Legislature(2015 - 2016)ANCH LIO AUDITORIUM
08/25/2016 01:00 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Aklng Project Update: New Concept Plan for State-led Alaska Lng Pipeline | |
| Legal Discussion of State Tax Exempt Status | |
| Producer Partner Comments on Transition Issues | |
| Enalytica: Nikos Tsafos | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
Anchorage LIO
August 25, 2016
1:00 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator Peter Micciche - via teleconference
Senator Bill Wielechowski - via teleconference
HOUSE RESOURCES
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Mike Hawker, Vice Chair - via teleconference
Representative Bob Herron
Representative Andy Josephson
Representative Paul Seaton
Representative Geran Tarr
MEMBERS ABSENT
SENATE RESOURCES
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Bert Stedman
Senator Bill Stoltze
HOUSE RESOURCES
Representative Craig Johnson
Representative Kurt Olson
Representative Mike Chenault
OTHER LEGISLATORS PRESENT
Senator Mike Dunleavy
Senator Anna MacKinnon
Representative Dan Saddler
Representative Liz Vasquez
COMMITTEE CALENDAR
NEW CONCEPT PLAN FOR STATE-LED ALASKA LNG PIPELINE:
Legal Discussion of State Tax-Exempt Status
Producer Partner Comments on Transition
Comments from enalytica, Legislative Consultant
- HEARD
PREVIOUS COMMITTEE ACTION
See Resource Committee minutes from August 24, 2016.
WITNESS REGISTER
CHARLES SCHUETZE, Attorney
Manley & Brautigam
Anchorage, Alaska
POSITION STATEMENT: Presented information on the possibility of
a federal tax exemption for an Alaska-owned LNG project.
ERIC WOHLFORTH, Attorney
Jermaine, Dunnagan & Owens, P.C
Anchorage, Alaska
POSITION STATEMENT: Presented information on the possibility of
tax-exempt financing for an Alaska-owned LNG project.
BILL MCMAHON, Commercial Advisor
ExxonMobil
Anchorage, Alaska
POSITION STATEMENT: Commented on a state-led Alaska LNG project.
DAVID VAN TUYL, Regional Manager
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Commented on a state-led Alaska LNG project.
DARREN MEZNARICH, Project Integration Manager
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Commented on a state-led Alaska LNG project.
NIKOS TSAFOS, Legislative Consultant
enalytica
Washington, D.C.
POSITION STATEMENT: Urged a careful analysis of multiple
structures of AKLNG ownership, including the state-led option.
ACTION NARRATIVE
1:00:10 PM
CHAIR CATHY GIESSEL called the joint meeting of the Senate and
House Resources Standing Committees to order at 1:00 p.m.
Committee members present at the call to order were Senators
Wielechowski, Micciche, and Chair Giessel and Representatives
Seaton, Herron, Hawker, Tarr, Josephson, Saddler, Co-Chair
Talerico, and Co-Chair Nageak. Senators Dunleavy and MacKinnon
were also in attendance.
^AKLNG Project Update: New Concept Plan for State-Led Alaska LNG
Pipeline
AKLNG Project Update: New Concept Plan for State-Led Alaska LNG
Pipeline
1:03:22 PM
CHAIR GIESSEL said this is a continuation of yesterday's meeting
about the AKLNG [Alaska Liquefied Natural Gas] project and the
AGDC [Alaska Gasline Development Corporation] new concept plan.
She noted that there were 170 phone and internet connections
during yesterday's meeting.
CHAIR GIESSEL said that the committee was briefed by Mr. Steve
Butt, project manager for AKLNG, about the ongoing Pre-FEED work
by the producing partners and the state. He emphasized that now
is the time to ask questions, because there is a spend rate to
consider. Mr. Butt pointed out that early on $30 million a year
was spent on the project. It is now in Pre-FEED, and it is
costing $30 million a month, which is divided four ways, she
explained. The project is at the decision point on whether to
move into the next stage, which will cost $30 million a week.
The state is proposing going it alone. The actual construction
will be $30 million a day, so this is not a small undertaking,
thus the reason for these frequent meetings. The consultants
from Wood Mackenzie (WM) said the project has one of the highest
costs in the world and suggested that AGDC could lower costs by
getting a third party to take on the debt and the risk, as well
as accepting a lower rate of return. The consultant suggested
that state ownership could possibly allow for a federal tax-
exemption, and it could remove all state taxes from the project.
