Legislature(2017 - 2018)BUTROVICH 205

03/21/2018 03:30 PM RESOURCES

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Audio Topic
03:30:12 PM Start
03:30:46 PM Overview: Department of Natural Resources' Role in Natural Gas Commercialization Efforts
04:55:28 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: TELECONFERENCED
The Department of Natural Resources' Role in
Natural Gas Commercialization Efforts
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 21, 2018                                                                                         
                           3:30 p.m.                                                                                            
                                                                                                                                
                             DRAFT                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator John Coghill, Vice Chair                                                                                                
Senator Natasha von Imhof                                                                                                       
Senator Kevin Meyer                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator Click Bishop                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Bert Stedman                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Overview: Department of Natural Resources' Role in Natural Gas                                                                  
Commercialization Efforts                                                                                                       
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ANDREW MACK, Commissioner                                                                                                       
Department of Natural Resources (DNR)                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Provided the overview: Department of Natural                                                              
Resources' Role in Natural Gas Commercialization Efforts.                                                                       
                                                                                                                                
ED KING, Gas Commercialization Advisor                                                                                          
Department of Natural Resources (DNR)                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Helped provide the overview: Department of                                                                
Natural Resources' Role in Natural Gas Commercialization                                                                        
Efforts.                                                                                                                        
                                                                                                                                
                                                                                                                                
STEVE WRIGHT, Senior Project Advisor                                                                                            
Alaska LNG Gasline Project (AKLNG)                                                                                              
Department of Natural Resources (DNR), Commissioner's Office                                                                    
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Helped provide  the overview:  Department of                                                             
Natural   Resources'  Role   in  Natural   Gas  Commercialization                                                               
Efforts.                                                                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:30:12 PM                                                                                                                    
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting  to order at 3:30  p.m. Present at the  call to                                                               
order  were Senators  Bishop, Von  Imhof, Wielechowski,  Coghill,                                                               
Meyer, and Chair Giessel. Senator Stedman was excused.                                                                          
                                                                                                                                
^Overview: Department  of Natural Resources' Role  in Natural Gas                                                               
Commercialization Efforts                                                                                                       
           Overview: Department of Natural Resources'                                                                       
         Role in Natural Gas Commercialization Efforts                                                                      
                                                                                                                              
3:30:46 PM                                                                                                                    
CHAIR GIESSEL announced that today  the committee would hear from                                                               
the  Department of  Natural Resources  (DNR) on  its role  in the                                                               
state's  natural  gas  commercialization  efforts.  She  welcomed                                                               
Commissioner Mack who  would go over his  department's mission on                                                               
this  goal,  the  tools  that   it  possesses,  and  relate  what                                                               
legislators  can expect  in the  coming year  related to  natural                                                               
resources.                                                                                                                      
                                                                                                                                
3:31:29 PM                                                                                                                    
ANDREW  MACK,  Commissioner,   Department  of  Natural  Resources                                                               
(DNR),  Juneau,  Alaska,  introduced himself  and  invited  Steve                                                               
Wright,  the Alaska  LNG Gasline  Project (AKLNG)  Senior Project                                                               
Advisor and  a consultant  to the  Commissioner's Office,  and Ed                                                               
King, Gas  Commercialization Advisor, to  the table to  help with                                                               
the presentation.                                                                                                               
                                                                                                                                
COMMISSIONER MACK  said he would discuss  royalty in kind/royalty                                                               
in value  (RIK/RIV) and obligations  the DNR has with  respect to                                                               
that  decision, the  process of  royalty  gas disposition,  lease                                                               
management  considerations, and  DNR engagement  with the  Alaska                                                               
Gas Development Corporation (AGDC)  and related DNR contracts and                                                               
agreements, which are contemplated under SB 138.                                                                                
                                                                                                                                
3:33:55 PM                                                                                                                    
He  said it's  important to  frame the  first issue  to give  the                                                               
committee a  very clear look at  where he believes they  stand in                                                               
the process. He has been asked  how much progress they have made,                                                               
and the truth  is they are in the early  stages of the evaluating                                                               
portion, but under  the AKLNG process, he feels they  are in good                                                               
shape. A couple of critical points are:                                                                                         
                                                                                                                                
     1. SB 138, that created  and established AGDC, is still                                                                    
     the   law   they   follow,    and   they   take   those                                                                    
     responsibilities seriously.                                                                                                
                                                                                                                                
     2. They believe  SB 138 as a legal  structure fits very                                                                    
     well with the way  the project is currently structured,                                                                    
     which is different  than what was envision  when it was                                                                    
     passed.   They    have   not   been   aware    of   any                                                                    
     inconsistencies  with  how  the  project  is  currently                                                                    
     formulated.                                                                                                                
                                                                                                                                
3:36:01 PM                                                                                                                    
COMMISSIONER MACK said  he wanted to describe  how the department                                                               
is  meeting its  obligations,  walk through  where  he feels  the                                                               
project is from  a DNR perspective, and tell  them what resources                                                               
the  department has  available. In  2016,  when he  came to  this                                                               
position,  the DNR  Gas Commercialization  Team  had a  dedicated                                                               
budget  and  eight  staff  and   facing  a  situation  where  the                                                               
companies  had collectively  indicated  that  as an  equity-based                                                               
project  they weren't  sure it  would pass  muster. An  offer was                                                               
made, and the state accepted, to take the lead in the project.                                                                  
                                                                                                                                
He  views  2016 as  a  transition  year,  he  said, and  in  that                                                               
process, he  made the difficult decision  of "right-sizing" their                                                               
effort by  laying off  or moving those  eight employees  from DNR                                                               
employment to  other areas  in DNR or  other agencies.  He worked                                                               
very  hard to  maintain  critical pieces  of  the team  including                                                               
Steve  Wright,  whose  background  is  having  been  the  working                                                               
interest representative for Chevron at  the two North Slope Units                                                               
that are implicated by this  project (Prudhoe Bay (PBU) and Point                                                               
Thomson (PTU); and maintained the  contract with the consultants,                                                               
Black and Veatch.                                                                                                               
                                                                                                                                
COMMISSIONER  MACK  said that  it's  been  pretty public  that  a                                                               
transition was  going on where  the data and  underlying resource                                                               
reports  which were  provided to  the  Federal Energy  Regulatory                                                               
Commission (FERC) to  support the project were being  tied up and                                                               
submitted. There  was also the  effort by the  Governor, himself,                                                               
AGDC,  Keith  Meyer, and  John  Hendricks  of  going out  in  the                                                               
market,   traveling,  and   meeting  with   potential  interested                                                               
parties.  They took  a  couple  of trips  in  2016 to  Singapore,                                                               
Korea,  and  Japan  and  talked about  the  opportunity  and  the                                                               
opportunity in  terms of  a project.  He was  there specifically,                                                               
because he  was talking  about the great  potential on  the North                                                               
Slope.                                                                                                                          
                                                                                                                                
