
than 10 percent  or get more  than an incidental benefit  "when we                                                              
can't  monetize our  gas and  our oil  for the  people of  Alaska,                                                              
because  someone  else has  purchased  a  lease  space to  try  to                                                              
remove our gas or our oil."                                                                                                     
                                                                                                                                
MR. WOHLFORTH  said he does  not exclude the possibility-and  only                                                              
a possibility-that  there could  be a tax  exemption of  a portion                                                              
of the line that equals the state's 25 percent share.                                                                           
                                                                                                                                
SENATOR MACKINNON asked  if the state could take a  segment of the                                                              
project to make  it more cost effective. The  state was originally                                                              
partnered with  TransCanada, "and we  stepped up and said  we were                                                              
going  to take  a greater  share of  the pipeline."  She said  she                                                              
supported that because  the pipeline is the backbone  with a solid                                                              
8 percent  rate of return,  so it seemed  fairly secure  that once                                                              
there  was a gas  commitment and  shippers, the  people of  Alaska                                                              
would benefit  from an 8 percent  rate of return  through tolling.                                                              
"Is  there  a  component  of  the  pipeline  that  would  be  more                                                              
advantageous or easier to get a tax-exempt portion on?"                                                                         
                                                                                                                                
MR.  WOHLFORTH said  he  has not  considered  that question,  "but                                                              
that would be something to look at."                                                                                            
                                                                                                                                
CHAIR  GIESSEL  announced  that  the Legislative  and  Budget  and                                                              
Audit  Committee  has a  copy  of  the  AGPA application  for  the                                                              
private letter ruling, and she will put it online.                                                                              
                                                                                                                                
2:10:55 PM                                                                                                                    
REPRESENTATIVE  TARR noted  that yesterday  Mr. Meyer put  forward                                                              
the idea of  having one entity own  the pipeline, one  own the GTP                                                              
[gas  treatment plant],  and one  own  the liquefaction  facility,                                                              
but  it   sounds  like  Mr.  Schuetze   is  saying  there   is  no                                                              
possibility  for  tax exemption  unless  each  is a  wholly  owned                                                              
state entity.  "If the  state is  one of the  owners, and  each of                                                              
those individual  units has  other private  investment, it  sounds                                                              
like what you're  saying is none of them, then,  would be eligible                                                              
for the tax-exempt status."                                                                                                     
                                                                                                                                
MR. SCHUETZE  said yes. "Those  individual operating  entities for                                                              
each part, I would  expect that those would be  taxable if private                                                              
parties were  members of  them." There  is still  the issue  of if                                                              
the income  that flows  through  the state is  exempt from  income                                                              
tax.                                                                                                                            
                                                                                                                                
^Producer Partner Comments on Transition Issues                                                                             
         Producer Partner Comments on Transition Issues                                                                       
                                                                                                                                
2:12:53 PM                                                                                                                    
BILL MCMAHON, Commercial  Advisor, ExxonMobil, Anchorage,  said he                                                              
has 34  years with  ExxonMobil, and during  his last  testimony in                                                              
June, he  discussed the misalignment  that was developing  between                                                              
the state  and the  producer parties  on entering FEED  [front-end                                                              
engineering and  design] in 2017. The administration  was pressing                                                              
for certain  agreements to be in  place by the end of  the regular                                                              
session without  including a fiscal agreement, which  is necessary                                                              
for  entering FEED.  Two  concepts to  progress  the project  were                                                              
then presented,  he said. The first  was transitioning to  a state                                                              
LNG project,  so that  AGDC could  enter FEED  in 2017.  The other                                                              
was  to  pace the  four-party  Alaska  LNG  project to  match  the                                                              
current  market  conditions,  while   continuing  to  advance  the                                                              
regulatory  approvals,  reduce  project  costs, and  work  on  the                                                              
fiscal  and   commercial  agreements  to  provide   the  necessary                                                              
information for all four parties to make a FEED decision.                                                                       
                                                                                                                                
2:15:48 PM                                                                                                                    
MR. MCMAHON said  he wants to set the record straight.  At no time                                                              
has ExxonMobil  said the AKLNG  project should  stop or be  put on                                                              
the  shelf. Now  that  the Walker  administration  has decided  to                                                              
pursue  a state  LNG project,  ExxonMobil is  actively engaged  in                                                              
the plan  to bridge  from the four-party  joint venture  agreement                                                              
(JVA) to  a state project.  Key components include  completing the                                                              
pre-FEED  deliverables and  filing  the remaining  draft  resource                                                              
reports, which are  on track for completion in a  few weeks. Next,                                                              
a target  date needs  to be selected  for the  handover of  all of                                                              
the  JVA lead  party  responsibilities to  the  state, and  AGDC's                                                              
target  appears to  be sometime  in  the fourth  quarter of  2016.                                                              
Lead party  handover sessions need  to be scheduled, and  the FERC                                                              
and  NEPA progressions  need to  be handled.  ExxonMobil needs  to                                                              
support  pre-FEED data  access to  the state  project. "And,  then                                                              
finally," he  said, "we need  to sell the  Alaska LNG  project LLC                                                              
to AGDC," and  that will allow Alaska  to have access  to the land                                                              
for the LNG plant.  The state will also have to  buy from them the                                                              
DOE  [Department  of  Energy]  export   authorization,  the  AKLNG                                                              
website, and the logo.                                                                                                          
                                                                                                                                
MR.  MCMAHON  said  AGDC  will  then  be  able  to  establish  its                                                              
standing  with   FERC  and  DOE   and  demonstrate   to  potential                                                              
investors and  customers that  the state LNG  project is  open for                                                              
business. Once  the project  is up and  running, and the  JVA pre-                                                              
FEED  winds  up and  the  project  management team  is  disbanded,                                                              
ExxonMobil  will still  have a major  role in  the development  of                                                              
North Slope  gas by making it  available for sale to  the project.                                                              
The producers  have invested  billions of  dollars at  Prudhoe Bay                                                              
and Pt. Thomson.  Pt. Thomson requires additional  investment, and                                                              
much  of the  current  equipment  installed can  be  used for  gas                                                              
sales,  including  the Pt.  Thomson  export pipeline.  At  Prudhoe                                                              
Bay, the  gas has  been used for  oil recovery,  and by  using gas                                                              
for oil  recovery the working  interest owners have  provided over                                                              
three billion more barrels of oil than originally expected.                                                                     
                                                                                                                                
2:19:40 PM                                                                                                                    
MR.  MCMAHON said  investment  is  necessary to  allow  gas to  be                                                              
produced  for  a  state  LNG  project,  and  "we  expect  AGDC  to                                                              
approach Prudhoe  Bay about  potentially handling the  by-products                                                              
from  its  gas  treatment  plant."   Before  committing  to  these                                                              
investments, ExxonMobil  will need  robust gas sales  and purchase                                                              
agreements   with  assurances   that  purchasers   will  pay   for                                                              
ExxonMobil's  gas.  The corporation  has  always  been willing  to                                                              
make  its gas  available  for any  project  for reasonable  terms.                                                              
"You've been  provided copies of  various letters that  we've sent                                                              
to the State and to AGDC," he said.                                                                                             
                                                                                                                                
2:20:12 PM                                                                                                                    
MR.  MCMAHON noted  that  in July,  ExxonMobil  sent  a letter  to                                                              
Keith Meyer  that included an offer  to reengage on  well-head gas                                                              
sales negotiations.  In December  2015, ExxonMobil  sent  a letter                                                              
to  Governor Walker  saying its  gas was  available for  well-head                                                              
purchase by  the state.  In October 2015,  the corporation  sent a                                                              
letter  to Marcia  Davis and  to Rigdon  Boykin with  an offer  to                                                              
negotiate a  gas sales and  purchase agreement. Finally,  "you can                                                              
go back  to 2008 after receiving  inquiries from Senate  and House                                                              
Democrats,  ExxonMobil  provided  letters  on our  willingness  to                                                              
sell or  ship gas on commercially  reasonable terms" for  the AGIA                                                              
pipeline.                                                                                                                       
                                                                                                                                
MR.  MCMAHON  stated   that  last  year  Governor   Walker  sought                                                              
assurances from each  producer that they would  make gas available                                                              
if  they  are  no longer  part  of  the  LNG  project.  ExxonMobil                                                              
immediately    established    a   negotiating    team,    executed                                                              
confidentiality  agreements  with   the  state,  and  had  several                                                              
preliminary  meetings. With  the advent  of a  state LNG  project,                                                              
ExxonMobil  remains  ready to  negotiate  gas sales  and  purchase                                                              
agreements-under commercially  reasonable terms. "And,  of course,                                                              
ExxonMobil   has  had   confidential,   bilateral  gas   marketing                                                              
conversations  with the state  as contemplated  under Senate  Bill                                                              
138,"  he said.  The  conversations  have been  on  hold, but  the                                                              
company  stands   ready  to   restart  them.  ExxonMobil   remains                                                              
committed  to commercializing  the  natural gas  resources on  the                                                              
North Slope  and is  willing to work  with any interested  parties                                                              
to explore all options.                                                                                                         
                                                                                                                                