She quoted from the WM presentation yesterday: "Even the removal
of all taxes on pipeline and plants is insufficient to reduce
the cost of supply below the current level of LNG prices."
CHAIR GIESSEL said that the committee then heard from AGDC, and
they have ideas about seeking funding from foreign utilities,
pension funds, and other investors who would be willing to take
on the risk and take a lower rate of return. The AGDC is opening
an office in Houston, Texas, to market the project. She noted
that committee members had multiple questions, and there was not
enough time to answer them all. She noted a document on the
website dated August 23 containing the answers to eight
questions to AGDC. She will forward more questions to AGDC as
they come in.
1:06:36 PM
CHAIR GIESSEL noted that AGDC said they plan to solicit a
project management contractor (PMC) to have on board by the end
of 2016. The AGDC also said, "We will develop cost estimates for
the PMC in future phases of the projects." She referred to the
Lummus Report, which was contracted by the administration but
not yet seen by the committee. Former DNR [Department of Natural
Resources] Deputy Commissioner Marty Rutherford previously
referred to the Lummus Consultants International, which was
contracted to opine on the feasibility and economics of the gas
pipeline project. The report was supposed to be completed eight
months ago. Last Friday, Chair Giessel renewed the request for
access to that report, and yesterday DNR Commissioner designee
Andy Mack responded by sending a letter to Lummus asking them to
complete the revisions to its report as requested by the
administration. "I appreciate Mr. Mack's attention to this and
look forward to seeing that final work product," she said.
1:08:26 PM
CHAIR GIESSEL said this meeting will begin with two law firms
that were asked about the state's use of a federal tax exemption
that could potentially reduce the cost of supply for a gas
pipeline project. She noted that she went through the
Legislative Budget and Audit Committee chaired by Representative
Hawker to secure the services of the two firms.
1:09:07 PM
REPRESENTATIVE HAWKER said the administration introduced a new
direction a month ago, which differs from SB 138. He said he got
the impression that the administration "had a sure thing-a very
distinct process forward." It was determined there was not an
issue of seeing the concept document, and once legislators saw
the document, it raised past concerns regarding "the tax status
of both AGDC and whether or not we could see a tax-exempt
project under that proposed concept document." To get prepared
for this meeting, he approached these two law firms, and both
have extensive history with tax status in Alaska and are very
familiar with these issues. He heard yesterday that the board of
directors is considering different options, so, although the
gentlemen before the committee have done an outstanding job of
analyzing the taxability of projects like this, he expects to
see things evolve as the administration provides additional
specificity.
^Legal discussion of State Tax Exempt Status
Legal discussion of State Tax Exempt Status
1:12:22 PM
CHARLES SCHUETZE, Attorney, Manley & Brautigam, Anchorage, said
he has been asked about the federal income tax issues raised by
the concept document and the Heads of Agreement for a potential
company formed by the AGDC to own, develop, and operate the
AKLNG project. There are three primary ways to get a tax
exemption for an entity that the state would own. One would be
if the entity were to qualify as a political subdivision of the
state. Under case law that has existed for "quite a few
decades," the entity is required to have been conferred
sovereign powers. (This is called the Shamberg Rule). That case
dealt with the Port of New York Authority, and the Second
Circuit held that [the Authority] had two sovereign powers: the
power of eminent domain and certain police powers. He said AGDC
has been granted those powers, so it would appear to qualify as
a political subdivision.
MR. SCHUETZE said that the [Internal Revenue Service (IRS)] is
starting to be concerned about political subdivisions for the
purpose of tax-exempt bonds under Sec. 103. In February 2016,
the IRS issued proposed regulations defining what a political
subdivision would be for that purpose. He noted that the
regulations are not final, but they give an idea of how the
government might look at a private letter ruling request. The
proposed regulations would add a new subsection to say that a
political subdivision for purposes of Sec. 103 requires the
entity to not only have one or more sovereign powers, it would
also have to have a governmental purpose and be governmentally
controlled, and it involves showing that there is no private
benefit, he added. That could pertain to some options being
proposed for owning an interest in an LNG project. The other way
an entity can be treated as tax exempt is if it is an integral
part of the state, and that generally means that the entity is
wholly owned by the state under [26 CFR] 301.7701-1(a)(3). He
said that regulation can be relied on as authority.
