Legislature(2015 - 2016)BUTROVICH 205
01/27/2016 03:30 PM Senate RESOURCES
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| Joint Venture Participation Update by the Aklng Fiscal Team | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
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| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 27, 2016
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Peter Micciche
Senator Bert Stedman
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
JOINT VENTURE PARTICIPATION UPDATE BY THE AKLNG FISCAL TEAM
- HEARD
PREVIOUS COMMITTEE ACTION
See 1/25/2016 Senate Resources minutes.
WITNESS REGISTER
FRITZ KRUSEN, Interim President
Alaska Gasline Development Corporation (AGDC)
POSITION STATEMENT: Presented AKLNG joint venture update.
DAVE VAN TUYL, Regional Manager
BP Alaska
POSITION STATEMENT: Presented AKLNG Joint Venture update.
LEO EHRHARD, Vice President
Commercial Assets
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Presented AKLNG Joint Venture update.
BILL MCMAHON, Senior Commercial Advisor
ExxonMobil
POSITION STATEMENT: Presented AKLNG Joint Venture update.
MARTY RUTHERFORD, Deputy Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Presented AKLNG Joint Venture update.
ACTION NARRATIVE
3:30:21 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 Stedman, Costello, Micciche, Wielechowski,
Coghill and Chair Giessel.
^Joint Venture Participation Update by the AKLNG Fiscal Team
Joint Venture Participation Update by the AKLNG Fiscal Team
3:31:25 PM
CHAIR GIESSEL announced the Joint Venture Participation (JVP)
Update by the AKLNG fiscal team.
3:32:04 PM
FRITZ KRUSEN, Interim President, Alaska Gasline Development
Corporation (AGDC), assured the committee that the professionals
at AGDC are still ready to go and move this project forward.
With assistance from the legislature they achieved the transfer
of the state's representation from TransCanada to AGDC in what
is called the mid-stream components. The transition has gone
well and cash calls are being made. AGDC is now a full 25
percent partner.
3:33:33 PM
DAVE VAN TUYL, Regional Manager, BP Alaska, said he has worked
for BP in Alaska for over 31 years, the last several on getting
Alaska's gas to market. Now he works on the fiscal team and as a
Management Committee member on the AKLNG Project. His comments
were from BP's perspective.
The success of the AKLNG Project is critical to BP's future
business in Alaska, as well as the future of the State of
Alaska. This past year, 2015, has been an important and
successful one for the project that continues to make progress
towards becoming a reality.
Important achievements include filing 12 draft resource reports
- over 8,000 pages of documentation - with the Federal Energy
Regulatory Commission (FERC) in February. In March, the FERC
issued its notice of intent to proceed with an Environmental
Impact Statement (EIS) which opened a 9-month public comment
period on the project. In May, the project received
authorization from the U.S. Department of Energy (DOE) to export
up to 20 million tons per annum of LNG to non-free trade
agreement countries, coupled with a prior authorization to
export to free trade agreement countries. That authorization
sends a huge message to the world and is a major step forward as
the AKLNG Project was able to essentially jump the queue over a
number of other U.S. LNG projects that were also awaiting an
export authorization.
3:36:12 PM
In October, the Alaska Oil and Gas Conservation Commission
(AOGCC) increased the maximum allowable offtake rate from
Prudhoe Bay for gas to a level sufficient to support LNG export
from Prudhoe Bay. They also authorized injection of CO2 from the
gas treatment plant (GTP) into the main Prudhoe Bay reservoir.
Also in October, the AOGCC established a gas offtake rate at the
Point Thomson Unit that supports the AKLNG Project. Those are
authorizations that they never had before.
In November, the State of Alaska (SOA) acquired TransCanada's 25
percent interest, and now AGDC is Alaska's voice in the
midstream as well as the downstream. In December, BP,
ExxonMobil, ConocoPhillips and the SOA all approved the 2016
work program and budget that authorizes over $200 million in
spend to continue advancing the project. On Monday, the
committee heard from Steve Butt, project manager, that the
project team is making very good progress on the front end
engineering deliverables (pre-FEED).
A number of commercial issues were worked through during the
course of 2015 and progress is continuing on other issues.
Beginning last February, they worked with the administration to
understand more about its Plan B and the implications it has for
their joint work in the event that the AKLNG Project does not
proceed. This past summer they responded both verbally and in
writing to public notice of new confidentiality regulations
proposed for AGDC expressing their desire for terms that
facilitated AGDC's full and equal participation in the project,
which BP believes is essential for the project's success while
also protecting its competitive advantages.