3:39:37 PM                                                                                                                    
COMMISSIONER  MACK said  2017 was  really a  marketing year,  and                                                               
until late in  2017, they didn't have a "close  bead" on what the                                                               
opportunity  was. But  obviously,  with the  announcement of  the                                                               
Joint  Development Agreement  (JDA), the  department can  now set                                                               
its sights  on that opportunity.  This effort is  being resourced                                                               
within  the  DNR  Commissioner's  Office and  within  DNR  itself                                                               
including Mark  Wiggin, DNR Deputy  Commissioner, as the  DNR Gas                                                               
Commercialization  Manager; Ed  King,  DNR Gas  Commercialization                                                               
Advisor;  Steve Wright,  AKLNG Senior  Project Advisor;  and they                                                               
still maintain  Black and Veatch  as a contractor  for commercial                                                               
and upstream analysis.                                                                                                          
                                                                                                                                
For  commercial support  the Division  of Oil  and Gas  (DOG) has                                                               
three  individuals:  Rebecca  Kruse,   DOG  legal  counsel;  Greg                                                               
Bidwell,  the  lead commercial  analyst;  and  Johnny Maisa,  DOG                                                               
commercial  analyst.   For  legal   support  they  rely   on  the                                                               
Department  of Law  (DOL): principally  on  Martin Schulz,  Peter                                                               
Caltagirone,  and  outside counsel  Matt  Finley  with Ashburn  &                                                               
Mason. For permitting  needs, they have Heidi  Hanson, DNR Deputy                                                               
Commissioner;  Faith Martineau,  the new  Executive Director  for                                                               
the  Office of  Project Management  and Permitting  (OPMP); Jason                                                               
Walsh in the  DOG's State Pipeline Coordinator's  Office; and Don                                                               
Perrin,  the specific  permit coordinator  at OPMP  for the  AGDC                                                               
project.                                                                                                                        
                                                                                                                                
3:41:09 PM                                                                                                                    
COMMISSIONER MACK said  the reality is that none  of these people                                                               
are exclusive  to this project, but  they all have many  years of                                                               
experience; this  is just a part  of their job. They  do have the                                                               
benefit of the experience of SB 138, which was passed in 2014.                                                                  
                                                                                                                                
With 2016 being the transition year,  he said DNR didn't do a lot                                                               
of work on the project in 2017.  But, at the end of the year they                                                               
saw  the  announcement  of  the  JDA,  and  so  they  started  to                                                               
restructure  and  ramp-up efforts.  The  project  doesn't have  a                                                               
dedicated budget, but it is poised,  and this is the team that is                                                               
going to be doing the work.                                                                                                     
                                                                                                                                
SENATOR BISHOP asked him to  provide the committee with an Office                                                               
of Research and Development (ORD) chart.                                                                                        
                                                                                                                                
COMMISSIONER MACK answered, "Absolutely."                                                                                       
                                                                                                                                
Slide 3: Primary responsibilities for DNR                                                                                       
                                                                                                                                
COMMISSIONER  MACK said  AS 38.05.182  stipulates  that DNR  will                                                               
elect to  receive Alaska  LNG royalty  gas in-kind  (RIK), unless                                                               
the DNR Commissioner  finds that taking gas  in-value (RIV) would                                                               
be in the  best interest of the state. The  normal process is for                                                               
DNR to send  a letter to the Senate President  and the Speaker of                                                               
the  House -  the last  letter was  sent March  31, 2017,  and it                                                               
stated  that RIK  is the  default.  However, in  most cases,  the                                                               
state  takes RIV.  The  letter  points out  where  the state  has                                                               
actually gone  through the process  of determining where  to take                                                               
RIK.                                                                                                                            
                                                                                                                                
Briefly, he explained  the process. If there is  an indication of                                                               
interest before  entering into an RIK  contract, DNR has to  do a                                                               
preliminary best  interest finding (BIF), which  is usually being                                                               
developed at  the same time  a contract is being  negotiated. The                                                               
department  has two  contracts currently:  one with  Endeavor and                                                               
the other with  Petro Star; both are in-state  refiners which buy                                                               
royalty  oil. Ultimately,  this issue  has to  go out  for public                                                               
comment and  then to the  Royalty Board  before it comes  to this                                                               
body for legislative approval.                                                                                                  
                                                                                                                                
This  process has  been ongoing  since there  has been  a royalty                                                               
contract in  Alaska. The most important  parts of it are  the BIF                                                               
and the fact  that any RIK contract has to  come before this body                                                               
for ratification.  They would  go through the  same process  if a                                                               
decision were made to propose a RIK contract for gas sales.                                                                     
                                                                                                                                
3:45:40 PM                                                                                                                    
CHAIR  GIESSEL  asked  what  criteria he  uses  when  making  the                                                               
decision to choose to do the default (RIK).                                                                                     
                                                                                                                                
COMMISSIONER MACK said that decision  implicates two statutes: AS                                                               
38.05.183(e)  and AS  38.06.070(a).  Generally speaking,  biggest                                                               
criteria are  the cash  value and the  "projected effects  on the                                                               
state's economy."  AS 38.06.070(a) provides that  the decision is                                                               
based on  the revenue needed  and the projected  fiscal condition                                                               
of the state, which he thinks is the most important element.                                                                    
                                                                                                                                
CHAIR GIESSEL  asked what resources  or experts he would  rely on                                                               
in making that evaluation.                                                                                                      
                                                                                                                                
COMMISSIONER  MACK  said  he  would  rely on  the  team  he  just                                                               
identified. Historically,  when the state has  done RIK contracts                                                               
for  oil,  they have  been  done  exclusively internally  by  DOG                                                               
employees. Outside  counsel has been  used only a few  times. For                                                               
this particular question,  he would use both  the lead commercial                                                               
analyst,  Greg Bidwell,  Mr. Wright,  a contract  employee, Deepa                                                               
Poduval  with Black  & Veatch,  and other  support employees.  He                                                               
would also consult with the  Department of Law and the Department                                                               
of Revenue.                                                                                                                     
                                                                                                                                
3:49:28 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
3:50:47 PM                                                                                                                    
CHAIR GIESSEL called the meeting back to order at 3:50 p.m.                                                                     
                                                                                                                                
COMMISSIONER MACK said he was able  to find the criteria under AS                                                               
38.05.183 (e) and it says:  the cash value offered, the projected                                                               
effects of the  sale on the economy of the  state (critical), and                                                               
a couple that  are focused on the benefits  of refining in-state,                                                               
which might not be particularly relevant.                                                                                       
                                                                                                                                