1:16:41 PM
MR. SCHUETZE said that private letter rulings tend to go a
little further to see if there is sufficient state control and
whether the state has made a financial commitment to fund the
entity. Both have been established for AGDC, but "it is another
question as to other planning options." Finally, an entity could
qualify for tax exemptions under Section 115(1) of the IRS code
if the income is derived from any essential governmental
function and accrues to the state or any of its political
subdivisions. For ruling purposes, he said, the IRS also asks
for confirmation that private interests will not materially
benefit.
MR. SCHUETZE said the AGDC concept document raises certain tax
issues of its own. It states that AGDC would organize the
company that would own, commercialize, finance, design, build,
and operate the project. It does not state what kind of company
AGDC would organize to own and operate that project. Currently,
AS 31.25.120 empowers it to form subsidiary corporations for an
LNG project. If an entity is going to own and operate the
project, it is probably not going to be a corporation. Typically
oil and gas development ventures in the US are organized as tax
partnerships or maybe co-tenancies in order to provide flow-
through tax treatment to the owners of all the tax attributes of
the venture. They don't have to be organized that way, he said,
but they tend to because the investors usually want the benefit
of the tax deductions that are thrown off by the venture.
1:18:58 PM
MR. SCHUETZE said it is likely that AGDC would be thinking about
if it owns an interest in the LNG project, it would own it
through a subsidiary corporation. If it is wholly owned, then it
would likely be tax exempt to the state, but the actual interest
in the operating entity itself would be something other than a
corporation.
1:20:28 PM
MR. SCHUETZE said applying the test of whether the operating
entity would be a political subdivision and if there is interest
in getting a private letter ruling, which most investors will
want, then it will be important to look at the IRS position on
issuing private letter rulings. The proposed regulation by the
Treasury says that a tax exempt political subdivision would need
sovereign powers as well as a governmental purpose, and it would
need to be governmentally controlled. The organization that
would own, develop, and operate the project may be able to show
that it has public purposes-the statute tries to address that,
he said. It would hopefully be able to show that it exercises
its powers for the benefit of Alaskans: for their well-being and
prosperity and for the improvement of their social and economic
conditions. However, it will be harder to show that the project
does not provide more than an incidental private benefit,
considering AGDC may have one or more third parties as owners.
The document talks about producer parties, he said. The proposed
regulation also requires that a state or local governmental unit
exercise control over the organization. Control is defined as an
ongoing right or power to direct significant actions of the
entity, including the right or power to elect a majority of the
governing body of the entity in periodic elections. The concept
document states that one or more of the producer parties will be
invited to become members of the organization that operates the
project. Control will become much harder to establish at that
point, he said. For example, the document states that the annual
work program budget has to be unanimously approved by the
parties each year, which gives all a veto over work program and
budget. It is not something that the State of Alaska will be
controlling indirectly or directly.
REPRESENTATIVE VASQUEZ joined the committee.
1:24:04 PM
MR. SCHUETZE said the concept document does not assure that AGDC
would control the organization, as it provides for a management
committee, and if each member pays its fair share of the fees,
each would be able to participate on the committee. Section 5.4
requires that the organization that owns, develops, and operates
the project shall conduct all operations. It does not say the
state controls the project through AGDC. Conceivably, the
operating entity might try to be treated as an integral part of
the state. Favorable private letter rulings from the past ask
for sufficient state control over the entity and that the state
has made a financial commitment to fund the entity. The state
may be able to show it has made a financial commitment, but
under the concept document, state control over the entity is
uncertain. Mr. Schuetze turned to the option of the entity
becoming tax exempt under Section 115 of the IRS code, and that
requires that private interests do not materially participate in
the organization and do not benefit more than incidentally. This
comes from Revenue Ruling 90-74, which the IRS frequently cites
when it issues rulings under Section 115. Additionally, the
entity must be exercising an essential governmental function.