2:22:36 PM                                                                                                                    
DAVID VAN  TUYL, Regional Manager,  BP Alaska, Anchorage,  said BP                                                              
has  always seen  a tremendous  opportunity  for getting  Alaska's                                                              
gas to market,  and it still does.  The opportunity for  gas is of                                                              
such a scale  that it is unique  on the planet. Alaska  gas is the                                                              
single,  biggest undeveloped  resource  in BP's  portfolio. If  it                                                              
can get the gas  to market, BP can sell over  1 billion barrels of                                                              
oil equivalent.  "That is huge  to BP,"  he said. This  can become                                                              
Alaska's reality.  In 1977, oil producers all  thought Prudhoe Bay                                                              
gas would  be sold into Lower  48 markets within five  years. When                                                              
the market was  deregulated, gas price collapsed,  and the project                                                              
was put on  hold. The timing was  not right, and it  is absolutely                                                              
better that  Prudhoe Bay gas was  preserved in this way.  "We were                                                              
all blessed  with a  silver lining."  Commissioner Cathy  Foerster                                                              
of the  Alaska Oil  and Gas Conservation  Commission (AOGCC)  said                                                              
if  BP  sold gas  in  the  early  1980s, Prudhoe  Bay  would  have                                                              
produced only  8 billion barrels  of oil, and other  fields likely                                                              
would not  have been developed. The  gas was used to  increase oil                                                              
recovery, he  said. "We  have produced, to  date, over  12 billion                                                              
barrels of oil."  There are still about 2 billion  barrels more to                                                              
produce, and  there are over 4  billion barrels of  oil equivalent                                                              
in gas. This  Prudhoe Bay gas  combined with gas from  Pt. Thomson                                                              
can underpin an  Alaska LNG project, and BP has  invested billions                                                              
of dollars  at those fields and  continues to invest to  help make                                                              
gas available.                                                                                                                  
                                                                                                                                
2:26:39 PM                                                                                                                    
MR.  VAN TUYL  said there  have  been other  attempts to  monetize                                                              
North Slope  gas. This current  effort began  in 2011 when  gas in                                                              
Asia was  over $15  per million  BTUs. Governor  Parnell asked  BP                                                              
and others  to work  with the state  to determine the  feasibility                                                              
of a new project-called  AKLNG-that could get gas to  Asia in mid-                                                              
2020. In  January 2014,  the parties  signed a  heads-of-agreement                                                              
and  asked  the  legislature  to pass  SB  138.  The  confidential                                                              
bilateral gas marketing  conversations between BP  and Alaska were                                                              
important. He  said BP is willing  to make its gas available  to a                                                              
project under  commercially  reasonable terms.  It has spent  over                                                              
$600 million, and AKLNG continues to make good progress.                                                                        
                                                                                                                                
2:28:36 PM                                                                                                                    
MR. VAN TUYL  said that the shale  gas revolution in the  Lower 48                                                              
has changed the  gas supply picture. The cost  of supplying Alaska                                                              
gas  to Asian  markets is  estimated to  be too  high to  compete.                                                              
That's  the reality,  and in its  current form,  the project  does                                                              
not  compete,  but  there  are  game  changing  opportunities  for                                                              
Alaska LNG  that are worth pursuing.  He said LNG is  a commodity.                                                              
"We want  to be  able to  make a  competitive offer."  He said  BP                                                              
understands the state  wanting to move ahead. It  also understands                                                              
Alaska's fiscal  needs, and  Alaska should know  that BP  wants to                                                              
move  the project  forward. The  FEED phase  will cost  a lot  and                                                              
deserves a  careful evaluation before  BP commits. "We  don't want                                                              
to rush into the  largest energy project in North  America only to                                                              
end up losing  lots of money," he  said, and now is  not the right                                                              
time for BP to  make a commitment. He suggested  reducing the cost                                                              
of supply  with a state-led project,  "and we support  the state's                                                              
efforts." He  said BP  is determined  to find a  way to  lower the                                                              
cost of supply.                                                                                                                 
                                                                                                                                
2:30:56 PM                                                                                                                    
MR. VAN  TUYL suggested  a more commercially-efficient  structure,                                                              
and it  is not unusual  for a large  project to restructure  as it                                                              
matures.  A  state  project  could be  the  best  structure.  Why?                                                              
"Well, we  heard from Wood Mackenzie  yesterday that if  the AKLNG                                                              
project were  restructured  with the utility-like  toll,  it would                                                              
represent  a major  step-change  in cost  of  supply," he  stated.                                                              
State ownership  could provide  that structure.  That step  alone-                                                              
converting the upfront  capital into a toll over  time-could allow                                                              
the project  to compete globally.  He said  it was clear  that the                                                              
many  details will  matter. State  ownership  could lower  federal                                                              
taxes. As  a tax-exempt entity, the  state may be able  to deliver                                                              
this  important cost  reduction, he  said, but,  obviously, a  tax                                                              
exemption  is very  much fact  dependent.  The state-led  approach                                                              
allows  the   state  to   shape  its   policies  to  improve   the                                                              
competitiveness  of the  LNG project,  he added.  Since BP  thinks                                                              
the state-owned structure  can improve costs, it  has been working                                                              
with  the  other parties  to  achieve  a  number of  things,  like                                                              
transitioning,  finding other concepts  that have been  successful                                                              
in global  LNG projects,  transferring information,  and providing                                                              
access to assets so AGDC can file a successful FERC application.                                                                
                                                                                                                                
2:33:14 PM                                                                                                                    
MR. VAN TUYL  noted two things important to BP:  project financing                                                              
and efficient advancement  and delivery at or below  its estimated                                                              
cost.  The company  is considering  what form  of support  it will                                                              
provide.  "We  want   the  project  to  seamlessly   continue  and                                                              
maintain  momentum." If  the project  is successful,  BP can  sell                                                              
its gas.  The project's  success is  good for  BP, the  state, and                                                              
many Alaskans,  but the core  facts are  the same. Prudhoe  Bay is                                                              
one  of the  world's most  prolific  basins. The  Pt. Thomson  gas                                                              
condensate field  is producing now and  has even more gas  to play                                                              
for.  "We  are  aligned  on  our need  to  continue  to  look  for                                                              
opportunities,  to reduce the  cost of supply  for Alaska  LNG, to                                                              
provide a solid future for BP Alaska and the state."                                                                            
                                                                                                                                
2:35:48 PM                                                                                                                    
DARREN  MEZNARICH,  Project Integration  Manager,  ConocoPhillips,                                                              
Anchorage, said  he is leading  the company's efforts  to monetize                                                              
North Slope  gas. ConocoPhillips  supports the completion  of pre-                                                              
FEED work,  which is expected  to be done  in the next  few weeks.                                                              
He  noted  the  significant  contribution  of  the  project  team;                                                              
however,  ConocoPhillips is  unlikely to  directly participate  in                                                              
FEED  for the  project in  2017  due to  the significant  economic                                                              
headwinds and  other challenges.  If one or  more of  the parties,                                                              
including  AGDC, wants to  proceed, ConocoPhillips  is willing  to                                                              
cooperate in  a transition, including  the sale or  other transfer                                                              
of ConocoPhillips assets related to the project.                                                                                
                                                                                                                                
MR. MEZNARICH said  the state and AGDC have indicated  an interest                                                              
in  continuing  under AGDC's  leadership,  and  ConocoPhillips  is                                                              
working with  all parties to  facilitate that transition.  The new                                                              
concept  of  a state-owned  project  and  tax-exempt entity  is  a                                                              
paradigm shift,  and they  recognize the  creativity of  the state                                                              
and  AGDC for  offering  these  concepts,  which may  improve  the                                                              
project's  competitiveness;  however,  there are  many  questions.                                                              
Also,  AGDC  has  identified  a   series  of  questions  they  are                                                              
pursuing  to prove  out  the concept.  These  types of  management                                                              
questions seem  reasonable if  the legislature and  administration                                                              
make decisions as the project moves forward.                                                                                    
                                                                                                                                
MR.  MEZNARICH said  ConocoPhillips  is willing  to  make its  gas                                                              
available  on commercially  reasonable  terms, and  it expects  to                                                              
support  AKLNG through  its ongoing  North  Slope investments.  He                                                              
recognizes  that the  legislature  has questions  as it  considers                                                              
this  plan   going  forward,   and  ConocoPhillips'   actions  are                                                              
intended to  help the legislature  and the administration  get the                                                              
necessary information.                                                                                                          
                                                                                                                                
2:38:19 PM                                                                                                                    
REPRESENTATIVE SADDLER  said he heard Mr. Van Tuyl  say that state                                                              
ownership was  the best course  of action  and asked if  there are                                                              
any  factors other  than the  state's  desire to  progress in  the                                                              
face of the economic  conditions that make the switch  to a state-                                                              
owned project  the best course of  action and why that  wasn't the                                                              
first concept.                                                                                                                  
                                                                                                                                
MR.  VAN TUYL  said he  will answer  why  BP didn't  look at  this                                                              
different  structure  first if  it  now appears  to  be the  best.                                                              
Typically,  he explained, in  any major  energy project,  BP looks                                                              
at an  equity model  and emphasizes  alignment in interests  among                                                              
the parties.  That is the pathway set  out in the HOA  and that is                                                              
what was  envisioned under SB 138.  He said BP spent  $600 million                                                              
and then  found out that the  project does not compete,  which was                                                              
compellingly shown by Wood Mackenzie consultants yesterday.                                                                     
                                                                                                                                