Then  the criteria  lists AS  37.06.070, which  talks about  some                                                               
very  broad concepts  including the  revenue needs  and projected                                                               
fiscal  condition  of the  state,  the  existence and  extent  of                                                               
present and  projected local needs  for oil and gas  products and                                                               
byproducts,  the desirability  of  localized capital  investment,                                                               
social  impacts  of the  transaction,  and  additional costs  and                                                               
responsibilities  which  could  be  imposed upon  the  state  and                                                               
affect    political     subdivisions    by    development-related                                                               
transactions.                                                                                                                   
                                                                                                                                
These two  statutes describe the  criteria very  thoroughly. Most                                                               
recently, he said, and this  body and this committee reviewed the                                                               
Petro Star contract and ultimately  ratified it. It has been done                                                               
a number of  times for royalty oil contracts,  and the department                                                               
has  been  able to  show  where  the  state  can get  a  modestly                                                               
increased price.                                                                                                                
                                                                                                                                
CHAIR GIESSEL thanked  him for the explanation and  said the cost                                                               
of this project is massive and  legislators want to make sure the                                                               
state is  getting an equally massive  value out of it.  She asked                                                               
if  legislators  can expect  the  same  level  of detail  in  his                                                               
document  outlining decision  points  and data  the decision  was                                                               
based on.                                                                                                                       
                                                                                                                                
COMMISSIONIER MACK answered yes.  He added that royalty contracts                                                               
contemplating selling  royalty oil use  a quantum of 10,  20, 30,                                                               
and 40 thousand  barrels and most royalty oil  contracts are five                                                               
years in  length. Gas  contracts are different  in that  they are                                                               
much larger and  presumably longer. Most people  would agree that                                                               
in order for this evaluation to  be found in the interests of the                                                               
state for  this body to  deliberate, it would  have to be  a much                                                               
longer contract, which adds complexity.                                                                                         
                                                                                                                                
3:55:14 PM                                                                                                                    
CHAIR GIESSEL  said she totally  appreciated that and  expects to                                                               
see  detailed  modeling  on  those   criteria  and  asked  if  he                                                               
envisioned  a particular  time he  would make  the best  interest                                                               
findings (BIF).                                                                                                                 
                                                                                                                                
COMMISSIONER MACK replied they are  not on a specific time table,                                                               
but it  is somewhat  sequential in  the sense  that they  have to                                                               
understand what  the other  gas sales  contracts would  look like                                                               
for comparison.  Now they  feel they  are in  a good  position to                                                               
make that  evaluation, but  they are  at the front  end of  it. A                                                               
couple of years ago, the person  had been identified and hired to                                                               
start the process  of writing the preliminary BIF on  what an RIK                                                               
evaluation  would look  like, but  that  never materialized.  So,                                                               
they know that is in front of them.                                                                                             
                                                                                                                                
CHAIR GIESSEL  said she thought  it would  be some ways  down the                                                               
road when  he actually has data  about what the price  of the gas                                                               
will be  at the wellhead and  what the construction costs  of the                                                               
project will  be and those might  be in ranges, and  she asked if                                                               
he would  be able  to provide the  legislature with  the analysis                                                               
for the different price and cost  ranges in terms of making their                                                               
decision. They want to know how  broad his data is and whether it                                                               
covers those kinds of variables.                                                                                                
                                                                                                                                
COMMISSIONER  MACK  replied  the statute  has  opportunities  for                                                               
conversation around  what those  factors are.  This is  when they                                                               
have an evaluation  in hand, which they are relying  upon to make                                                               
a  recommendation for  an RIK  selection,  if that's  the way  it                                                               
goes.                                                                                                                           
                                                                                                                                
CHAIR  GIESSEL  said  she  suspected that  the  co-chair  of  the                                                               
Finance Committee will be interested in that information.                                                                       
                                                                                                                                
3:58:34 PM                                                                                                                    
SENATOR VON IMHOF asked if he  anticipated that the amount of RIK                                                               
gas  the state  may  be  able to  take  may  change depending  on                                                               
whether  the state  has a  25 percent,  a 10  percent, or  a zero                                                               
percent ownership.                                                                                                              
                                                                                                                                
COMMISSIONER MACK answered  when the state makes  its decision to                                                               
select RIK, a rate is set,  but the producers also have to decide                                                               
they want  to provide their tax  as gas. There is  an opportunity                                                               
for  that percentage  to go  up and  down during  negotiations if                                                               
certain decisions  are made  with respect to  other parts  of the                                                               
project.  From his  perspective, they  are looking  at this  as a                                                               
royalty  portion  and  a  TAG  portion,  a  fairly  well-laid-out                                                               
sequence in  the law. Either  they go down  that road and  end up                                                               
with 25 percent  of the gas being available or  it becomes an RIV                                                               
situation.                                                                                                                      
                                                                                                                                
4:00:31 PM                                                                                                                    
SENATOR  VON IMHOF  asked  if  the state  gets  any  take in  the                                                               
scenario   where   a   dominant    equity   investor   owns   the                                                               
infrastructure  and chooses  to  purchase the  gas  right at  the                                                               
beginning point before it goes into the pipe.                                                                                   
                                                                                                                                
ED  KING, Gas  Commercialization Advisor,  Department of  Natural                                                               
Resources (DNR),  answered that the  royalties that were  due are                                                               
lease-conditioned.  At Point  Thomson,  14.5 percent  of the  gas                                                               
that is  produced belongs to  the state.  Then the state  has the                                                               
option  of either  taking monetary  value of  that gas  or taking                                                               
physical custody of it and trying  to sell it for a higher price.                                                               
In Prudhoe Bay, all of the  leases are 12.5 percent, so the state                                                               
gets  12.5 percent  of  all of  that gas  regardless  of who  the                                                               
leaseholder  or  purchaser  of  the gas  is.  The  Department  of                                                               
Revenue also has a tax component,  which is not a lease agreement                                                               
but a  compulsory requirement by  the legislature that  the state                                                               
owns 13  percent of  the gas  that is  produced with  the royalty                                                               
subtracted first.  It works  out that 24.2  percent of  the total                                                               
gas that is  produced belongs to the state regardless  of who the                                                               
investor, lessee, or purchaser is.                                                                                              
                                                                                                                                
4:02:30 PM                                                                                                                    
Slide 4: Royalty Gas Disposition - RIK                                                                                          
                                                                                                                                
STEVE WRIGHT, Senior Project Advisor,  Alaska LNG Gasline Project                                                               
(AKLNG),  Department of  Natural  Resources (DNR)  Commissioner's                                                               
Office, said he  is engaged in North  Slope gas commercialization                                                               
efforts for  the state. He  said slide 4  discusses a few  of the                                                               
critical aspects  to disposing  of state's  royalty gas  under an                                                               
RIK scenario.                                                                                                                   
                                                                                                                                