1:26:37 PM
MR. SCHUETZE concluded that unless AGDC or a wholly owned
subsidiary owns the entire project for the project's lifetime,
the operating entity will likely be subject to federal income
tax. If AGDC or its wholly owned subsidiary qualify for a tax
exemption either as a political subdivision, as an integral part
of the state, or under Section 115, the interest itself of the
state indirectly through AGDC may be exempt from federal income
taxation. He said there is an issue as to whether the government
would be willing to issue a ruling under Section 115 on that. If
the ruling request were only under 115(2), it may be possible,
but it depends how the IRS is going to assert its non-ruling
position, because this year, in Revenue Procedure 2016-3, the
government indicated that it would decline to issue a tax
exemption ruling in a situation where less than all of the
income from an entity is being earned by a subdivision of the
government.
1:28:21 PM
MR. SCHUETZE added that if AGDC or its wholly owned subsidiary
own a discreet portion of the project for the lifetime of the
project, it appears that that discrete portion could qualify, as
long as the standards are met. That would likely leave the other
parts of the project subject to federal income taxation.
CHAIR GIESSEL asked him to explain a private letter ruling, its
importance, how long it might take, and any associated costs.
MR. SCHUETZE answered that private letter rulings are
administrative grace from the [US Department of] Treasury. The
rulings are issued on specific transactions where the taxpayer
asks to be treated as having specific tax characteristics. These
cannot be hypothetical, there has to be a specific transaction
that has been negotiated and is presented to the government.
There is a $28,300 fee for a ruling like this. If a ruling is
substantially identical to another, the cost is $2,700 for the
added one. He gave the example of AGDC, the state, and a wholly
owned subsidiary all asking for the same ruling.
1:31:04 PM
MR. SCHUETZE added that attorneys will charge for preparing the
ruling request. The IRS can revoke a private letter ruling if
facts were misrepresented or if the government made a mistake,
but that is not common. Generally, it is the only way to get
certainty, and it is often required as part of business
transactions when a major commitment is being made, he said.
1:32:04 PM
REPRESENTATIVE JOSEPHSON asked if the three contingencies are
disjunctive tests or if AGDC must pass through every hurdle.
MR. SCHUETZE said they are disjunctive.
REPRESENTATIVE JOSEPHSON suggested that Mr. Schuetze would not
advise that AGDC police powers be weakened. "If anything, they
need to be robust and strong." Is that true?
MR. SCHUETZE agreed.
1:33:29 PM
REPRESENTATIVE JOSEPHSON said it seems as if Mr. Schuetze comes
close to recommending that Title 31 be amended to make it clear
that there was less separation between AGDC and the state.
MR. SCHUETZE noted that the state has a lot of issues, and many
are not tax related, including whether the state would be liable
for the operations of AGDC. The Shamberg test is satisfied if
there is substantial sovereign powers, he said. The next thing
to look at is the ruling position of the IRS as well as the
proposed regulations where the IRS would consider whether AGDC
has governmental control and a governmental purpose. That would
be the primary focus, he said. To show a political subdivision
and get a ruling, Alaska would have to look very carefully at
the proposed regulation.
1:35:50 PM
REPRESENTATIVE JOSEPHSON referred to other partners, like
ConocoPhillips and BP, and asked if those complications are
dispensed with if the sovereign immunity provision is overcome.
"We don't need to worry about the second and third parts of your
memorandum?" If the tests are disjunctive, and if the state
could get a ruling relative to the question of implied statutory
immunity, then would the tax exemption be enjoyed?
MR. SCHUETZE said the question is if AGDC would get a ruling
under implied statutory immunity. For instance, when the Alaska
Gasline Port Authority applied for a ruling in 1999 based on
being a political subdivision, the IRS issued a ruling saying
that they would be tax exempt based on the representations in
the request, but it was not under being a political subdivision.
The IRS said it was for purposes of Section 103. He added, "So
the very fact that you ask for a ruling … does not, by any
means, guarantee you'll get that ruling from the government.
They may grant you a ruling that says that the entity is exempt
from federal taxation, but it may be for another reason."
1:38:19 PM
REPRESENTATIVE SADDLER said Mr. Schuetze gave several reasons
how the state could get a tax exemption for this project, and
they are very complicated. One thing that piqued his interest is
that the AKLNG project must remain wholly state owned in order
to be tax exempt. One of the precepts for these types of mega-
projects is that financing is aided by carving out and selling
elements of it, which is a way to help pay some costs and share
the risk. If the status of the LNG project changed such that it
did not enjoy a federal tax exemption, would there be a
retroactive penalty from the beginning?