Throughout 2015, Mr. Van Tuyl said, they worked with the
administration in defining a property tax framework and that
framework has been communicated to the Municipal Advisory Group
Project Review Board. BP successfully negotiated and executed a
gas availability agreement in December along with ConocoPhillips
and the SOA. BP also looks forward to continuing to work with
the state as it desires to progress any other such agreements.
They are also making progress on other commercial fronts
including support for the Department of Natural Resources (DNR)
in making its royalty in kind (RIK) election, defining fiscal
terms, and defining the manner in which instate gas supply would
be provided and other commercial issues.
MR. VAN TUYL said they understand and agree with the Governor's
recent statements about the need for additional progress on
agreements. However, these agreements are quite complex and will
impact this multi-billion project for decades. Given the
complicated issues they are working through and the fact that
each of the parties in the negotiations has its own needs and
concerns, it shouldn't be a surprise that those negotiations are
difficult.
3:39:46 PM
SENATOR STOLTZE joined the committee.
3:40:11 PM
MR. VAN TUYL said hitting speed bumps is actually an encouraging
sign that tough issues are being tackled. BP desires to get
these agreements done as soon as possible, but it's essential to
all parties that they are done well. BP is committed to working
out the remaining issues as quickly and as fairly as possible.
They are encouraged that the project continues to make real,
tangible progress as measured by the key external milestones,
and BP remains actively engaged in progressing the AKLNG Project
both with the technical work and the associated commercial work.
Given the current economic environment, 2016 looks to be a
challenging year for all, but BP and Alaskans know what it means
to face challenges and, "The best way we have found is to do so
together," he said. BP remains committed to the project.
3:41:45 PM
LEO EHRHARD, Vice President, Commercial Assets, ConocoPhillips,
Anchorage, Alaska, said he had been in this role for about nine
months. He has accountability for the Cook Inlet operated
assets, Prudhoe Bay non-operated assets, TAPS and other pipeline
interests, ConocoPhillips' aviation and the AKLNG Project. In
his past 30 years, he has worked in project development
capacities across the Middle East, Northwest Africa and now in
Alaska. For the AKLNG Project his role is as a project owner
and ConocoPhillips representative. His team's role is to
integrate all of the project aspects: technical, commercial, and
marketing - their objective being to economically monetize
Alaska North Slope (ANS) gas resources.
He said ConocoPhillips continues to support this project and to
progress commercial and technical aspects of it. The AKLNG
Project faces the significant economic headwinds of low oil and
gas prices as well as depressed Asia LNG prices that are down by
60 percent since early 2014. The LNG market is very tight, if
not oversold for 2016, but fortunately they are not selling into
this market today and prices will recover. It's just not known
when.
MR. EHRHARD said ConocoPhillips would work with their AKLNG
partners to find cost savings in their 2016 spend, just as they
have done for Alaska and their worldwide portfolio. He said a
long list of commercial agreements need to be completed to
support the special session. Unfortunately, they have not made
progress on these agreements compared to what they had hoped for
at this time. As most are aware, the Governor has identified a
list of agreements that he wants to see completed before the
special session and that will be very difficult to accomplish.
Of particular concern is the gas supply agreement.
As ConocoPhillips testified in February, June and September, Mr.
Ehrhard said, the gas supply agreement is foundational for the
project. It is the basis for determining the rate and total
volume of gas to be supplied to the project from Prudhoe Bay and
Point Thomson. It directly or indirectly sets equity
participation levels and says what happens if volumes are not
supplied; for example, if a field has a problem or there is an
opportunity to increase production.
ConocoPhillips believes that the gas supply agreement is one of
the key agreements required for the legislature to consider, for
both the project and action on the fiscal contract. It is
required for the FEED decision, as well. It is crucial to agree
to this as soon as possible to ensure the project has a solid
commercial foundation upon which the legislature can ratify its
legislation and pass the support for a constitutional amendment
vote.
MR. EHRHARD said ConocoPhillips is very aware that
commercialization of ANS gas is important to all, and should
these agreements reach an impasse, they won't stand in the way
of the project and will make ConocoPhillips' gas available to
the state on commercial reasonable terms. These are the gas
access agreements that Mr. Van Tuyl referenced a few moments
ago.