MR. VAN  TUYL said he  also made it  clear in testimony  that that                                                              
alone doesn't  say it  is time to  stop. This incredible  resource                                                              
is available,  and BP wants  to get it  to market. If  that method                                                              
doesn't  work, is  there  another  way to  be  competitive in  the                                                              
global marketplace?  "It  looks like we've  identified, at  least,                                                              
an option that was  outlined by Wood Mackenzie in  a tolling model                                                              
that seems  to, at  least to us,  to be  worth pursuing."  That is                                                              
why BP  will continue  to cooperate and  see where this  potential                                                              
might lead.  Regardless of the  commercial structure, BP  needs to                                                              
make sure the  project is financeable and  technically executable,                                                              
which  is really  important  for  mega-projects.  This pathway  is                                                              
worth pursuing, he said, because the stakes are worth it.                                                                       
                                                                                                                                
2:41:18 PM                                                                                                                    
REPRESENTATIVE SADDLER  noted that the two tax  attorneys told the                                                              
committee  that  getting tax  exemptions  for this  project  could                                                              
take a  year or more. He  asked what BP  could do in that  year if                                                              
the  process  was  held  in  abeyance   while  the  tax  exemption                                                              
questions are answered.                                                                                                         
                                                                                                                                
MR. VAN TUYL answered  that much work needs to be  done in framing                                                              
out the specifics  of this structure. While a  tax exemption would                                                              
be  a great  benefit, it  is not  the only  biggest benefit.  Wood                                                              
Mackenzie's  work  showed  that  80 percent  of  the  benefit  was                                                              
derived  from the  tolling  structure, and  the  balance was  from                                                              
federal and  state taxes.  Is it an  avenue worth pursuing?  Sure,                                                              
but there  are technical  challenges and details  that have  to be                                                              
worked out in specificity  to be able to make a  cogent request to                                                              
the IRS to  enable such a ruling.  "You have to do quite  a bit of                                                              
homework to earn the right to ask to begin with."                                                                               
                                                                                                                                
2:42:59 PM                                                                                                                    
MR. MEZNARICH added  that ConocoPhillips still sees  the producers                                                              
as  participating in  the project.  Wood  Mackenzie estimated  $10                                                              
billion  in   upstream  investments,   so  there  would   be  that                                                              
investment as well  as making the gas available. "It's  not like a                                                              
stoppage of the upstream participation," he clarified.                                                                          
                                                                                                                                
MR. MCMAHON  said he thought  the State  of Alaska could  do three                                                              
things  during that  time, including  pursuing the  NGA Section  3                                                              
application. He  explained that the AKLNG participants  understood                                                              
that  the  regulatory  process   was  a  critical  path  for  this                                                              
project. Another thing  that could be pursued during  this time is                                                              
to secure gas  supply for the project through  either purchases or                                                              
tolling agreements.  And then, finally,  for customers to  be able                                                              
to use the  project, either by  selling gas or tolling,  they will                                                              
need to understand  the fiscal terms so that  they have confidence                                                              
that when  they receive a  check for gas  or when they  receive an                                                              
invoice for  tolling that they know  what they are paying  for and                                                              
that it is not eroded by changes in taxes.                                                                                      
                                                                                                                                
2:44:32 PM                                                                                                                    
SENATOR DUNLEAVY asked  for clarity for the average  person on the                                                              
street. Is  the project envisioned  under SB 138 now  dead because                                                              
of economics?  From the  producer's perspectives,  is the  project                                                              
not moving forward as a result of the work done in the pre-FEED?                                                                
                                                                                                                                
MR. VAN  TUYL answered that BP's  perspective is that  the project                                                              
struggles to compete in the global marketplace.                                                                                 
                                                                                                                                
SENATOR  DUNLEAVY said  that some  can  interpret "struggling"  to                                                              
mean it is dying;  it's dead. He said he would  get calls from the                                                              
average  person on  the street asking,  "What  did they say?"  So,                                                              
the project is dead,  and now "we" are talking about  looking at a                                                              
different way of doing it?                                                                                                      
                                                                                                                                
MR.  MCMAHON  responded  that  the  nice  thing  about  the  gated                                                              
process is the  checking points after each major  expenditure. "We                                                              
spent $500  million on  pre-FEED," and  now ExxonMobil  is looking                                                              
at what the commercial  structure will be for  governing FEED, the                                                              
fiscal  terms,  and how  cost  of  supply competes  against  other                                                              
projects around the  world. At this juncture, ExxonMobil  needs to                                                              
stay in  pre-FEED before  making an  affirmative decision  to move                                                              
into  FEED. This  was discussed  in  February, and  one thing  the                                                              
company  offered at  that time  was to  continue to  stay in  pre-                                                              
FEED,  keep  the  four  parties'   interests  together,  and  work                                                              
through  until  all  parties  say   yes  to  move  into  FEED.  An                                                              
alternative was discussed where the state could move into FEED.                                                                 
                                                                                                                                
MR. MCMAHON  stated his understanding  that AGDC intends  to build                                                              
on all  the work that has  been done in  pre-FEED. It is  the same                                                              
LNG plant,  the same  gas treatment plant,  and the  same pipeline                                                              
that connects Prudhoe  Bay and Pt. Thomson. What  will be changing                                                              
are the  participants, project funders,  and how the gas  is going                                                              
to  be accessed.  Under the  four-party  arrangements all  parties                                                              
have gas,  all four invest,  and all four  have capacity,  and now                                                              
AGDC is  looking at a  structure "where  they will have  to access                                                              
gas to go through a 100 percent state-owned project."                                                                           
                                                                                                                                
2:48:18 PM                                                                                                                    
MR. MEZNARICH  said  he does  not see  this as dead.  "We are  not                                                              
going to  give up on  this resource. The  resource is too  big for                                                              
all  our companies;  it's  too big  for the  state,  so I'm  never                                                              
going  to say  it's dead."  The  technical work  is  done and  now                                                              
ConocoPhillips  has to  look  at the  economic  headwinds and  the                                                              
agreements, which  are not  ready. It is  not economic  right now,                                                              
so the company is trying to find a way to move forward.                                                                         
                                                                                                                                
2:49:09 PM                                                                                                                    
SENATOR  DUNLEAVY  said no  one  is  giving  up on  the  resource,                                                              
because it's  there, but  the envisioned project  is not  going to                                                              
move forward. "I  don't see you folks investing the  money into it                                                              
at this point as  it was envisioned." It is important  to say that                                                              
Alaska  is probably  the only sovereign  that  chases you  guys to                                                              
make you  do something.  All over  the world  there are  resources                                                              
that the  producers see that  they want  to develop, "and  it just                                                              
seems that there  are times in Alaska, and this is,  I think, what                                                              
we're seeing  unfold here  in the  last two  days, is  a situation                                                              
where  it  is  not economical  from  your  perspective,  which  is                                                              
understandable.  The  question   is  going  to  be,  if  it's  not                                                              
economical from  your perspective, how  is it economical  from the                                                              
state's perspective?"                                                                                                           
                                                                                                                                
2:49:56 PM                                                                                                                    
REPRESENTATIVE   HERRON  noted  that   Mr.  McMahon   referred  to                                                              
mischaracterizations  and  that   he  wanted  to  set  the  record                                                              
straight,  but  he  testified  that he  very  much  supports  this                                                              
project moving ahead although it is state led. "Is that true?"                                                                  
                                                                                                                                
MR. MCMAHON replied, yes, that is true.                                                                                         
                                                                                                                                
REPRESENTATIVE  HERRON asked if  he is  talking to contractors  or                                                              
other people to help in this transition.                                                                                        
                                                                                                                                
MR. MACMAHON answered  that the conversations he  is involved with                                                              
on this transition  from a four-party to a state  LNG project have                                                              
been primarily  with AGDC to  make it a  smooth handoff.  He knows                                                              
that  Steve  Butt   and  the  project  team  are   having  similar                                                              
discussions to  make sure  that the technical  work can  be handed                                                              
off seamlessly  and efficiently, as  well as the  regulatory work.                                                              
Of course,  the AKLNG  participants do  have contractors  involved                                                              
in  that work,  and  some of  those  contractors  are involved  in                                                              
those conversations.  "We do have  the full team,  both commercial                                                              
and project,  working to  build a successful  bridging to  a state                                                              
LNG project," he explained.                                                                                                     
                                                                                                                                
REPRESENTATIVE HERRON  asked if  there are other  entities outside                                                              
of those two groups of people.                                                                                                  
                                                                                                                                
2:52:08 PM                                                                                                                    
MR. MACMAHON said no.                                                                                                           
                                                                                                                                
REPRESENTATIVE HAWKER  noted that Mr. Meyer at  AGDC discussed the                                                              
actual  marketing of  Alaska's gas,  and it sounded  like  he said                                                              
that AGDC  is actively  marketing gas, not  only the  state's gas,                                                              
but he  referenced marketing  "a company's  gas," which  he didn't                                                              
name, and  that other  companies might want  AGDC to  market their                                                              
gas. He  asked the  witnesses if  they agreed  with the  state for                                                              
joint marketing.                                                                                                                
                                                                                                                                
MR.  VAN TUYL  answered  that  the short  answer  for  BP is  that                                                              
marketing of gas  is a sensitive issue subject  to U.S. anti-trust                                                              
laws and other law,  and BP takes it very seriously.  If there was                                                              
implication  that  there  was  some sort  of  a  "joint  marketing                                                              
arrangement,"  it is nothing  that BP would  be involved  with. He                                                              
heard the  testimony and  didn't know if  Mr. Meyer  was referring                                                              
to marketing of  gas or, more generally, marketing  of the project                                                              
and of an awareness of the project.                                                                                             
                                                                                                                                