MR.  WRIGHT explained  that under  the  current AGDC-led  project                                                               
structure, if  DNR elects  to receive RIK,  the state  could sell                                                               
its  royalty  gas  and  tax  as  gas  (TAG)  to  the  Alaska  Gas                                                               
Development  Corporation  (AGDC),  and  AGDC  has  had  extensive                                                               
conversations about how to monetize gas.                                                                                        
                                                                                                                                
Custody transfer  of the state's RIK  and TAG gas share  from the                                                               
Prudhoe Bay  Unit (PBU) and the  Point Thomson Unit (PTU)  to any                                                               
potential buyer  would take place  on the North Slope,  either at                                                               
the wellhead,  at the fence line  for either of the  units, or at                                                               
the inlet to  the gas treatment plant (GTP). This  point is still                                                               
uncertain.                                                                                                                      
                                                                                                                                
The DNR  is actively engaged  with AGDC on  discussions regarding                                                               
development  of the  Gas Sales  Agreement (GSA).  A contract  for                                                               
sale of the state's RIK and  TAG gas will require a Royalty Board                                                               
recommendation and approval by the legislature.                                                                                 
                                                                                                                                
4:04:41 PM                                                                                                                    
COMMISSIONER MACK  said in regard  to custody, one of  the things                                                               
they are  aware of  (from the equity-based  model with  the three                                                               
producer  companies)  is  that the  application  to  the  Federal                                                               
Energy Regulatory Commission (FERC)  included the lateral between                                                               
the two units. That is still  pending at FERC. The two units were                                                               
viewed  as being  critical  to the  development  of the  project,                                                               
because the  resource was needed to  bring down the cost.  So, in                                                               
an equity-based  project it  was easy to  foresee how  that would                                                               
get built.  Now that AGDC has  taken the lead, it's  not entirely                                                               
clear but it  is contemplated that they would be  the entity that                                                               
would  take the  lead in  building  the project.  The reason  the                                                               
second bullet  point on slide  4 is  unclear is because  there is                                                               
still room for negotiation.                                                                                                     
                                                                                                                                
4:06:14 PM                                                                                                                    
MR. KING  remarked that  the department has  two options  when it                                                               
takes its  royalty: it can take  physical custody of gas  in kind                                                               
and  then it  has the  responsibility of  disposing of  it, which                                                               
requires a  marketing team and  a contract. Another option  is to                                                               
effectively let the  producers sell the gas for  the state (coat-                                                               
tail  on  the producers'  contracts),  which  is done  by  taking                                                               
royalty  in value  (RIV). This  is where  the state  receives the                                                               
same value  that the producers receive  for the gas that  it owns                                                               
as royalty  gas. If  the state  does that,  all it  has to  do is                                                               
determine  what  the  value  at  the  wellhead  is  in  order  to                                                               
determine how much  money is due. In order to  do that, the state                                                               
would need  to be able  to calculate  what the royalty  value is,                                                               
which would require  the state to see the  contracts, the tolling                                                               
arrangements,  and transportation  costs (the  same as  the state                                                               
does  to back  up the  costs for  the oil  fields). If  the state                                                               
can't  beat the  royalty  value that  the  producers are  selling                                                               
their gas for, then the department  has the option to simply take                                                               
the same value that they are receiving.                                                                                         
                                                                                                                                
MR. KING said SB 138  provided a provision to AS 38.05.180(ii)(2)                                                               
that allows the  department to modify leases in  order to clarify                                                               
the value  of the  methodology for determining  the value  of the                                                               
gas, something that  is lacking in current law,  just because the                                                               
North Slope  has never had  a commercial  gas sale. If  the state                                                               
were  to  decide to  do  RIV,  it's  likely  that some  of  those                                                               
existing  ambiguities  would  need   to  be  rectified,  and  the                                                               
commissioner would have the authority to amend the leases.                                                                      
                                                                                                                                
SENATOR BISHOP remarked that the  Alaska Oil and Gas Conservation                                                               
Commission  (AOGCC) didn't  provide  the  state authorization  to                                                               
make a gas sale until a couple years ago.                                                                                       
                                                                                                                                
MR. KING apologized and said he didn't mean to imply fault.                                                                     
                                                                                                                                
COMMISSIONER  MACK  added that  October  15,  2015, is  when  the                                                               
Alaska  Oil and  Gas Conservation  Commission (AOGCC)  issued its                                                               
first order  approving offtake to  match some of the  volumes the                                                               
project contemplated.  It was a  very critical  juncture, because                                                               
they pointed  out to 2020,  2021, 2022,  2023, 2024, and  2025 as                                                               
the probable  dates when gas could  be taken off the  Prudhoe Bay                                                               
Unit.                                                                                                                           
                                                                                                                                
CHAIR GIESSEL  went back to  slide 5 and  asked him to  list what                                                               
the "net allowable deductions" would be.                                                                                        
                                                                                                                                
4:09:37 PM                                                                                                                    
MR.  KING  answered  the  lease terms  require  that  payment  be                                                               
received  at the  point  of production.  A lot  of  times -  when                                                               
selling  oil,  for example  -  it  has  to  be shipped  down  the                                                               
TransAlaska Pipeline (TAPS)  and down to California,  and all the                                                               
costs   associated  with   that   transportation  are   allowable                                                               
deductions. The lease  terms also have costs  that are associated                                                               
with producing the oil or gas  that can be construed as allowable                                                               
deductions.  However,  leases have  changed  over  the years  and                                                               
companies have different allowable  deductions called "field cost                                                               
allowances" or "unit cost allowances."                                                                                          
                                                                                                                                
CHAIR GIESSEL  commented that field cost  allowances were brought                                                               
up in a  written answer from questions to the  AGDC implying that                                                               
field   cost  allowances   were   somehow   brought  before   the                                                               
legislature for approval, and that  is something she wasn't aware                                                               
of. She asked for clarification.                                                                                                
                                                                                                                                
COMMISSIONER MACK  answered that field  costs in many  cases have                                                               
been negotiated and  settled and it is not unusual  for the state                                                               
to  be  dealing  with  them.   Most  field  cost  allowances  are                                                               
contained  within the  settlement agreements,  although some  are                                                               
outstanding.                                                                                                                    
                                                                                                                                
He  said  that  field  costs  at  the  Point  Thompson  Unit  are                                                               
significant  issues that  need to  be dealt  with. It  has a  new                                                               
production  facility,  unlike  Prudhoe  Bay  which  has  been  in                                                               
production  for  a  long  time  and the  state  has  come  to  an                                                               
understanding with the operator.                                                                                                
                                                                                                                                
CHAIR  GIESSEL  said those  are  decisions  between DNR  and  the                                                               
producer or the company.                                                                                                        
                                                                                                                                