ConocoPhillips remains committed and engaged with the other
parties to complete all the agreements on the table and is
encouraged by the state's ongoing engagement and progress on the
project. This includes the Governor's accessibility and his
personal engagement in their meetings.
3:46:20 PM
BILL MCMAHON, Senior Commercial Advisor, ExxonMobil, said he has
over 30 years of experience with the company. He has worked on
the commercialization of ANS gas since 1992. He said ExxonMobil
remains committed to AKLNG and believes this project is the best
way to develop ANS natural gas resources. ExxonMobil as a
leaseholder of natural gas on the North Slope has diligently
undertaken various individual and joint activities to
commercialize ANS natural gas.
He said ExxonMobil is following the framework set out by the
state through the Heads Of Agreement (HOA) and SB 138 and the
AKLNG Project has achieved significant project and regulatory
milestones. The pre-FEED effort, alone, with ExxonMobil as the
lead party, is costing over $500 million, with ExxonMobil
providing about one-third of the funding and two-thirds of the
project personnel.
He said ExxonMobil appreciates the way the Alaska Legislature
worked during the special session to provide funding to AGDC so
that the 2016 work program and budget could be approved and so
that the pre-FEED work could continue uninterrupted.
The current AKLNG project schedule calls for completing the pre-
FEED deliverables in 2016. This will position all participants
to make a decision about entering the FEED stage that will cost
over $1 billion. As ExxonMobil considers this decision, they
will evaluate the project's potential commercial technical
viability by assessing the following: capital requirements and
execution schedule, the outlook for getting FERC approvals and
other regulatory authorizations in a timely fashion, and the LNG
market as well as buyer support. They will also be looking at
the business environment including the LNG price outlook and the
availability of materials, equipment, and qualified contractors
and vendors. Finally, they will be looking to the project
enabling fiscal and commercial agreements.
MR. MCMAHON said a key FEED requirement for ExxonMobil is a
mutually acceptable fiscal contract that provides competitive
predictable and durable terms. They also are cognizant that an
affirmative vote for FEED by all the participants is dependent
upon the availability of near term cash in today's challenging
economic environment. "Now more than ever, we are reminded that
projects must be extremely cost competitive to survive the
inevitable ups and downs of the market cycle." The AKLNG parties
continue to evaluate opportunities to reduce overall cost
through various engineering and technical options. These options
and efforts will be critical to support the project's economic
viability and position AKLNG to be competitive in the world
market.
He said when the producers and the administration are aligned
and ready, legislative action on project enabling agreements
will be signed consistent with SB 138. ExxonMobil believes that
the support of all stakeholders, including the ANS leaseholders
the SOA and its citizens is necessary for a successful project.
Actions of ExxonMobil to complete the pre-FEED, negotiate
commercial and fiscal agreements and secure timely regulatory
approvals demonstrate its commitment to advance AKLNG.
3:50:56 PM
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources (DNR), Anchorage, Alaska, thanked the legislature for
its support in the special session that allowed the TransCanada
buyout and transfer to the AGDC, which now provides a very
streamlined voice in the project. She also recognized the
outstanding progress the technical project has made and said
they continue to be very diligent in trying to reduce the
project cost.
She said this administration is now very committed to the AKLNG
Project and committed to completing the project agreements as
soon as possible. However, the Governor, in his January 18
letter to the producers, indicated his frustration with the pace
of negotiations. It is clearly the Governor's goal to have
commercial agreements available to the legislature for a spring
special session that will lead to a constitutional amendment to
be voted on in November. Each of the parties has recognized that
as a very challenging schedule, but the administration is
hopeful it can be attained and will throw everything they have
at it to meet that schedule. They do not want to see any
slippage on the decision to move into FEED.
3:54:05 PM
MR. MCMAHON began a slide presentation highlighting the progress
that has been made since the last time they met, adding that a
lot of the achievements had already been mentioned in the
opening remarks like the seamless TransCanada interest
transition with some key TransCanada personnel still working on
the project, and the AOGCC authorizations for offtakes and CO2
injection into Prudhoe Bay.
He said one of the top feedbacks from Alaskans is how they are
going to get access to Alaska gas. So, AGDC has stepped in to
fill that need and had recently formed an instate gas aggregator
subsidiary to accumulate supplies from the project and work on
distribution plans.
3:56:26 PM
Slide 3 highlighted plans for AGDC to join the AKLNG, LLC, in
place of TransCanada and slide 4 encapsulated all the work Mr.