MR. MCMAHON  responded that he  has just explained  how ExxonMobil                                                              
continues to  make its gas  available to  the State of  Alaska and                                                              
AGDC.  Perhaps,  Mr.  Meyer  was  relying  on  those  offers  from                                                              
ExxonMobil.                                                                                                                     
                                                                                                                                
MR. MEZNARICH  agreed that marketing  is sensitive to  talk about.                                                              
ConocoPhillips  feels  that  JV [joint  venture]  marketing  would                                                              
have been the  best method for the  project to have a  single face                                                              
in  the  market  and  jointly  work  together.  But  there  is  no                                                              
agreement now to pursue joint venture marketing.                                                                                
                                                                                                                                
CHAIR  GIESSEL thanked  the  witnesses  and said  their  testimony                                                              
will be available to the public online.                                                                                         
                                                                                                                                
^enalytica: Nikos Tsafos                                                                                                        
           Legislative Consultant Comments: enalytica                                                                         
                                                                                                                              
2:55:20 PM                                                                                                                    
CHAIR GIESSEL welcomed the next witness.                                                                                        
                                                                                                                                
NIKOS  TSAFOS,  Legislative  Consultant,   enalytica,  Washington,                                                              
D.C., noted  that enalytica  is a  consultant to the  legislature,                                                              
contracted  through the  Legislative Budget  and Audit  Committee.                                                              
He said this  is a big project,  and if it gets built,  it will be                                                              
around  for a really  long time,  "and stuff's  going to  change."                                                              
People will  come and go, as will  investors. The gas  might be on                                                              
line in  10 years and  run for 20  years, "so we're  talking about                                                              
getting our  money back  by 2046."  He said  that 2046  forward is                                                              
kind of the  same thing as 1986  backward, and in 1986,  there was                                                              
a  Northwest Shelf  project  in  Australia that  had  just made  a                                                              
final  investment   decision  where  investors  were   looking  at                                                              
getting their  money back in 20-25  years. The Cold War  was going                                                              
on; Chernobyl  had not  happened. China was  just opening  up, and                                                              
the European  Union was about 10  members. There was no  Google or                                                              
cell  phones,  and this  Northwest  Shelf  project would  have  to                                                              
survive through  all that.  He said that  Kenai goes back  to 1969                                                              
and shipped  its first gas during  the Vietnam War. His  point is,                                                              
he said, is that  "stuff is going to happen; you're  going to have                                                              
to  pace yourself."  It is  difficult  to manage  this process  if                                                              
every time  the commodity goes up  or down, everyone  throws their                                                              
arms in  the air and  wants to start  over. It takes  patience and                                                              
powering through.                                                                                                               
                                                                                                                                
2:58:50 PM                                                                                                                    
MR.  TSAFOS referred  to a  state-led  project and  said there  is                                                              
merit  in an  expanded state  role,  and he  has no  philosophical                                                              
objection.  He has worked  with national  oil companies  and state                                                              
institutions  around the world,  and some are  great and  some are                                                              
terrible.  "There's nothing  beforehand  that tells  you how  it's                                                              
going to  end up."  There are things  the state  can bring  to the                                                              
table that are  really valuable and worth exploring.  Listening so                                                              
far, he said,  he has way too  many questions about how  this will                                                              
work, who is  taking on what risk,  and how things will  play out;                                                              
therefore, it is important to remember the core principles.                                                                     
                                                                                                                                
3:00:43 PM                                                                                                                    
MR.  TSAFOS referred  to  Slide  3 of  his presentation.  He  said                                                              
Option 1  is where  AKLNG becomes  a state-owned tolling  project.                                                              
He clarified  that he is speaking  to his interpretation  of "what                                                              
is going  on," and it  is not necessarily  exactly what is  on the                                                              
table. Alaska  LNG has  a treatment  plant, an 800-mile  pipeline,                                                              
and a  LNG facility, with  75 percent owned  by the  producers and                                                              
25 percent  owned by the state.  "Throw that [plan] out,"  and now                                                              
it  is  100  percent  owned  by   Alaska.  As  the  owner  of  the                                                              
infrastructure,  the state  will  find people  to use  it and  get                                                              
long-term  commitments. They  will pay  "your tax."  If the  state                                                              
decides to take  its gas as gas, the royalty-in-kind,  and the tax                                                              
as gas, then  the state may  sign up with itself.  The departments                                                              
of natural  resources and revenue could  sign up with AGDC  to use                                                              
the facility,  and they could  pay a tax. These  contracts-whether                                                              
they are  with the producers,  departments, or other  folks-can be                                                              
taken to banks or investors when asking for money.                                                                              
                                                                                                                                
MR.  TSAFOS  stated that  Option  1  relieves the  producers  from                                                              
spending  between $45  and $65  billion, because  the state  will.                                                              
Like deciding between  buying and renting, it depends  on what the                                                              
numbers  are.  He  said  renting  a house  could  have  much  less                                                              
stress, so  companies who ask  their board  for 30 percent  of $45                                                              
billion will  get different responses  than asking for  30 percent                                                              
of  $10  billion,  which  is  what  Wood  Mackenzie  said  is  the                                                              
upstream  costs. Additionally,  Option 1  takes away  some of  the                                                              
project complexity.  The state will  not sue itself  over property                                                              
taxes,  for example,  so payment  in lieu of  tax is  unnecessary,                                                              
but there  will still  be proportion questions  for the  state and                                                              
local  communities. The  state has  to do that  anyway, "you  just                                                              
can get  rid of the  producers … so  that simplifies  things." The                                                              
need  for fiscal  stabilization  may  change.  "If you  spend  $45                                                              
billion,  you   want  fiscal  stabilization,"  but   spending  $10                                                              
billion  over  15  years,  may  lower  the  demand  for  stringent                                                              
stabilization. He  said he is  just speculating, however.  None of                                                              
this  does anything  about  the  cost of  supply,  except maybe  a                                                              
federal income  tax exemption. "I  don't know what  your take-away                                                              
was  from  the  previous  presentation  [on  tax  exemptions].  My                                                              
thinking was: I have no idea."                                                                                                  
                                                                                                                                
MR.  TSAFOS  noted   the  above  benefits,  but  if   this  is  an                                                              
uneconomic  project,  all  the state  has  done  is take  over  an                                                              
uneconomic project.  Option 1 shifts some responsibility  from the                                                              
producers to the  state, and how much it shifts  really depends on                                                              
the structure.  There are  ways to protect  the state,  he stated.                                                              
In Indonesia,  the state  owns the  liquefaction facility,  but it                                                              
is  operated by  a  consortium of  the suppliers.  The  suppliers'                                                              
goal was  to make sure  the facility worked  well, so  they wanted                                                              
"to be  in the room,"  and it  works for them.  Option 1  has some                                                              
benefits, but it does not go very far, he summarized.                                                                           
                                                                                                                                
3:06:30 PM                                                                                                                    
MR. TSAFOS  turned to Option  2, which  is similar, but  the state                                                              
is "starting  to treat the formula  to really do something  to the                                                              
cost of  supply." He said  the committee was essentially  provided                                                              
that  information  from  Wood  Mackenzie  in trying  to  make  the                                                              
project  more  economic, but  there  are  risks. The  state  could                                                              
lower  its  return to  7  percent-or  keep  lowering it  until  it                                                              
works, and that  is not a good  position to be in. At  this point,                                                              
there is  a delta between  the price and  the cost, and  the state                                                              
is the  one that  will absorb  the delta.  He asked  what kind  of                                                              
return is acceptable.  It is easy to build a  $50 billion project,                                                              
"if  you're willing  to  lose $50  billion."  Knowing the  desired                                                              
return is a really good conversation to have.                                                                                   
                                                                                                                                
MR. TSAFOS said that  the price of LNG will go  up again, and when                                                              
it does,  because the state  has lowered  the tariff to  match the                                                              
current price,  all of the  money will  go to BP, ExxonMobil,  and                                                              
ConocoPhillips.  The state  will  be very  upset and  will try  to                                                              
raise taxes to get  that money back. In this structure,  the state                                                              
has no production  tax, and "you're  not really making  any of the                                                              
upside." After  taking all  of the risk  and accepting a  low rate                                                              
of return, the money  will all go to the producers,  and that will                                                              
not  be  sustainable. It  is  important  to  talk about  risk  and                                                              
return and  how to  balance it.  "How do we  talk about  that?" He                                                              
urged the  state to really bring  the producers on board  and say,                                                              
"Okay, what  are you  guys doing to  make this more  competitive?"                                                              
It should not  just be the state  accepting a low rate  of return;                                                              
the producers  need to commit to  doing something, because  if the                                                              
state  makes the  project  economic by  lowering  its return,  the                                                              
producers do not have to put any effort into reducing costs.                                                                    
                                                                                                                                