COMMISSIONER MACK added,  "And the court, Madam  Chair." A number                                                               
of those  issues have been  litigated. But other cases  have been                                                               
negotiated and settled.                                                                                                         
                                                                                                                                
Slide 6: SB 138 Allows Lease Amendments                                                                                         
                                                                                                                                
MR.  KING  said  SB  138.05.180  (hh)  and  (ii)  (authority  and                                                               
standards) had  provisions giving the commissioner  the authority                                                               
to modify leases. The royalty  contract terms are binding on both                                                               
parties. So, they can't just  be changed without approval by all.                                                               
The  department doesn't  have  general  authority to  renegotiate                                                               
contracts unless  the legislature  gives them  explicit authority                                                               
or  if the  department  takes the  contract  to the  legislature.                                                               
However,  under SB  138.05.180 (j),  the  department has  royalty                                                               
modification  authority  to  reduce  royalty  rates  when  it  is                                                               
required.                                                                                                                       
                                                                                                                                
SB  138  gives  the  department additional  authority  to  modify                                                               
specific  lease  terms. One  of  those  is  the ability  for  the                                                               
commissioner  to decide  to  take  RIK or  RIV  within a  certain                                                               
window.  Usually,  in  a  royalty  oil  contract,  the  tell  the                                                               
producer is notified  that in 90 days the state  wants its oil in                                                               
kind, and  that would  satisfy the  contract. When  that contract                                                               
expires or  if the buyer  were unable  to accept the  state's oil                                                               
for some  reason, the  state has  the ability  to switch  back to                                                               
RIV.                                                                                                                            
                                                                                                                                
MR. KING  explained that when  they were talking about  the AKLNG                                                               
project  back  in 2014  when  SB  138  was  passed, it  was  very                                                               
critical  to  all parties  to  have  supply security  during  the                                                               
initial project  term: producers  were very  afraid of  the state                                                               
being able to make switches from  RIK to RIV. So, the legislature                                                               
gave DNR  the authority  to remove  that switching  ability. They                                                               
also  gave  them  the  authority   to  modify  or  create  a  new                                                               
methodology for calculating  the allowable expenditure deductions                                                               
(that generates that RIV amount).                                                                                               
                                                                                                                                
As he  said before, some  ambiguities have been litigated  in the                                                               
past.  The  legislature gave  the  department  some authority  to                                                               
remedy some  of the  ambiguities with the  contract or  on leases                                                               
that were not fixed rate  royalties (a sliding scale royalty that                                                               
changes as production  or price levels change or when  there is a                                                               
net profit share  term (NPST), which is an  additional payment to                                                               
the state once  capital is recovered). These two  types of leases                                                               
also gave rise to the ability for  the amount of gas that was due                                                               
to the  state to change  on a  month-to-month basis. It  was very                                                               
difficult  under an  equity structure  -  where the  state had  a                                                               
fixed amount of  capacity - if it had fluctuating  amounts of gas                                                               
supply it  was trying to  move over  a fixed amount  of capacity.                                                               
So,  the authority  was given  to DNR  to "levelize"  the royalty                                                               
rate. For instance, for a 12.5  percent royalty with a 30 percent                                                               
NPSL,  they would  do the  calculation  and figure  out what  the                                                               
right number  was that  gives the  equivalent value.  The sliding                                                               
scales  are similar  where instead  of being  able to  slide they                                                               
would just calculate the equivalent value.                                                                                      
                                                                                                                                
4:17:21 PM                                                                                                                    
He said this  issue isn't as big  of an issue any  more under the                                                               
new model,  because the fixed capacity  isn't really constraining                                                               
the  producers  or   the  state.  It  isn't   as  important,  and                                                               
therefore, they  have not done any  work on it since  the project                                                               
structure changed.                                                                                                              
                                                                                                                                
Slide 7: DNR Commissioner's RIK Finding.                                                                                        
                                                                                                                                
MR. WRIGHT  said the North  Slope has no other  competitive major                                                               
gas sales project  to monetize the gas  at PBU and PTU,  and so a                                                               
noncompetitive  sale is  most likely,  and  that is  contemplated                                                               
within the  statutes. In  that case, DNR  must find  that selling                                                               
the gas to  AGDC in a non-competitive contract is  in the state's                                                               
best  interest. The  gas  sales  contract will  then  need to  be                                                               
ratified  by  the  legislature.   Before  entering  into  an  RIK                                                               
contract to  sell gas,  DNR must  also issue  a finding  that in-                                                               
state gas demand would be met  under the project design. AGDC has                                                               
said  publicly  that they  anticipate  setting  aside up  to  500                                                               
million cubic  feet of  gas, which is  currently more  than twice                                                               
the state's gas  consumption for future and  current in-state gas                                                               
needs. AGDC has  the responsibility to assess  those in-state gas                                                               
demands along with support from DNR.                                                                                            
                                                                                                                                
CHAIR  GIESSEL  said  that  probably  DOG  staff  would  do  that                                                               
assessment and determine if the 500 mcf is accurate.                                                                            
                                                                                                                                
4:20:00 PM                                                                                                                    
COMMISSIONER MACK answered that DNR  has a lot of information and                                                               
technical staff to  evaluate what those needs  would be, although                                                               
they don't get  into the distribution end of things  too far. For                                                               
instance,  the Cook  Inlet Natural  Gas  Storage Alaska  (CINGSA)                                                               
facility on the Kenai Peninsula had to have been approved.                                                                      
                                                                                                                                
CHAIR  GIESSEL   recalled  that  DNR  originally   was  going  to                                                               
participate  in marketing  of the  gas  and asked  if they  would                                                               
still  be  engaged  in  any   in-state  marketing  for  potential                                                               
resource  development  projects that  would  be  using gas,  like                                                               
mines.                                                                                                                          
                                                                                                                                
COMMISSIONER MACK  answered yes. DNR  would be in a  position to,                                                               
and be in a  position of ensuring that if there  is an RIK event,                                                               
that  the project  is poised  to  actually fill  those needs.  He                                                               
invited Mr. King to respond to an RIV scenario.                                                                                 
                                                                                                                                
MR. KING said for an RIV  scenario, the department is required to                                                               
make sure that domestic needs are  met, which falls under the gas                                                               
sales statute, AS 38.05.183 (d). If  the gas is going for export,                                                               
the  department has  to make  a finding  that domestic  needs are                                                               
satisfied first. They would also  be leveraging the work the AGDC                                                               
is doing in  the same way. If  the state were to sell  its gas to                                                               
AGDC, AGDC would be required to meet those standards, as well.                                                                  
                                                                                                                                