Butt and the project team are doing and what the eventual
participants will be doing.
Slide 5 diagramed what is inside the AKLNG Project: transmission
lines, GTP, pipeline, LNG plant, storage and loading. Important
activities are outside the diagrammed circle as well: work that
is going on at Prudhoe Bay to prepare to make gas available to
the project as well as the gas development at Point Thomson. Off
to the side was the work AGDC is doing for the instate gas
facilities. Everything on the chart is important, but when they
talk about the project investment, itself, it refers to the
things inside the circle.
MR. MCMAHON said that slide 6 illustrated venture participant
work, which is handled differently than the project team work.
When Mr. Butt speaks to them it is on behalf of all the project
participants and his team that are co-located in one office
working on the technical work, Mr. McMahon explained, but
venture participant work has representatives from all five
parties involved representing their interests to move the
following forward: gas production (making sure gas is available
to produce into the project), commercial agreements, fiscal
agreements, regulatory work with DOE and FERC, and external
affairs and government relations efforts to be the face of the
project with the community.
3:59:19 PM
Slide 7 illustrated AOGCC work; they approved an amended Prudhoe
Bay field gas offtake authorization that will allow gas to be
produced at higher rates than previously authorized and at rates
sufficient to support the project. Also included was an
authorization to be able to inject CO2 and other by-products
coming from the GTP from other fields into the Prudhoe Bay
reservoir. Finally, a field gas offtake authorization was
granted in October at Point Thomson for a gas expansion project.
4:00:10 PM
Slides 8 and 9 showed how the working interests in the Prudhoe
Bay and Point Thomson fields came up with composite working
interests and how the state becomes 25 percent owner in the
project.
4:01:44 PM
SENATOR MICCICHE said Alaskans are confused about the complexity
of the gas sharing agreement and asked him to explain why it's a
difficult undertaking.
MR. EHRHARD said probably the place to start is to recognize the
unprecedented nature of the project. It's probably the only
project in the world that has been sourced by two separate
fields with different interests. Usually the participants go
through a unitization process that simplifies the arrangement.
In AKLNG, the units handle the operation of each of the fields
that source gas into the project and they want to make sure that
those fields retain their responsibilities that are separate
from what is supposed to done by the governing group that runs
the AKLNG Project, and those things have to be aligned.
A second area of complexity is the state's synthetic equity or
the equity that is created by the state's election to take
royalty in kind (RIK) and for the producers to pay their tax as
gas. This has to be accommodated in the gas supply agreement.
There are multiple ways to go about doing that, but the state
has to have a clear line of sight to its resource base, so it
understands the scheduling on which it's going to get its gas
and then it has an opportunity to participate in whatever
marketing mechanism it needs down the value chain. This turns
out to be fairly complicated and probably one of a kind. He was
not aware of a RIK/tax as gas structure for any other major LNG
project.
One more item is the question of equity marketing versus joint
venture marketing and depending on how that is handled it can
help streamline the contract or conversely complicate it. So,
they are trying to come to a four-party accord.
MR. VAN TUYL added that if every day the gas production shares
and marketing demand were as shown on slides 8 and 9, it would
certainly simplify the complexity, but the fact of the matter is
the production from the two North Slope fields varies with time.
Sometimes a facility is down for a period and therefore changes
are made in what portion of gas is coming from which field, and
because the field equities are different, that changes the
entitlements. Those have to match up with the long term
contracts everyone has with the market at the other end of the
project stream. That's on the upstream end and those can change.
At the same time, the demand in the market can change. From
month to month a particular buyer may say they don't need a
cargo one month or they can't take a cargo for whatever reason;
maybe they need two cargos the next month. Those sorts of
flexibilities need to be considered, making for a complicated
arrangement. He said that BP had entered into gas balancing
agreements around the world with other LNG projects, but this
project does offer some "pretty unique complexities."
4:07:03 PM
CHAIR GIESSEL asked if the gas supply and balancing agreement is
between the producers or is the state involved.
MS. RUTHERFORD answered that the state will be a party to this,
because it needs a direct window into both the supply and the
delivery to feed the contracts it will be entering into on the
other end with the LNG purchasers. The state is not a working
interest owner (WIO); however, the state is a derivative owner.
So, the state is interested in how the structure accommodates
the state's interest as a derivative. All three of the producers
have been very good at recognizing what kind of things need to
be protected in the state's interest. The state will not be
signatory to the actual agreement, because it is not a WIO.