3:10:06 PM                                                                                                                    
MR. TSAFOS  turned to Option 3  on slide 5: "the  scary scenario."                                                              
It  is unnecessary  and super  scary, he  said. It  is called  the                                                              
merchant plan  in the  LNG business, where  the state  would still                                                              
own everything, but  rather than charging a toll,  the state would                                                              
just  buy the gas.  There are  endless  ways to do  this, but  the                                                              
state could  buy the gas at the  wellhead and sell it  in Nikiski.                                                              
In one  scenario, the  transactions are  linked. For example,  the                                                              
state buys the gas  at the Henry Hub price and  sells it for Henry                                                              
Hub plus x. In  that case, the state is performing  an unnecessary                                                              
function, because  if that makes  sense, the producers will  do it                                                              
themselves.  The only  question  is  whether x  is  a good  enough                                                              
number, and  that can be tweaked  by lowering the rate  of return-                                                              
so, really, it is completely useless to do this.                                                                                
                                                                                                                                
MR. TSAFOS said,  alternatively, the state could buy  at Henry Hub                                                              
and sell  the gas  at an  oil-linked price.  This is probably  the                                                              
scariest  of all options.  It is  a cross-commodity  risk  that no                                                              
oil company  would take on. "I'm  not saying that you're  going to                                                              
do this, partly  because nobody would lend you money  to do this,"                                                              
but  he gave  an example:  The project  is running  and the  state                                                              
buys 75 percent of  the gas at Henry Hub. It  is financed on debt,                                                              
because outside  of the permanent  fund, Alaska does not  have any                                                              
equity.  The  state  pays  a little  property  tax  and  runs  the                                                              
facility.  If the  state  then  sells this  gas  to  Japan at  the                                                              
market  rate of  $7,  Alaska would  be about  $1  billion or  $1.5                                                              
billion in  the red  for the  year. He  said, "Cash, not  profit."                                                              
The state  would need that  much money just  to pay the  bills. He                                                              
purported that no  one would do this, but there might  be a chance                                                              
that this is being contemplated.                                                                                                
                                                                                                                                
MR. TSAFOS  noted that he has  said this before: If  the producers                                                              
are  willing to  sell  you the  gas,  don't buy  it.  If they  are                                                              
willing to  sell the gas  to the state,  it means that  they think                                                              
they can  get a  better deal than  if they  had built  the project                                                              
and sold  it on  the market.  The only  way the corporations  will                                                              
sell the gas to Alaska is if it is unprofitable. "Don't buy it."                                                                
                                                                                                                                
3:13:28 PM                                                                                                                    
MR. TSAFOS  said his  final topic  is the  duty to produce.  "It's                                                              
sneaking up on us."  When he thinks about the duty  to produce, he                                                              
assumes a court  has ordered someone to produce and  sell the gas.                                                              
He cautioned  that he is  not a lawyer,  but he assumes  also that                                                              
there  is someone  that  has to  buy  the gas.  A  court would  be                                                              
telling Alaska to  buy it. He provided the following  scenario: In                                                              
round numbers,  there are 30 TCF  [trillion cubic feet]  of gas on                                                              
the North Slope,  and Alaska has 25 percent. So,  Alaska would buy                                                              
the  other 75  percent,  or  22.5 TCF.  If  Henry  Hub was  $3.00,                                                              
Alaska would pay  $66 billion and would have to  build another $50                                                              
billion worth of  infrastructure, "so on Day 1,  you're minus $116                                                              
billion." He  said he is  not saying this  will be  the structure,                                                              
but when  starting down  this path,  this is  where it  will lead,                                                              
and he cautioned the state to be careful what it gets into.                                                                     
                                                                                                                                
3:15:20 PM                                                                                                                    
MR. TSAFOS  turned to  "Core Principles"  on Slide  6. He  said if                                                              
the  LNG  project  is  led  by   the  state,  it  really  needs  a                                                              
credibility  boost. He  noted that  he  hangs out  with people  in                                                              
this industry, and  people often ask him if "that  Alaska project"                                                              
is ever going  to work. When he  says that ExxonMobil  is the lead                                                              
party, that  there are 80 people  on the project  management team,                                                              
and  the  parties  are  spending  $700  million  on  FEED,  people                                                              
conclude  that  if   anyone  can  make  the  project   work,  it's                                                              
ExxonMobil. The question  now is if the state can  pull it off. He                                                              
stated  that there  is a  slight deterioration  in confidence,  so                                                              
Alaska needs a plan to address that.                                                                                            
                                                                                                                                
MR. TSAFOS  turned to the  topic of outsourcing  risk. Outsourcing                                                              
construction  risk  depends  on   the  costs,  and  there  is  the                                                              
question  of  what  happens  if  things go  wrong.  A  lawsuit  in                                                              
Australia has  been mentioned here,  and there are  other projects                                                              
where contracts go  wrong in spite of an agreement.  "At least the                                                              
lawyers are  going to make  money," he said.  If the state  has to                                                              
pay 25 percent or  so to fix the price, then what  is the benefit?                                                              
The idea  that someone else  will take the  risk and that  it will                                                              
be cheap,  "I think  really has  to be  demonstrated." What  about                                                              
other folks  willing to participate for  a low rate of  return? He                                                              
said this  has been  a cornerstone  [of the  new plan]  that there                                                              
are  all these  infrastructure funds,  pension  funds, and  others                                                              
"that are really  going to look at this and think  it's great." He                                                              
said he has about six responses to that notion.                                                                                 
                                                                                                                                
MR.  TSAFOS said,  first, he  looked at  who owns  LNG around  the                                                              
world,  and he  may  have missed  something,  but  he found  three                                                              
instances  of   an  infrastructure-type  fund  that   have  really                                                              
invested  in  LNG  facilities.  One  is  the  Yemen  Pension  Fund                                                              
investing in Yemen  LNG, and it is not applicable,  he said. China                                                              
Investment  Corporation is  a Chinese sovereign  wealth fund  that                                                              
manages the  foreign reserves  that are  accumulating through  the                                                              
trade deficit.  It bought a  10 percent  share in Atlantic  LNG in                                                              
Trinidad  in 2011, 12  years after  the project  came on  line. It                                                              
was part  of a corporate  deal with GDF  Suez (now  called Engie).                                                              
The third example  is the Yamal LNG in Russia,  where China's Silk                                                              
Road  Fund,  another  sovereign  wealth  fund,  has  taken  a  9.9                                                              
percent share of  Yamal LNG as part of a broader  financing packet                                                              
of Chinese  banks to Yamal and  as part of Chinese  NOCs [national                                                              
oil companies]  buying Yamal gas and  equity. He said that  is the                                                              
only  example that  looks a  little  bit like  "what would  happen                                                              
here."  There are not  many examples,  so Alaska  needs to  really                                                              
talk about exactly who these players are.                                                                                       
                                                                                                                                
MR.  TSAFOS noted  that  TransCanada wanted  a  12 percent  return                                                              
without taking  any risk. The  legislature had asked  enalytica if                                                              
12 percent  was legitimate,  and after  looking at FERC  regulated                                                              
pipelines, enalytica  concluded it was.  The range was  from about                                                              
9 to  18 percent return  on equity, and  weighted average  cost of                                                              
capital,  when  debt was  added,  was  around 10  percent.  Canada                                                              
regulates return on equity, and it is about 8 or 9 percent.                                                                     
                                                                                                                                
3:21:07 PM                                                                                                                    
MR. TSAFOS  said his third  point, "when  I look at  the Wood-Mack                                                              
number, it comes  down to about $4,  if you eyeball it,  if you do                                                              
the  8 percent  rate of  return  plus a  70/30-remember that  dark                                                              
blue   thing."  Mathematically,   that   is  totally   legitimate;                                                              
however, the  Corpus Christi LNG  facility developed  by Cheniere,                                                              
which   is   completely   greenfield,  is   charging   $3.50   for                                                              
liquefaction. There  is no pipe  or GTP [gas treatment  plant], he                                                              
added.  "This is essentially  what  you hope  a third party  would                                                              
be." In earlier  deals, Cheniere was more desperate  so it charged                                                              
as low as $2.25  and $2.49 for brownfield, and by  the time it got                                                              
to greenfield,  it was $3.50.  He said he  would like to  see more                                                              
data before  understanding  the likelihood  of someone offering  a                                                              
$4.00  tariff  for  this  entire  facility,  because  "that's  not                                                              
really the number that I see out there."                                                                                        
                                                                                                                                
3:22:54 PM                                                                                                                    
MR. TSAFOS turned  to construction risk. He said he  asked a noted                                                              
LNG company  why it was building  a project on its  balance sheet.                                                              
"Why  can't you  just bring  in  an infrastructure  fund and  have                                                              
them buy some of  the equity and take it off  your balance sheet?"                                                              
The  answer  he was  given  is  that  the company  will  not  take                                                              
construction  risk,  but  when  the project  is  up  and  running,                                                              
proven,  and operational,  it  will sell  off  10-20 percent,  and                                                              
"we're going  to keep operatorship,  there will be  contracts, and                                                              
at  that time  we may  be able  to  monetize and  sell down."  Mr.                                                              
Tsafos pointed  out the  Queensland Curtis  project in  Australia.                                                              
It  is a  BG-led project  (now owned  by  Shell), and  it built  a                                                              
massive pipeline gathering  system. It built the pipe  and sold it                                                              
to  a pipeline  company after  it  was operational.  It was  fully                                                              
contracted  with tariffs  and  was sold  for  about $6.4  billion.                                                              
Turning to  "this question  of 8 percent,"  he said  the permanent                                                              
fund makes  about 5 to  6 percent, and about  20 percent of  it is                                                              
US treasuries,  which do not  really earn  anything. To get  to an                                                              
average  of  6  percent,  "there's  lots of  stuff  that  are  way                                                              
higher," so  it is difficult to  justify an 8 percent  return with                                                              
a commitment  to a project of this  complexity. He said  he is not                                                              
saying it is impossible,  but most of the data points  that he has                                                              
gathered makes  him question  whether there  is a strong  appetite                                                              
for this type of investment.                                                                                                    
                                                                                                                                