4:22:43 PM                                                                                                                    
SENATOR MEYER asked  where he would anticipate  keeping this gas:                                                               
in Nikiski, on the North Slope, or build storage somewhere?                                                                     
                                                                                                                                
MR. KING  replied that it  wouldn't be  prudent for the  state to                                                               
elect RIK and then store the  gas. An RIK election would be under                                                               
an RIK sales contract in which  case the gas would be transported                                                               
through the pipeline to a consumer.                                                                                             
                                                                                                                                
SENATOR   MEYER  responded   that   language   says,  "the   AGDC                                                               
anticipates setting aside," and that was confusing.                                                                             
                                                                                                                                
COMMISSIONER MACK replied that was  maybe not the most artful way                                                               
to say it, but  it would be to commit a  specific amount to sales                                                               
contracts.  The  project  contemplates five  offtake  points  for                                                               
domestic  use. Presumably,  if  there is  an  RIK contract,  that                                                               
demand might be  met by the state  as a seller of  gas, but those                                                               
would be previously negotiated contracts  to utilities that would                                                               
associate  the   costs  of   taking  gas   off  the   system  and                                                               
distributing it. If  it were an RIV event,  that obligation would                                                               
probably fall  to AGDC, and  he didn't think a  storage component                                                               
was contemplated.                                                                                                               
                                                                                                                                
4:24:31 PM                                                                                                                    
SENATOR MEYER said  that Donlin Creek is  anticipating building a                                                               
pipeline  to  their mine  in  Cook  Inlet. Would  DNR  anticipate                                                               
selling them  some of the  gas and  would they be  competing with                                                               
the smaller companies in the Inlet?                                                                                             
                                                                                                                                
COMMISSIONER MACK  answered in  an RIK  situation, they  would be                                                               
marketing the gas  and would contemplate selling it  to a project                                                               
like  Donlin  Creek.  There  would   be  competition  because  of                                                               
existing  production  in  Cook  Inlet.  He  assumed  people  were                                                               
talking about the energy needs for the project.                                                                                 
                                                                                                                                
MR. KING  clarified that the intent  is that AGDC would  not sell                                                               
all  the gas  to  foreign  export users.  It  would withhold  500                                                               
mcf/day of gas  that is not under a long-term,  fixed contract so                                                               
that it can  meet in-state needs. It isn't intended  to mean that                                                               
gas would be put in storage  for future use. If the need existed,                                                               
it would  be available; and if  it wasn't needed, it  could go to                                                               
export.                                                                                                                         
                                                                                                                                
SENATOR BISHOP  commented that it  could just sit in  Prudhoe Bay                                                               
until needed.                                                                                                                   
                                                                                                                                
COMMISSIONER MACK said that was correct.                                                                                        
                                                                                                                                
SENATOR COGHILL wondered how the  gas would move through the pipe                                                               
and what that does to the cost of transportation.                                                                               
                                                                                                                                
MR. KING replied  that the cost of transportation is  going to be                                                               
effectively the  cost of  operations and  capital divided  by the                                                               
number of  molecules that are  transported through  the pipeline.                                                               
So, AGDC  would have to  model a situation  in which the  gas was                                                               
suddenly diverted to a mine.                                                                                                    
                                                                                                                                
COMMISSIONER MACK supported  that answer. He said  the thought is                                                               
once  the system  is up  and  running that  the pull  will be  so                                                               
strong that those costs won't be significant in the long run.                                                                   
                                                                                                                                
4:29:04 PM                                                                                                                    
SENATOR COGHILL  acknowledge that this  issue was way out  in the                                                               
future, but if  the state is selling  its gas as RIV  and then an                                                               
Interior community pulls  off a small amount, 150  mcf, could the                                                               
value be backed up enough to make up for some of the costs.                                                                     
                                                                                                                                
CHAIR  GIESSEL said  she  assumed  that would  be  part of  their                                                               
analysis.                                                                                                                       
                                                                                                                                
COMMISSIONER  MACK  replied that  the  effect  on communities  is                                                               
specifically one of the criteria in  their evaluation and it is a                                                               
big impact. Several communities have a rural energy component.                                                                  
                                                                                                                                
SENATOR VON  IMHOF said  earlier she asked  what the  state's RIK                                                               
would  be if  the  state  ended up  owning  zero  percent of  the                                                               
pipeline or  a small percent. If  the state ends up  owning zero,                                                               
but  it is  going  to  set aside  500  mcf,  the dominant  equity                                                               
investor might not be happy about that. How is that addressed?                                                                  
                                                                                                                                
COMMISSIONER MACK  responded that they  have to be  careful about                                                               
investment  and ownership.   Early  discussions didn't  include a                                                               
system  owned by  anybody other  than  the State  of Alaska.  The                                                               
investments come from another spot.                                                                                             
                                                                                                                                
MR.  KING remarked  that investors  are  always going  to find  a                                                               
return on their  investment and will require  some revenue stream                                                               
in order to  get that. The way  that is done in a  pipeline is by                                                               
charging a  toll for  moving gas  through it,  the transportation                                                               
cost.  The  owners  end  up  paying a  toll  (a  tariff)  to  the                                                               
midstream  owners,  the  same  as  for  the  TAPS  now.  The  big                                                               
advantage the  state had  as an investor  under the  equity model                                                               
was  that the  return on  that capital  would flow  to the  state                                                               
rather than to  the owners of the pipeline. The  same thing would                                                               
be true  in this model if  the state is  going to put up  its own                                                               
money; it gets return on that  capital. If state were to take its                                                               
gas in  RIK it  would have  to ship it  over the  pipe and  pay a                                                               
toll. But that  is not the model that is  being contemplated now.                                                               
The model  that is most  commonly cited  now would be  a wellhead                                                               
sale and then the AGDC or  its investors would be responsible for                                                               
the cost of transportation.                                                                                                     
                                                                                                                                
4:33:23 PM                                                                                                                    
SENATOR VON  IMHOF recapped that as  soon as the state  takes its                                                               
24.5 percent  then it sets aside  about 500 mcf in  value for in-                                                               
state  needs  regardless  of  the   ownership  of  the  pipe  and                                                               
infrastructure.                                                                                                                 
                                                                                                                                
COMMISSIONER  MACK replied  that  law  states that  has  to be  a                                                               
requirement/condition of the financing package.                                                                                 
                                                                                                                                
SENATOR  VON IMHOF  followed up  asking  since investors  haven't                                                               
been  attracted yet,  the department  doesn't know  what type  of                                                               
conditions and terms will be  negotiated - rational or irrational                                                               
- so,  making any  assumptions right now  is theoretical.  One of                                                               
her  concerns is  if legislators  will  be privy  to those  terms                                                               
prior to any inked signatures on the line.                                                                                      
                                                                                                                                