MR. EHRHARD said one other element this contract attempts to
accomplish is to provide a function of mutual aid between the
two fields. It's a great benefit to have a major LNG project
with multiple fields, because it's a way of risk sharing across
the fields recognizing that from time to time one field could be
down from some reason and they want to be able to share gas
between those fields. Mechanisms for sharing the gas are needed
like: notification periods, repayment methodologies, repayment
timing, establishing value in case it can't be repaid, risk to
the reservoir if these occurrences happen late in the field
life, and things like that. He wanted to make sure that everyone
on the committee is aware of the central function, almost, of
this particular agreement. Yes, the governance, fiscals, the RIK
and TAG are important, but this agreement monitors the fiscal
flows and establishes the equities of participation either
directly or indirectly, and this is going to be central to banks
who are financing the project. The buyers have the same interest
in knowing where the gas is coming from and how it gets into the
project and need assurances that the contract they are signing
has sufficient resources behind it.
CHAIR GIESSEL said they had heard about the goal of having the
legislature approve certain contracts by May or so and asked the
likelihood of the gas balancing agreement achieving that.
4:11:10 PM
MR. EHRHARD answered that they had been at the negotiation
process for two years and it is the basis for which the
participants get comfort in spending $50 billion on an LNG
project. They look at the complexity and the timeline and what
they have been through in order to write these drafts and are
concerned that it takes so much time and trial and error, even
to draft an idea. From the amount of time left to the
participants, it is difficult to see those complex agreements
being resolved.
SENATOR COSTELLO asked if the team is not making significant
progress what needs to change to speed it up.
MR. EHRHARD answered that terrific progress has been made on the
technical aspects of the project, but they aren't as far along
on the commercial side as they would like to be. What has to
change? They have to be inventive, creative, and flexible and
look toward natural balance points between the parties. They
need to stand in each other's shoes and recognize that there are
preexisting equity positions being leveraged into a project of
great magnitude, scope, complexity and cost. They don't stand
here and accuse each other of not doing that, but they say, "We
have to do that more. We have to do that better."
4:14:37 PM
SENATOR COSTELLO asked if the "team" has efficient
communication.
MR. MCMAHON answered that teams are dedicated for each of the
agreements - the fiscal agreement, venture agreements, and gas
supply and balancing agreement - and have frequent
communications. The key is having a clear understanding of
positions and finding ways to bridge the gaps. They have good
communication and just have to continue those efforts. These
agreements are one of a kind and complicated and won't move
forward for approval until all five parties can support them.
SENATOR COSTELLO asked how much of Ms. Rutherford's time is
dedicated to this project.
4:16:53 PM
MS. RUTHERFORD answered 150 percent, virtually all of her time.
SENATOR MICCICHE asked if the complexity of the gas balancing
agreement is due to issues surrounding operatorship.
MR. VAN TUYL answered that operatorship hasn't been a factor in
the discussions, but commercial agreements are just complex.
MR. EHRHARD agreed.
4:18:34 PM
MR. MCMAHON went to slide 10 that highlighted commercial
activities and then to slide 11 that covered the governance
agreement for the long term venture including expansions. It
governs how the pre-FEED is executed, how the project will be
constructed (engineering, procurement and construction), and it
will also govern the project for the 30-plus years of operation.
Good progress is being made on these agreements and outstanding
issues will likely get resolved along with the fiscals and gas
supply agreements. It's really important for each of the parties
at the table to make sure that their interests are represented
in those agreements, because they will live under them for
decades to come.
He said the team is working on getting alignment on a common
structure and a couple of alternatives are under consideration.
From the SOA's perspective this is the agreement that is going
to give the state and its LNG buyers a clear line of sight to
the state's right to lift gas, not as a working interest owner,
but as a lifter of RIK and tax as gas (TAG).
The gas supply agreement will inform what they are going to do,
and the lifting rights are going to inform how it's going to be
done for things like scheduling cargos when the LNG carriers
show up, and rules for whose ships come in at what time.
MR. VAN TUYL supplemented Mr. McMahon's comments saying that
things you might expect to see in that agreement are the terms
that describe how the system will be used: things like an annual
delivery plan, the nuts and bolts involved in operating the LNG
system.