MR. SCHUETZE asked if Representative Saddler is talking about
getting a ruling first.
REPRESENTATIVE SADDLER said he does not know the regulatory
process but assumes it would be getting a private letter ruling
first. To retain the status, Mr. Schuetze made the point that
the project had to remain wholly owned.
MR. SCHUETZE reworded Representative Saddler's scenario: The
state starts out owning, directly or indirectly, the entire LNG
project, and at some point in the future, as laid out in the
plan, the state will sell off parts of the venture. Mr. Schuetze
said he suspects that the government would view that as a
negative factor in considering its ruling. Revenue Procedure
2016-3 states that the government would not rule under Section
115 as to whether some but not all of the income from an entity
is from exercising an essential governmental function. "They may
think that that applies to this example that you gave." There is
a vaguer statement in that procedure, he said, about not issuing
rulings where the project is designed primarily to avoid the
tax. He noted that all business transactions try to limit taxes,
so this is in the eye of the beholder, but it indicates possible
skepticism in granting a favorable ruling under that
circumstance. He stated that there is no way of knowing until
the facts are presented to the government.
REPRESENTATIVE SADDLER asked Mr. Schuetze to characterize how
difficult it is to obtain a private ruling. Also, is an entity
locked into the terms presented in the ruling request?
1:42:27 PM
MR. SCHUETZE explained that every private letter ruling is based
upon the representations of the requestor. If things materially
change, a second ruling could be requested.
REPRESENTATIVE SADDLER asked how durable and reliable the ruling
would be for the life of the project.
REPRESENTATIVE SEATON asked about the definition of private
benefit and if it only applies to ownership and not to investors
or things like shipping commitments.
MR. SCHUETZE said it refers to "no more than an incidental
private benefit. It's really quite wide open." They are just
looking at whether distinct, private parties, as opposed to the
population as a whole, might have some particular benefit from
the project, he explained.
REPRESENTATIVE SEATON said if the North Slope producers are able
to monetize their gas, will that be a private benefit?
MR. SCHUETZE stated that if it is a matter of Alaska, through
AGDC, investing in a project to make money for the state, it may
be satisfactory. Everyone who lives in Alaska would benefit from
the state generating more revenue. But, if it is an entity where
the state owns an interest and there are private parties owning
interest, "then it becomes a very real concern that there is
more than an incidental benefit-if you're talking about the tax
status of that entity, itself, that's operating the venture."
1:45:45 PM
REPRESENTATIVE SEATON surmised that it is the ownership of the
pipeline and the money generated from it and the liquefaction,
and not that Alaska has 25 percent of the gas and three or four
other parties have the rest of the gas. He questioned if private
entities shipping their gas down through the pipeline would not
influence the tax exempt status for the state if it owned all of
the pipeline, and if producers monetizing their gas would not be
considered a private benefit. Getting the answer in writing
would be fine, but if monetizing the producers' gas is
considered a private benefit on this project, that is key.
1:46:33 PM
CHAIR GIESSEL said the witness is not the IRS and cannot provide
a ruling. As professionals, the attorneys are not going to
mislead the committee. She introduced the next witness.
1:47:37 PM
ERIC WOHLFORTH, Attorney, Jermaine, Dunnagan & Owens, P.C,
Anchorage, said he has practiced public finance law for "so long
you wouldn't believe it-it's actually 60 years this year." He
said he was asked about tax-exempt financing where the interest
is exempt from federal income taxes. As currently configured,
tax-exempt financing of the gas pipeline is not possible under
general tax law. With the use of the line by the three
producers, the interest on Alaska or AGDC bonds to finance the
project could not be exempt, he explained. Bonds issued by the
Alaska Railroad Corporation (ARRC) under special permission in
the Federal Railroad Transfer Act may possibly be tax exempt.
Obligations issued by the state would be "private activity
bonds," and under Section 103 of the tax code, the tax-exempt
interest exclusion does apply. Section 141(b) sets up private
business tests to define "private activity bond" and is defined
under "private business tests," which are twofold: One is the
"private business use test," and the other is the "private
security or payment test." He explained that both tests must be
passed for the exemption.