4:35:04 PM                                                                                                                    
SENATOR BISHOP reminded them that "the  law of the land is half a                                                               
'B' a day for Alaskans."  He thought distance-sensitive rates had                                                               
been built into SB 138 for the five offtake points in Alaska.                                                                   
                                                                                                                                
MR.  KING  recalled  that  conversation,   but  he  didn't  think                                                               
distance-sensitive rates got into the final version of SB 138.                                                                  
                                                                                                                                
SENATOR MEYER followed up on  Senator von Imhof's question asking                                                               
at what point  in the project DNR will find  that selling the gas                                                               
to  AGDC in  a non-competitive  contract is  in the  state's best                                                               
interest.                                                                                                                       
                                                                                                                                
COMMISSIONER  MACK  replied  that  he  is  referring  to  an  RIK                                                               
situation,  and   that  point   has  already  been   passed;  DNR                                                               
determined to  go down the path  of taking RIK. Was  his question                                                               
when that would happen?                                                                                                         
                                                                                                                                
SENATOR MEYER  replied he already  said he wasn't sure  when that                                                               
would happen and asked if it  will happen prior to any deal being                                                               
signed and ratified.                                                                                                            
                                                                                                                                
COMMISSIONER  MACK  replied  they  need to  understand  what  the                                                               
fundamentals of an  RIV contract would be and what  the other gas                                                               
sales contracts fundamentals are and  what the value to the state                                                               
might be  under that  scenario before  starting to  evaluate RIK.                                                               
DNR needs  to figure  that out before  any final  decisions about                                                               
the disposition of royalty gas.                                                                                                 
                                                                                                                                
SENATOR MEYER recapped  his question: before the  state makes any                                                               
commitments, that determination will have been made.                                                                            
                                                                                                                                
COMMISSION MACK responded "yes."                                                                                                
                                                                                                                                
4:38:17 PM                                                                                                                    
Slide 8: DNR Commissioner's RIK Finding                                                                                         
                                                                                                                                
MR. WRIGHT continued that AGDC  currently contemplates buying gas                                                               
from  Prudhoe  Bay  and  Point  Thomson  Unit  from  the  working                                                               
interest owners  and possibly from  the State of Alaska  using an                                                               
alternative pricing  mechanism that offers two  alternative price                                                               
structures: the first  is a fixed price structure  selling a unit                                                               
of gas  either in MMBtu  at a fixed  price set and  determined in                                                               
advance  or second,  by  using wellhead  netback  pricing with  a                                                               
fixed  floor. The  objective is  to  establish a  fair gas  price                                                               
structure for  the sellers and  buyers that will  incentivize the                                                               
completion and success of this very complex and unique project.                                                                 
                                                                                                                                
One  of the  key determinants  on  the state's  side for  revenue                                                               
realization from the  project is whether revenues  get shifted up                                                               
or  down  the  value  chain  from the  upstream  units  where  it                                                               
receives title  to the gas and  could transfer it to  a seller. A                                                               
key provision  being discussed involves  the terms  for byproduct                                                               
or CO  disposition and handling as it needs  to be defined in the                                                               
     2                                                                                                                          
gas  sales  contracts  that  AGDC  hopes  to  develop.  The  cost                                                               
associated  with byproduct  handling and  disposition could  be a                                                               
real  value lever  for  some  of the  other  stakeholders in  the                                                               
project in that the state doesn't  want to work hard to establish                                                               
a good revenue stream at the  wellhead and then see some of those                                                               
revenues   or    values   eroded   further   downstream    by   a                                                               
disproportional high cost  for CO  handling and disposition. They                                                               
                                 2                                                                                              
there  will  be  many  tcf  of  carbon  dioxide  and  some  other                                                               
impurities that  will need to be  disposed of, and at  this point                                                               
very likely  disposed of  within the  two participating  units in                                                               
the  major gas  sales  project. So,  they are  going  to be  very                                                               
careful  to  make sure  that  the  provisions  of the  gas  sales                                                               
agreements have terms  that are favorable for the  state in terms                                                               
of allocation of byproduct handling.                                                                                            
                                                                                                                                
4:41:21 PM                                                                                                                    
CHAIR GIESSEL  asked how the CO  was  going to be paid  for under                                                               
                               2                                                                                                
the previous agreement with the three producer partners.                                                                        
                                                                                                                                
MR.  WRIGHT answered  that hadn't  been  firmly established,  but                                                               
what had  been discussed  was that the  very large  gas treatment                                                               
plant (GTP)  would be located in  or adjacent to the  Prudhoe Bay                                                               
Unit.  The gas  impurities would  flow  back to  the Prudhoe  Bay                                                               
Unit, which  would incur operating  costs to dispose of  that gas                                                               
into an  underground reservoir. The  unit operator would  then be                                                               
responsible for  disposition of that  gas and would  receive some                                                               
relatively  equitable  compensation  for managing  it.  Scenarios                                                               
were modeled  around reinjection of  the CO  into the gas  cap at                                                               
                                           2                                                                                    
Prudhoe  Bay Unit  would be  advantageous for  additional liquids                                                               
recovery, whether  there were shallower reservoirs  that would be                                                               
technically capable of receiving those volume of CO,  and whether                                                               
                                                   2                                                                            
the reservoir  has sequestration characteristics that  would hold                                                               
and store CO  volumes for an extended period  of time as would be                                                               
            2                                                                                                                   
required to  make sure it  didn't leak either into  the producing                                                               
reservoirs  or back  up to  the surface.  A tremendous  amount of                                                               
reservoir engineering  work was going on  around CO  disposal and                                                               
                                                   2                                                                            
none of it was fully completed on the last effort.                                                                              
                                                                                                                                
4:43:25 PM                                                                                                                    
SENATOR VON IMHOF said she  is hearing that there are potentially                                                               
two opportunities  to buy  the gas from  producers: once  when it                                                               
comes out  of ground  or as  clean gas if  the GTP  facility gets                                                               
built.                                                                                                                          
                                                                                                                                
MR.  WRIGHT replied  yes,  but  what is  being  discussed now  is                                                               
either within the production units  at the wellhead or the flange                                                               
going into  the GTP.  So, the  raw gas as  its produced  from the                                                               
unit would be sold and  ownership transferred, and the byproducts                                                               
stream coming  out of the GTP  would be returned to  the sellers.                                                               
That would  be a viable  setup for working interest  owners. That                                                               
would prove to  be problematic for the state  without its ability                                                               
to participate in unit operations at  Prudhoe Bay. That is one of                                                               
the aspects of a gas sales  contract the state needs to work with                                                               
AGDC.                                                                                                                           
                                                                                                                                
SENATOR VON IMHOF asked him to  provide a range of dollar amounts                                                               
for raw gas.                                                                                                                    
                                                                                                                                