4:22:13 PM
MR. MCMAHON continued that in the area of instate gas AGDC
really has two sides of the same coin to work. They are coming
up with the state's preferred commercial structure for instate
gas distribution from the flange and, at the same time, with
their aggregator subsidiary, they need to come up with how gas
will be supplied to the aggregator to feed this distribution
system. Those will be key agreements to the people of Alaska,
the legislature and the administration. Another agreement that
is being worked on is the GTP byproduct handling.
MR. VAN TUYL explained that the byproduct handling agreement is
an offshoot of the AOGCC authorization that was received in
October in an area injection order that says byproducts from the
GTP can be injected into the Prudhoe Bay reservoir. The question
then is whether there will be a fee associated with using the
facilities to reinject that gas.
4:23:59 PM
MR. MCMAHON said Prudhoe Bay has a similar agreement that
specifies how field costs will be paid for royalty gas that is
going to be lifted. They don't have such a settlement agreement
at Point Thomson, and parties think it would be prudent to get
that agreed to up front and are working on such an agreement.
Along those same lines at Point Thomson the parties are working
to convert some nonstandard lease forms of sliding scale royalty
leases and net profit share leases into a fixed royalty
percentage that would allow the state to have an increased gas
royalty in kind take and increase its participation in the
project.
MS. RUTHERFORD said bilateral discussions are taking place on
the state's methodology for how it would market its gas either
through a joint relationship with one or more of the producers
or as called for in SB 138 where it says that each producer will
provide the state a method of purchasing, disposing of, or
marketing its royalty gas and TAG on the same or substantially
the same terms as they do their own.
MR. MCMAHON said this is one of the key things that SB 138
provided for to make sure that the state is not at a
disadvantage when disposing of its LNG share. Each of these
agreements will support DNR's RIK election and a special session
to approve the contracts as well as the proposed fiscal terms.
CHAIR GIESSEL asked who negotiates these contracts on behalf of
the state.
MS. RUTHERFORD answered the Ken Minesinger with Greenberg
Traurig and Manzer Ijaz with Millbank, Tweed, Hadley & McCloy,
LLP, are the state's lead negotiators. They work directly with
her, the DOR commissioner and the Attorney General. They have
regularly scheduled meetings with the Governor and AGDC is a
part of those discussions. At Friday's hearing they would share
the matrix method used for working these issues, because there
are subject matter experts both inside the agencies and external
contractors who assist the negotiators as support. Policy issues
are raised and that information is fed back resulting in regular
dialogues. They will also identify who the lead entity is;
sometimes it's AGDC with consultation by DNR and DOR; sometimes
it's DNR in consultation with AGDC. So each of the various
issues, sometimes entire agreements, are led by a particular
agency with involvement by the other. The statutes driving that
complexity have been identified and it is now working fairly
well.
4:29:13 PM
SENATOR COGHILL asked for context of marketing gas through joint
venture and individual marketing.
MR. VAN TUYL explained that at the highest level there are two
forms of marketing and BP is involved with both in various
projects around the world. One is joint venture marketing where
the LNG that's produced out of a project is actually collected
together and marketed by a joint venture. In this case, all of
the AKLNG gas would be marketed together by a separate joint
venture company. Another form is equity marketing where for
instance there are BP molecules that BP is going to be
responsible for and has its own marketing affiliate and each of
the other project partners make similar arrangements. One
essential thing to remember is that everyone here are
competitors as it relates to marketing. Individual marketing can
happen with the state under SB 138. If the state made an
arrangement with BP whereby it would market some of the state's
gas, but they can't agree with other companies on how a market
is going to be divided; that would violate anti-trust laws.
Clear entitlement lifting rights for each of the parties would
be needed to enable forming of a joint venture marketing
company. It is pretty clear from the working interest ownership
that the producers have it and the state's entitlement must be
clearly defined in those agreements so it can market its gas
just like one of the producers.
SENATOR COGHILL said he wanted people to hear there is no
collusion or price fixing, but the state is just trying to
figure out how different to market its share with the producers
or on its own.
4:33:30 PM
MR. MCMAHON said slide 12 is the fiscal page and shows the
foundation upon which fiscal discussions are under way. This is
one of the key enablers for the project.
CHAIR GIESSEL asked which of the contracts will need legislative
review and approval.
MS. RUTHERFORD answered generally, any agreement that
appropriates state resources or monies must come before the
legislature for review and approval and any agreement that the
DNR enters into that is two years or longer also requires
approval by the legislature. She just received a request to
update the previous presentation on particular agreements and
who is party to them. That will be produced by the end of the
week. It will identify which of the contracts they believe will
require legislative approval; not all of them will.