MR. TSAFOS  turned to  the topic  of veto rights.  He has  noted a                                                              
huge  emphasis  in  Alaska  about "not  letting  anyone  hold  you                                                              
back." However,  no one is going  to just come along for  the ride                                                              
without having a  say. No one will buy into a  $45 billion project                                                              
and surrender their  right to say no. He said the  question is not                                                              
having  veto rights,  "it  is  how much  you  have  a veto  over."                                                              
Building  the project  is the only  thing that  no investor  would                                                              
ever surrender. "It's  hard for me to see a restaurant  deal where                                                              
you would  surrender  to your two  partners that  have 60  percent                                                              
the right to  build the restaurant,  and you have no right  to say                                                              
whether you want  to do this or not." There is  no way an investor                                                              
would  do that,  so either  you  do it  alone  or you  do it  with                                                              
others, and  they have veto [rights].  It is difficult  to see any                                                              
middle ground, he stated.                                                                                                       
                                                                                                                                
3:26:42 PM                                                                                                                    
MR.  TSAFOS  turned  to  financial   engineering.  The  return  is                                                              
supposed  to  be  driven  by  the project  risk,  not  by  who  is                                                              
investing. When  permanent fund  investors look at  an investment,                                                              
they do not ask  how it can make a 6 percent rate  of return, they                                                              
ask, "What is this  investment?" If it is a US  Treasury, there is                                                              
a lower threshold  than a bridge in the jungle. Rate  of return is                                                              
a  project  level concept.  Additionally,  when  someone  borrows,                                                              
expected equity  has to increase. "If  I go into a project,  and I                                                              
put in 20 percent  equity and borrow 80 percent …  it means that I                                                              
am not  going to see any  money until the  bank gets paid,  and if                                                              
it's 80  percent leveraged,  there is  a good  chance it  might be                                                              
years I  don't get any  money, which means  that the risk  of that                                                              
20  percent  is much  higher  than  if  we'd  done it  50/50."  He                                                              
referred  to  his  corporate  finance  textbook,  which  basically                                                              
says, "Don't  think that you  can just  lower the cost  of capital                                                              
by adding debt."  By adding debt, you have to  increase the return                                                              
on equity, he explained.                                                                                                        
                                                                                                                                
MR. TSAFOS  said that  it all comes  back to  risk and  return. If                                                              
Alaska  will accept  an 8,  10, or  12 [percent  rate of  return],                                                              
what is the upside?  What will it get out of this?  Why have state                                                              
ownership? There is  a spectrum from the current  structure to the                                                              
state  taking over  the project,  and he  can think  of about  six                                                              
permutations between  those two options.  "We've gone from  one to                                                              
the other,  and I  have no  idea why  we're not  doing any  of the                                                              
things in  between." At the  beginning, it seemed  to be a  way to                                                              
avoid delay,  he said,  and Alaska  is now  looking at  a mid-2018                                                              
FEED  decision, which  seems  like some  of  the companies  "could                                                              
have gone  there on  their own."  It is not  clear why  Alaska has                                                              
gone to  this extreme. "I'm  not really a  big fan of  windows; as                                                              
you saw from  Wood Mac, it is  not really a window,  it's a wedge,                                                              
and it always keeps  growing." He described it as  an opening that                                                              
can just  get wider. "If I  try to sell  you gas for 2040,  it's a                                                              
really big  window, because  no one's there."  There is no  one on                                                              
the  other side  to  buy  it, because  no  one cares  about  2040.                                                              
Trying to  make a window is  an invitation to make  bad decisions.                                                              
Ten or twelve  years ago, someone  might have claimed there  was a                                                              
window to  build a  pipe to the  Lower 48,  and Alaska  would have                                                              
lost considerable money if it had.                                                                                              
                                                                                                                                
3:31:03 PM                                                                                                                    
MR. TSAFOS referred  to a letter from ExxonMobil to  AGDC where it                                                              
seems like  there is a 2017  work program and budget.  Before that                                                              
is all  tossed out,  it would be  interesting to  know what  is in                                                              
that.  "How far  did it  get us?  What  kind of  progress did  you                                                              
make? Can you build  on that?" He said he would  love to know more                                                              
about that  and if  there is something  between where  the project                                                              
is right  now and  where the  state takes  everything over.  There                                                              
are options  between those  two, and he  wants to know  why Alaska                                                              
is not pursuing them.                                                                                                           
                                                                                                                                
MR.  TSAFOS  spoke to  organization.  Frankly,  he said,  for  the                                                              
three years  he has been  [on this project],  the same one  or two                                                              
people have  been representing each  of the producers, but  on the                                                              
state  side, there  have  been  numerous people  representing  its                                                              
interests.  But in  all that time,  Steve Butt  of ExxonMobil  has                                                              
been representing  the project.  He said he understands  political                                                              
changes,   but  there  have   been  many   others.  He   suggested                                                              
understanding the  organizational plan.  Mr. Butt said  that there                                                              
are about 150 people  working on the project, and  when it gets to                                                              
FEED,  there will  be up  to 600  people. "Where  are they?  Who's                                                              
going  to pay  for all  these folks?"  That is  something to  talk                                                              
about.  He said  it  is difficult  to  go to  the  market with  10                                                              
permutations of the plan.                                                                                                       
                                                                                                                                
3:34:53 PM                                                                                                                    
MR.  TSAFOS turned  to  questions about  financing  plans and  tax                                                              
exemptions.  It  has  been  two  years  since  the  Joint  Venture                                                              
Agreement  and almost  two and  half years  since SB  138, and  "I                                                              
don't think  we have  any better  idea about  the answer  to these                                                              
two  questions  than we  did  on  SB 138."  He  spoke  of all  the                                                              
discussions  and  studies  that   occurred  without  gaining  more                                                              
information. The testimony  an hour ago on tax  exemptions was the                                                              
first new  information on taxes.  "It's been two years,  right? At                                                              
the same  time the  project has  gotten a  DOE export  application                                                              
started, FERC has  bought up half the Kenai. There's  kind of like                                                              
steps to  that process, and you  have to go there."  Regarding tax                                                              
exemptions, he  asked about the  compatibility of telling  the IRS                                                              
not to tax AGDC  because it is basically the state,  and then when                                                              
dealing with the  debt, claiming that AGDC is on  its own. Another                                                              
question he has  is if the tolling structure gives  all the upside                                                              
to the  producers, would  it be  a private  benefit? If  Alaska is                                                              
buying  and selling  gas, unlike  infrastructure, is  it really  a                                                              
core state function?                                                                                                            
                                                                                                                                
3:36:37 PM                                                                                                                    
MR. TSAFOS asked  who the target investors are. There  seems to be                                                              
a lot  of emphasis  on the  ability to  attract investors,  and he                                                              
would like  to see  more case  studies where  this has  worked. He                                                              
said  he wants  to revisit  the  risk sharing  strategy, which  is                                                              
key. "How far  are you willing to  go to get this  [project]?" Who                                                              
will share  the risk, and  how are they  doing their part?  But he                                                              
cautioned not to  forget the upside-it is easy  to be pessimistic,                                                              
because the price  of gas is low and the state  is in trouble, but                                                              
this  is a 30-year  endeavor  and prices  will go  up. All of  the                                                              
committee  discussions are  about making  the project  competitive                                                              
at the low  end and allowing the  producers to capture  all of the                                                              
upside. That doesn't sound right, he concluded.                                                                                 
                                                                                                                                
3:38:08 PM                                                                                                                    
REPRESENTATIVE  TARR noted  that  the state  now  shares the  risk                                                              
equally with  each of the producers  with all parties  wanting the                                                              
project  to come  in under  budget.  What is  really troubling  is                                                              
putting the state  at risk. She asked Mr. Tsafos  if a state-owned                                                              
project would put all of the risk on Alaska.                                                                                    
                                                                                                                                
MR. TSAFOS  said Alaska would likely  not have 100 percent  of the                                                              
risk. The market  could tank, for instance, so  the producers will                                                              
have some  risk. Or the state  could raise taxes if  the producers                                                              
make  too much  money,  but, really,  the  overwhelming amount  of                                                              
risk will shift  to the state. To pass risk to  parties other than                                                              
the producers,  the state will have to  pay for it in  the form of                                                              
higher costs, higher debt, or giving up equity, for example.                                                                    
                                                                                                                                
SENATOR  MACKINNON  asked  if  the length  of  gas  contracts  has                                                              
changed.  When these  discussions  started, Mr.  Tsafos said  that                                                              
contracts  that were  coming due  for  renewal in  the 2020s  were                                                              
typically  20- to  25-year contracts.  Does that  hold true  today                                                              
with the flood of gas on the market?                                                                                            
                                                                                                                                
MR. TSAFOS  explained that the  average duration of  contracts are                                                              
going down.  People want  shorter contracts  and flexibility,  but                                                              
new  projects   are  still   generally  anchored  with   long-term                                                              
contracts.  He  stated  that  some folks  sign  up  for  long-term                                                              
contracts and then  regret it. It happened in the  Gulf Coast with                                                              
some companies.  At times a project  will get a  20-year contract,                                                              
but  a  middleperson  will  sign  the  contract  and  control  and                                                              
distribute the  gas. He does not  know of any project  since a few                                                              
years ago  that took FID [final  investment decision]  without any                                                              
contracts. Most are still anchored by 20-year contracts.                                                                        
                                                                                                                                