MR. WRIGHT  replied that speculative  values have been  placed on                                                               
it. AGDC negotiations with the  producers are confidential and he                                                               
didn't know what terms are being discussed.                                                                                     
                                                                                                                                
4:45:49 PM                                                                                                                    
Slide 9: RIK and RIV Benefits and Risks                                                                                         
                                                                                                                                
MR.  WRIGHT said  slide  9 depicts  a set  of  known and  assumed                                                               
benefits  and risks  associated  with  either an  RIK  or an  RIV                                                               
election  to summarize  some  current  understandings. Under  the                                                               
benefits  portion  of the  RIK  column,  AGDC's purchase  of  the                                                               
state's  royalty  and  TAG  gas would  benefit  and  support  the                                                               
state's  LNG marketing  relationships  that  are being  developed                                                               
globally. The state  in an RIK election process  would also avoid                                                               
the  necessity of  having to  audit the  producers contracts  and                                                               
procedures around  gas sales. The  audit process under  RIK could                                                               
be  fairly fraught  and finding  ways to  mitigate that  might be                                                               
considered beneficial by some of the project stakeholders.                                                                      
                                                                                                                                
Potential  risks  associated  with   RIK  elections  include  the                                                               
possible disadvantage the state might  pay in cost allocation for                                                               
byproduct  handling and  disposal. Also,  locking in  a long-term                                                               
RIK election for the initial  project term, which is estimated to                                                               
be 20-25  years, could eliminate  the opportunity to  switch from                                                               
RIK to RIV if problems arise  during the execution of the project                                                               
that hadn't  been anticipated or  if the economic outcome  of the                                                               
project didn't match pre-investment  for gas. Finally, field cost                                                               
allowance  issues  related  to   production  and  gas  processing                                                               
certainly have  the opportunity  to shift value  up and  down the                                                               
value chain and could impact state revenues.                                                                                    
                                                                                                                                
4:48:31 PM                                                                                                                    
On  the RIV  column, benefits  include  the state  would have  no                                                               
exposure to negative  netback risk. This was a  concern under the                                                               
previous  project structure  where it  was envisioned  that there                                                               
would  be  a  wellhead  netback  pricing  structure  that  didn't                                                               
include a fixed floor. Under  the current pricing mechanisms that                                                               
AGDC is  looking at currently,  they seem  to have found  ways to                                                               
mitigate that  negative netback risk  using either  fixed pricing                                                               
or a  wellhead netback  with a  fixed price  floor. Under  an RIV                                                               
scenario the state would also  receive its value if the producers                                                               
elect to market  their own gas to foreign  buyers and potentially                                                               
benefit  from the  global marketing  expertise  that these  major                                                               
international oil  companies who  have LNG portfolios  world wide                                                               
could sell into and could  potentially capture greater value than                                                               
markets that the state or AGDC could tap into.                                                                                  
                                                                                                                                
One of the  risks in RIV is there is  always future uncertainties                                                               
regarding  the RIV  value  to the  state  around commodity  price                                                               
fluctuations  globally,   transportation  deductions   which  may                                                               
change over  the life of the  project, and scenarios where  in an                                                               
RIV  world  the  state  revenues  could  be  fairly  dramatically                                                               
eroded.                                                                                                                         
                                                                                                                                
MR. WRIGHT said they are  now looking to characterize and compare                                                               
and  contrast  the relative  benefits  and  risks around  RIK  as                                                               
opposed to RIV.                                                                                                                 
                                                                                                                                
4:50:33 PM                                                                                                                    
Slide 10: Engagements with AGDC                                                                                                 
                                                                                                                                
COMMISSIONER  MACK added  that the  DNR commissioner's  office is                                                               
engaged with  AGDC on  a number of  parallel paths,  and actively                                                               
engaged  on  royalty  and  TAG  gas sales.  The  OPMP  Office  is                                                               
providing agency  coordination and  support of the  AKLNG project                                                               
and  the  very  experienced  Don  Perrin  has  been  retained  to                                                               
coordinate that effort.                                                                                                         
                                                                                                                                
One of  the things that  has come  up recently on  the permitting                                                               
side is  the activity  at FERC,  which is  going very  well. It's                                                               
common to  have lots of  questions. The application  put together                                                               
as  part of  the process  which was  led by  ExxonMobil is  still                                                               
intact and moving forward.                                                                                                      
                                                                                                                                
COMMISSIONER   MACK  said   he   personally   traveled  and   DNR                                                               
participate in engagements with  potential LNG markets and buyers                                                               
in 2016 and those have led  to successful securing of interest in                                                               
the  project under  the ADA  that was  signed last  November. And                                                               
they are working  on the integration of the  LNG projects ongoing                                                               
commercial analysis, too, with a  team of folks including some at                                                               
the table, Black & Veatch, and others.                                                                                          
                                                                                                                                
4:52:48 PM                                                                                                                    
Slide 11: DNR's Role in Contracts                                                                                               
                                                                                                                                
MR. KING said  for completeness he wanted to talk  about the role                                                               
of DNR in contracts and  contract negotiations. Under SB 138, DNR                                                               
had two  sections: one was  a new authority for  the commissioner                                                               
to enter  into contracts  related to North  Slope gas  sales; the                                                               
other being the lease amendments talked about earlier.                                                                          
                                                                                                                                
DNR now  does have  the authority to  enter into  contracts. That                                                               
was very important  under the equity model when  trying to figure                                                               
out  things like  gas  balancing agreements.  They  were able  to                                                               
enter into  confidentiality agreements and enter  into commercial                                                               
agreements  with producer  partners.  But  they aren't  currently                                                               
under  any of  those contracts,  but as  they move  forward, they                                                               
will probably need to use  this authority to enter into contracts                                                               
in the future.                                                                                                                  
                                                                                                                                
SENATOR BISHOP  editorialized that the commissioner  had some big                                                               
decisions to make and he didn't envy him.                                                                                       
                                                                                                                                
4:54:58 PM                                                                                                                    
CHAIR GIESSEL said  the committee was aware of  the importance of                                                               
hearing from DNR  and thanked them for  the presentation. Members                                                               
would watch closely as they make the BIF and RIK decisions.                                                                     
                                                                                                                                
4:55:28 PM                                                                                                                    
CHAIR  GIESSEL adjourned  Senate Resources  Committee meeting  at                                                               
4:55 p.m.                                                                                                                       
                                                                                                                                

Document Name Date/Time Subjects
Senate Resources - Hearing Agenda - 3 - 21 - 18 .pdf SRES 3/21/2018 3:30:00 PM
SRES DNR Alaska LNG Presentation.pdf SRES 3/21/2018 3:30:00 PM
AK LNG
DNR Gas Team Organization Chart, Rev 2 3.27.2018.pdf SRES 3/21/2018 3:30:00 PM
AK LNG