CHAIR GIESSEL said the state had received a report on how to
finance this project and asked if there is an analysis of that
by a consultant.
MS. RUTHERFORD answered that they have an updated report from
Lazard and she would ask the DOR commissioner if he could
discuss it on Friday.
4:36:20 PM
SENATOR STOLTZE asked to see the proposed constitutional
amendment so it could be vetted.
MS. RUTHERFORD commented that the Attorney General will be here
in the committee on Friday and that could be talked about more.
However, a determination on what a constitutional amendment
looks like is going to be fairly reliant upon what kind of
fiscal contract is proposed to be entered into between the
parties. Unfortunately, that has not progressed to the stage
where she nor the Attorney General are able to determine what
exactly must be addressed in such an amendment. Using overly
broad language becomes more difficult to convince people you
want to amend the constitution, so the thinking is to keep it as
focused as possible and what that would look like will be an
evolution of the fiscal agreement that is negotiated.
CHAIR GIESSEL commented that the administration presented a
draft of a constitutional amendment in the June Joint Resources
meeting and she would get copies of that. She understood that
the draft amendment was essentially placeholder language.
4:40:30 PM
MR. MCMAHON said they had reported earlier this year about
filing draft resource reports with the FERC and they plan on
getting a second draft in for the first half of 2016. The FERC
invites draft submissions so they can be placed on the website
for public and staff comment. The idea is to have the final
application be as good as possible so it can be acted upon
quickly. He explained that the resource reports have been
modified as they continue to look at cost savings ideas and
changing the project description a bit - the 48 versus 42-inch
work that is under way - will impact them as well.
CHAIR GIESSEL asked which one of the reports addresses community
impacts, because she wanted it highlighted for constituents.
4:42:26 PM
MR. MCMAHON answered resource report number five and said that
there is a major effort by External Affairs to outreach to
communities that is reflected in slide 14.
CHAIR GIESSEL asked if he could talk about the impact of the
SOA's consideration of a change in oil and gas tax policy for
the project, such as a change in tax credits or changes to the
minimum tax.
4:43:36 PM
MR. VAN TUYL reflected that BP thinks a successful AKLNG project
depends on a healthy base oil business. It's very important for
a number of reasons; one is because those very same facilities
at Prudhoe Bay will be relied on for decades. They know that
first gas is still many years away and they need to be able to
have a safe, compliant, sustainable base business for the long
term. That is what BP and their co-venturers - ExxonMobil,
ConocoPhillips, Chevron and Prudhoe Bay - are working towards
right now in reducing costs to make it even more efficient in
this cost challenging environment. They are doing the same with
AKLNG. They can't control the price, but they can control the
cost at which LNG can be delivered to the market. An increase in
tax is an additional challenge to those missions, and affects
the base business that supports AKLNG.
MR. MCMAHON agreed; an increase in oil taxes could impact their
decision to enter the FEED and FID.
MR. EHRHARD echoed the same perspective.
MR. MCMAHON said slide 15 highlighted accomplishments since
September. The team is now focused on these Outstanding Issues:
-Domestic instate gas supply structures in place using the AGDC
gas aggregator
-LNG marketing structures in relation to the state's LNG share
-Timely completion of the commercial and fiscal contracts
followed by legislative approval consistent with SB 138
including a gas supply to the project.
ROYALTY DECISIONS:
-Lease modifications at Point Thomson for conversion of the
specialized field leases
-Modification to limit the state's right to switch between RIK
and royalty in value (RIV) consistent with a RIK election.
-RIK election subject to the Project Enabling Agreements
-Determining the state's gas share structure
LEGISLATION TO AUTHORIZE:
-Public vote on constitutional amendment to provide predictable
and durable fiscal terms.
-Property tax structure
SENATOR MICCICHE asked if a delay on the other agreements could
potentially compromise the timeline that gets the constitutional
amendment on the ballot in 2016.
MR. VAN TUYL answered that his understanding of the timeline for
entertaining a constitutional amendment is clearly defined: it
can only be entertained during a general election, in this case
in November, 2016. To be able to do that, the amendment would
need to be drafted by a date in June. Missing that timeframe
would complicate things.
SENATOR STOLTZE asked how much can they rely on the draft
constitutional amendment language provided in June, 2015.
MS. RUTHERFORD said it is a fluid document and not indicative of
anything the administration would propose moving forward.