SENATOR MACKINNON  stated, "If contracts for  already-in-existence                                                              
projects or  gas that's being produced  elsewhere in the  world is                                                              
going to  shorter contracts,  then we go  to a middleman-my  guess                                                              
is.  People continue  to refer  to  these flexible  terms, and  we                                                              
have had  some indication on  what those might  be. It might  be a                                                              
destination where  you drop and  deliver the product. It  might be                                                              
the   quality  of   the   project  if   you   mix  the   molecules                                                              
differently." She  asked about the  flexible terms that  have been                                                              
referred to in the last two days.                                                                                               
                                                                                                                                
MR. TSAFOS said  there are a number of things that  buyers mean by                                                              
"flexibility." The  biggest source of flexibility  is destination.                                                              
Generally, if  a buyer no  longer wants  a contract and  wants the                                                              
gas  shipped  elsewhere, the  buyer  has  to break  the  contract.                                                              
Destination flexibility  removes that clause, which  is illegal in                                                              
Europe, because  it is  anticompetitive.  "Asia hasn't gone  there                                                              
yet, but  they're waking up to  it." Basically, it allows  a buyer                                                              
to sell unwanted  gas to someone else without  consulting with the                                                              
seller,  he  said. Volume  can  also  be  flexible. In  a  typical                                                              
contract  there is  "downward" flexibility,  and  a buyer  usually                                                              
has  to make  that  up  later. The  flexibility  would  be in  the                                                              
ability to take  less if the buyer  does not want it.  In the Gulf                                                              
Coast, for  example, if someone buys  LNG at a certain  price plus                                                              
a liquefaction fee,  the seller may say that  the liquefaction fee                                                              
is how it pays  its debt, so that part must be  paid; however, the                                                              
buyer is not forced  to take and pay for all of  the gas. In other                                                              
words, "You  still have to  pay the tariff,  but I'm not  going to                                                              
force you  to take  on a  cargo that  you don't  want." That  is a                                                              
form of flexibility that buyers really like, he stated.                                                                         
                                                                                                                                
3:46:03 PM                                                                                                                    
SENATOR MACKINNON  said the price could dive  or spike incredibly.                                                              
Sometimes  there are  relationships and  risk and  reward on  both                                                              
sides of that contract, "so is price …?"                                                                                        
                                                                                                                                
MR. TSAFOS  said the  price is  negotiated, and  it comes  down to                                                              
how the price is  set and the price boundaries. If  Alaska were to                                                              
ask for a  minimum price, the buyer  may agree but then  hold down                                                              
an increase if  gas prices go up.  That is a form of  risk sharing                                                              
where  the  seller  wants  a  price   to  be  protected  from  the                                                              
downside, and the buyer gets protection at higher prices.                                                                       
                                                                                                                                
SENATOR  MACKINNON  said  her understanding  is  that  the  global                                                              
supply  of gas  is starting  to stabilize-demand  is beginning  to                                                              
meet supply.  Will Alaska  see a discounted  rate for  the project                                                              
to get a 20-year contract when using a third party financer?                                                                    
                                                                                                                                
MR. TSAFOS said he  does not know. In the Gulf  Coast, there is no                                                              
price difference  for a buyer  who is buying  the gas  for someone                                                              
else. The  price depends  on the market,  and generally  there are                                                              
four-year  or five-year  cycles  of high  and low  pricing. It  is                                                              
really  down now, but  that is  what determines  the price.  There                                                              
are times when  companies choose to make disadvantageous  deals to                                                              
be the first to capture a market or such.                                                                                       
                                                                                                                                
SENATOR MACKINNON  said the  producers have said  they need  a 20-                                                              
year  contract  from the  state.  They  are asking  for  financial                                                              
conditions that constrain  the state through a vote  of the people                                                              
of Alaska to a fixed price. Please comment.                                                                                     
                                                                                                                                
3:50:42 PM                                                                                                                    
MR.  TSAFOS said  he suspects  that their  requirement for  fiscal                                                              
certainty will  change if  their capital  commitment goes  down to                                                              
$10 billion  over 10 years relative  to $50 billion over  5 years.                                                              
He said  he is  only speculating,  but a  bigger commitment  would                                                              
call for  more certainty.  If the  producers are shipping  through                                                              
Alaska's facility  and the  price goes up,  all the profits  go to                                                              
them,  so there  will be  a great  temptation  to increase  taxes.                                                              
With  buying the  gas, there  is  no upside  or downside-there  is                                                              
just  a transaction  that  might  not have  the  same exposure  to                                                              
potential tax  changes. The  tolling model  shifts revenue  to the                                                              
resource,  so if the  price goes  up, the  resource makes  all the                                                              
money, and that would be good for everyone-except Alaska.                                                                       
                                                                                                                                
REPRESENTATIVE JOSEPHSON  referred to the  change in the  gas team                                                              
lead for the  Alaska administration. Even though  this new pathway                                                              
could affect  the ultimate  timeline, do you  agree that  there is                                                              
nothing  the administration  has  done  that is  prohibiting  FEED                                                              
from   occurring  as   originally  scheduled   next  spring?   The                                                              
committee hears  repeatedly that  Alaska's partners are  not ready                                                              
to enter  FEED, and  the administration has  not done  anything to                                                              
cause that.                                                                                                                     
                                                                                                                                
3:53:02 PM                                                                                                                    
MR. TSAFOS  said he  is absolutely  correct.  The question  is how                                                              
the state responds to the producers' decision to not go to FEED.                                                                
                                                                                                                                
REPRESENTATIVE  JOSEPHSON said his  colleague made comments  about                                                              
the new  director of  AGDC that  troubled him.  "We voted  for the                                                              
power to  hire him by a  vote of 52 to  3, and I think  the record                                                              
should reflect that."  He said that Mr. Tsafos has  made some good                                                              
arguments for  the state to be  cautious. He noted that  AS 31.025                                                              
empowers AGDC  to do what  it is doing,  and the legislative  role                                                              
is the power  of the purse. He  asked if Mr. Tsafos  believes that                                                              
nothing that AGDC is suggesting in this pivot is prohibitive.                                                                   
                                                                                                                                
MR. TSAFOS said  that the legal interpretation of SB  138 is above                                                              
his pay grade.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  JOSEPHSON noted  that  Mr. Van  Tuyl said,  pretty                                                              
effusively,  that   the  state-led  project  could   be  the  best                                                              
structure going  forward, "and  I think he  was the  most effusive                                                              
of  the three."  What do  you make  of his  testimony relative  to                                                              
your very compelling precautionary statements?                                                                                  
                                                                                                                                
MR.  TSAFOS  said  he  has no  qualms  with  what  Wood  Mackenzie                                                              
presented yesterday.  "I started off  by saying I think  there's a                                                              
good merit  for the  state to consider  a bigger  role. I  have no                                                              
objection  to that.  I  think  that makes  a  lot  of sense."  His                                                              
message  today  is that,  "If  I was  taking  over  a $50  billion                                                              
project  I would  be a  lot more  worried  than I  feel folks  are                                                              
worried." There  is so much  that comes with  it, and most  of the                                                              
things  that  have  been  offered   as  reassurance  have  yet  to                                                              
reassure him.  He said he does  not necessarily disagree  with Mr.                                                              
Van Tuyl, but  he is not sure  if a state-led project  is the best                                                              
way. There  are possibly  other ways  Alaska could approach  this.                                                              
It is a whole  other world that Alaska is getting  into, and until                                                              
more questions are answered, be skeptical.                                                                                      
                                                                                                                                
REPRESENTATIVE  SADDLER  noted  that  Mr. Tsafos  is  an  informed                                                              
observer  of the  oil and  gas industry.  This  process has  stage                                                              
gates that assume  that every step is going to have  a decision to                                                              
continue  the project.  It called  for the four  parties to  spend                                                              
about  a  half  million dollars  to  get  reliable  answers  about                                                              
whether to  continue or to stop.  The producers seem to  be saying                                                              
"no" or "not  yet," but the administration is  insisting on saying                                                              
"yes, now," and  proposing to change the structure.  He said there                                                              
are a lot  of questions that  need to be answered  before agreeing                                                              
to support  that change. He asked,  "Do you see  any justification                                                              
for  changing the  structure  other  than the  slow  down and  the                                                              
charge  toward  FEED?"  Are there  any  technical,  political,  or                                                              
global market changes that might make this a wise move?                                                                         
                                                                                                                                