SENATOR MICCICHE said the point he is trying to make is if they
miss the June 16th deadline that will adversely affect the
potential of this project to move forward.
MR. VAN TUYL said he was not prepared to say definitively what
the impact would be, but BP is working hard to ensure they
aren't delaying the project.
4:53:04 PM
MR. MCMAHON said slide 16 was the closing slide and a graphic to
show all the deliverables to support the FEED decision, some of
which are still under development.
4:53:33 PM
CHAIR GIESSEL said she was thinking about the long haul and was
looking for a slide of the production curve for this gas
project, similar to the North Slope's production curve. She said
the expectation is that there will be more production emerging
from other areas, like the Foot Hills, and the state is counting
on other smaller companies to access the expansion potential in
the gas pipeline and that affects other decisions they are
making in this session related to the state's tax structure.
SENATOR STEDMAN commented that the oil production curve is very
different than a gas production curve. He recalled a
conversation that reinjecting waste product into Prudhoe Bay
could re-pressurizing the field somewhat, which would result a
more oil being produced.
CHAIR GIESSEL said she knows that CO2 injection is an effective
production enhancement in the Lower 48 but wondered whether it
is an effective production enhancement in Alaska on the North
Slope.
4:57:11 PM
SENATOR WIELECHOWSKI asked on a scale of 0-100 how likely this
project is to happen within the next 15 years.
MR. EHRHARD responded that this project has the necessary
ingredients to be successful. It has a fantastic gas resource
that has been recycled multiple times through the reservoir and
another gas resource that can help fill in the volume. It has
good transportation distances to markets in the Far East and it
has a reputation. Japanese and Korean buyers like the idea of
buying gas from the United States and from Alaska. Significant
technical progress has been made. The fundamentals are there.
MR. MCMAHON was hesitant to put a number on it, since he had
been working on it since 1992. But a lot of good things line up:
the fact that they have the resource, the fact that all five
parties are sitting at the table working together, the fact that
after pre-FEED this project will have gone further than any
project in the past, getting the DOE export license and a second
set of draft resource reports in. He is bullish on the project.
The reason he hesitates to put a number on it is because of
market factors. The AKLNG gas resource is a tremendous part of
ExxonMobil's endowment and they will not stop pursuing it until
it's done successfully. It is a key part of their portfolio.
MR. VAN TUYL echoed the previous comments. Alaska has multiple
known resources and the gas source is close to markets; all the
companies have done big LNG projects around the world; the
alignment continues on this project and that is absolutely
critical. They continue to be bullish on this project and it is
critical to BP's future in Alaska.
MS. RUTHERFORD said she also feels very bullish about this
project. Some of the fundamental problems encountered in
previous attempts to monetize Alaska's gas have been resolved.
She is concerned about the current economic environment, but the
good news is that this project won't come to the market for
eight to nine years, so that works to its advantage. The
Japanese buyers are very excited about AKLNG, because they have
had a long term relationship with Alaska and feel very good
about it. It is close to their market; it is a stable political
environment; known quantities of gas underpin this project to a
far greater degree than other project around the world, and the
state is aligned with the producers. The sovereign involvement
is critical to the Asian buyers; it is a huge advantage.
5:04:27 PM
MR. KRUZEN added that AGDC is the state's gasline pipeline
company and they want to make this project happen, but it has to
make economic sense. They are working with the project to help
bring the capital costs down and to increase reliability.
CHAIR GIESSEL thanked the participants
.
5:05:54 PM
ADJOURNMENT
CHAIR GIESSEL adjourned the Senate Resources Committee meeting
at 5:05 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AKLNG SRES Venture Participant Update 01-27-2016.pdf |
SRES 1/27/2016 3:30:00 PM |
AK LNG |
| AK LNG-Agreements to be Negotiated-01-29-2016.pdf |
SRES 1/27/2016 3:30:00 PM |
AK LNG |
| AKLNG - SRES-Testimony-Leo Ehrhard-Conoco Phillips-01-27-2016.pdf |
SRES 1/27/2016 3:30:00 PM |
AK LNG |
| AKLNG-SRES-Testimony-Dave VanTuyl-BP-02-27-2016.pdf |
SRES 1/27/2016 3:30:00 PM |
AK LNG |
| HRES SRES-Testimony-Bill McMahon-ExxonMobil-01-27-2016.pdf |
SRES 1/27/2016 3:30:00 PM |
AK LNG |