3:57:42 PM                                                                                                                    
MR. TSAFOS  said he  buys the cost  of supply  issue. At  the same                                                              
time, the Wood  Mackenzie work shows that nothing  breaks even, so                                                              
$45  oil   equivalent  does  not   work,  because  it  is   not  a                                                              
sustainable   price.  His   understanding   from  reading   public                                                              
statements   is   that   all  three   producers   have   different                                                              
perspectives about  going into FEED. "I don't  think anyone really                                                              
wants to go  into FEED, but I  think they have different  views as                                                              
to  how  much  they  would  like to  keep  working  on  this."  He                                                              
referred to  a letter from  ExxonMobil that  says there is  a 2017                                                              
work  program budget,  and "I  don't want  to put  words in  their                                                              
mouth, but  if I'm ExxonMobil and  I prepare a budget,  I assume I                                                              
like the  budget, otherwise  why would you  prepare it and  put it                                                              
forward?" He  also has  read from  AGDC that the  JVA says  if two                                                              
parties want to  go forward, they can go forward,  but if only one                                                              
party wants to go  forward, the JVA gets dissolved.  He said he is                                                              
trying  to explore  that space between  where  the project  is and                                                              
where  it is  headed,  and  there  is a  lot  in the  middle.  For                                                              
example,  the  main  benefit  of  a state-led  project  is  a  tax                                                              
exemption.  Otherwise,  the producers  would  be  better than  the                                                              
state  at finding third  party investors;  they  can do better  at                                                              
selling the product  to the market; and they  can find contractors                                                              
better than  the state. So,  he said, he  is thinking  that rather                                                              
than  take over  the  project  on the  premise  of  an unsure  tax                                                              
exemption, "why  don't we  figure out what  we can keep  spending?                                                              
Can  we  make  sure  that  they  don't  ship  Steve  Butt  off  to                                                              
somewhere else?"  He suggested  having Mr. Butt  see what  else he                                                              
can come  up with,  as he has  already gotten  the project  to the                                                              
lower end  of the $45  to $65 billion cost.  "Send him back  to do                                                              
some more  homework, and  you do your  homework." There  is plenty                                                              
the  legislature could  be doing,  including the  question of  tax                                                              
exemptions. He  understands that  the state is  looking at  a FEED                                                              
decision  in  the middle  of  2018  with the  state-led  scenario,                                                              
"which you  could probably  get to anyway,  at least with  some of                                                              
the parties  if you were to  keep working this approach."  He said                                                              
there is a  huge space in between,  "and I don't really  know what                                                              
happened to that space."                                                                                                        
                                                                                                                                
REPRESENTATIVE  SADDLER  said  Representative   Hawker  encouraged                                                              
everyone to read  the industrial megatrends book.  The book taught                                                              
him that  "you can  be driven by  time, in  which you  trade money                                                              
for time,  or you  can be driven  by money,  which you  would play                                                              
for time.  So, trying to adhere  to a firm timetable  irrespective                                                              
of the global  considerations exposes you to  tremendous financial                                                              
risks."                                                                                                                         
                                                                                                                                
REPRESENTATIVE HERRON  noted that the attorneys said  that the IRS                                                              
tends  to  regard  anything  that  makes  or  saves  money  for  a                                                              
political  subdivision   as  an  essential   government  function.                                                              
Interestingly,  Mr. Tsafos'  Option  2 showed  that  a 12  percent                                                              
return  is important  for the  viability of  the project.  Shaving                                                              
that down  would be  problematic, he opined.  Option 3  dealt with                                                              
Alaska buying  and selling  gas, and based  on what  the attorneys                                                              
said,  he wondered  if that  is an  essential government  function                                                              
that makes  or saves money. "Are  those a couple of holes  that we                                                              
must consider?"                                                                                                                 
                                                                                                                                
MR. TSAFOS  said absolutely. Those  are two of the  many questions                                                              
that Alaska should figure out.                                                                                                  
                                                                                                                                
4:02:19 PM                                                                                                                    
SENATOR  DUNLEAVY noted  that  Mr. Tsafos  was  around during  the                                                              
construction of  this bill. He asked,  "Are we getting  to the end                                                              
of what was  embedded within this  law?" He asked if SB  138 still                                                              
allows  different options  to  be explored  and  to keep  spending                                                              
money, or does SB 138 need to be revisited?                                                                                     
                                                                                                                                
MR. TSAFOS  said the discussions  of SB  138 did not  include this                                                              
option.  That does  not mean  SB 138 negates  it,  but it was  not                                                              
"what we  were sitting around talking  about." Is SB 138  dead? It                                                              
seems  to be in  its last  gasps, he  said, but  there are  things                                                              
that  can be done  to save  good parts  of the  process, like  the                                                              
alignment with  producers. "You  had three  of the best  companies                                                              
in the world having  your back, and now they're on  the other side                                                              
of the table." Judging  from testimony, SB 138 seems  to have come                                                              
to an end, "but I don't really understand why."                                                                                 
                                                                                                                                
SENATOR DUNLEAVY  said the checks and  balances in SB 138  got him                                                              
to  reluctantly vote  yes, because  of  the history  in Alaska  of                                                              
projects that  just don't pan out  or are not thought  out. "We've                                                              
reached  that gate  where it appears  that at  various levels  the                                                              
private  partners  have  basically said  they're  not  comfortable                                                              
investing more  in this  concept that  was envisioned  under 138."                                                              
If  the  vision  and  concept  is   changing,  we  can  have  that                                                              
discussion.  He  has concerns  that  the  bill is  open-ended  and                                                              
allows almost anything to be contemplated.                                                                                      
                                                                                                                                
4:06:49 PM                                                                                                                    
MR.  TSAFOS  said  specific  checks   and  balances  were  in  the                                                              
legislation. For  example, contracts longer than two  years had to                                                              
come  back   to  the  legislature,   but  the  members   were  not                                                              
contemplating   this   concept   deviation.   The   blueprint   is                                                              
different, and it would be nice to know what the new one is.                                                                    
                                                                                                                                
4:07:29 PM                                                                                                                    
CHAIR GIESSEL  said she  posted a  letter for yesterday's  meeting                                                              
from the  Department of Law that  opines on whether SB  138 allows                                                              
this level  of flexibility. The letter  says that it does,  but it                                                              
points out that the legislature has controls put in place.                                                                      
                                                                                                                                
4:07:59 PM                                                                                                                    
SENATOR MACKINNON  said she does not believe  that the legislature                                                              
ever  voted on  President  Meyer.  We vote  on  board members  who                                                              
actually  hire [the  president]. It  has already  been stated  why                                                              
the  producers may  feel  like the  state  has  not fulfilled  the                                                              
obligation to  go into FEED.  The enalytica contractor  has stated                                                              
that  there is  not  fiscal certainty  and  there  are some  other                                                              
things that the  state hasn't done "in the form of  PILT and other                                                              
things  that we haven't  come forward  with,"  but there are  also                                                              
things that  the producers have  not done, like the  gas balancing                                                              
agreement  and  some other  things.  There  are equal  fingers  to                                                              
point at each other  for completion prior to going  into FEED, she                                                              
said. There  is a JVA with a  small group of people  who advocates                                                              
for the  parties that  remain-the three  producers and  the state.                                                              
The management team is much larger.                                                                                             
                                                                                                                                
MR.  TSAFOS said  there are  about  130 people  on the  management                                                              
team that report to Steve Butt.                                                                                                 
                                                                                                                                
SENATOR MACKINNON  said today the committee heard  that ExxonMobil                                                              
has 80 people  on that team who  need to transition to  the state.                                                              
She asked how many people on the team are from the state.                                                                       
                                                                                                                                
MR.  TSAFOS  said  he  does  not know,  but  he  saw  one  company                                                              
breakdown  during  the  TransCanada negotiations.  At  that  time,                                                              
AGDC had zero people on the team.                                                                                               
                                                                                                                                
SENATOR MACKINNON  said her  point is that  she wants  a pipeline,                                                              
but  she wants  it to  be  competitive, and  she  wants Alaska  to                                                              
responsibly  take on  any transition  that  the administration  is                                                              
proposing. It is  a huge ask of the legislature  given its current                                                              
involvement in that management team.                                                                                            
                                                                                                                                
4:11:26 PM                                                                                                                    
CHAIR  GIESSEL said  this  concludes the  two-day  meeting on  the                                                              
transition to  a new Alaska LNG  plan, which will take  place next                                                              
month. She thanked participants. She said she will submit                                                                       
additional questions from committee members to AGDC.                                                                            
                                                                                                                                
4:12:50 PM                                                                                                                    
There being no further business to come before the committee,                                                                   
Chair Giessel adjourned the meeting at 4:12 p.m.                                                                                
                                                                                                                                

Document Name Date/Time Subjects
Tax Issues Raised by the AKLNG Project Document - Manley & Brautigam 2016.pdf SRES 8/25/2016 1:00:00 PM
Tax issues and the AKLNG project
enalytica, AK LNG State-led project (slides), August 2016.pdf SRES 8/25/2016 1:00:00 PM
Enalytica analysis AKLNG
enalytica, AK LNG State-led project, August 2016.pdf SRES 8/25/2016 1:00:00 PM
enalytica analysis AK LNG.2
Jermaine Dunnagan Owens Memo to LB&A 8-22-16.pdf SRES 8/25/2016 1:00:00 PM
JDO Opinion on Taxation for AGDC new concept plan
Remarks by Bill McMahon to SRES HRES 08-25-2016.pdf SRES 8/25/2016 1:00:00 PM
ExxonMobil Testimony
ExxonMobil Letters to Alaska_Gas_Sales.pdf SRES 8/25/2016 1:00:00 PM
BP Legislative Testimony_08-2016_R9_as delivered.pdf SRES 8/25/2016 1:00:00 PM
BP testimony
AGPA PLR 2000.pdf SRES 8/25/2016 1:00:00 PM
Tax Documents AGPA
AGPA application to IRS 1999 (2).pdf SRES 8/25/2016 1:00:00 PM
Tax exempt application AGPA