1:50:27 PM
MR. WOHLFORTH said the private business use test is passed if
more than 10 percent of the proceeds of the issue is to be used
for private business. An issue meets the private security or
payment test if the payment of principal or interest is directly
or indirectly secured by or payable from property or payments
used for a private business use. For this project, an issue of
Alaska or AGDC bonds might finance the entire pipeline to be
used by the state for its share of royalty gas and by the
producers for their share. Producers using over 10 percent of
the pipeline capacity meets the private use test, which denies a
tax exemption. Likewise, payments for such use by the producers
would meet the security or payment test.
1:51:32 PM
MR. WOHLFORTH said one might ask why $1.4 billion of bonds were
financed on a tax-exempt basis for the TAPS marine terminal in
the 1970s. At the time, he explained, they were qualified bonds,
and they are called exempt facility bonds. In 1977, those were
facilities for providing local energy or gas. Additionally, the
docks and wharves were a permitted purpose for tax-exempt
financing even though privately owned. That exemption went away
with the Tax Reform Act of 1986.
1:52:52 PM
MR. WOHLFORTH said the federal transfer legislation endowed the
railroad with unique tax provisions unencumbered by the above
restrictions. Recognizing this, the state gave ARRC state
financing authority of gas pipelines in 2003. However, tax-
exempt financing for this purpose would likely require a ruling
by the IRS, and it would be very difficult, if not impossible,
to obtain such a ruling. The IRS has been dedicated to limiting
tax-exempt financing. According to the Congressional Joint
Committee on Taxation, the tax-exempt bond subsidy is generally
considered to be inefficient, because the forgone tax revenues
often exceed the value of the subsidy to the governmental
issuers, "even though, in our estimation, it may be essential to
the vitality and continuance of state and local governments." He
said, "In our view, both the intent and the letter of the
authorizing state law and that project must be congruent with
federal tax law, regulations, and rulings for a positive ruling
result." Rulings are typically given only when there is a
measure of certainty on financing arrangements. Every ruling
request must contain a full description of all facts relevant to
the transaction. The IRS is not bound by a ruling if there are
undisclosed facts, and any substantial change in the financing
arrangement jeopardizes the exemption. He explained that a
ruling request for such a large and complex project would take
time to prepare, and the IRS response may take a year or more.
He opined that there is "only a possibility" that the IRS
response would be positive.
1:55:44 PM
MR. WOHLFORTH said attorneys have been working on the ARRC tax-
exempt financing issue since the transfer legislation in 1982.
It is possible that congressional intent was to give broad
authority to the ARRC. The transfer legislation states that it
is "intended to confer upon the state-owned railroad all
business opportunities available to comparable railroads,
including contract rate agreements…." Historically, railroad
holding companies have financed and operated both railroads and
pipelines. He said the problem is that when the railroad
received tax-exempt financing permission, it was simply a
railroad. Other railroad holding companies operated pipelines,
but the ARRC was neither a holding company nor did it operate a
pipeline at that time, and the IRS could cite this fact in
ascertaining the intent of Congress. "In our opinion, the IRS is
ultimately unlikely to find authority for a very large pipeline
financing to have been within the ambit of this language."
1:59:14 PM
CHAIR GIESSEL said [the committee] hears a lot about using ARRC
bonding authority.
1:59:39 PM
REPRESENTATIVE JOSEPHSON put forth that there is no doubt that
the state and the industry would benefit from a tax exemption.
(Mr. Wohlforth agreed.) Regarding the use of ARRC bonding, "what
do you think about the other memorandum from Mr. Schuetze that
discusses the implied statutory immunity?" Is that a separate
argument that could stand on its own and could be effective?
2:00:40 PM
MR. WOHLFORTH said the law to issue tax-exempt bonds and the law
regarding other tax exemptions have some commonality, but,
essentially, the project either qualifies under Section 103 or
there is specific permission under the railroad legislation. He
said he is not referring to the tax exemption of the income as
Mr. Schuetze presented; "I'm talking solely about whether or not
interest on bonds could be tax exempt." Some comments apply to
both, he said, particularly if a tax-exempt deal suddenly
changes character. Bonds may have to be called at that point and
can be a huge financial event.
REPRESENTATIVE HAWKER asked Mr. Schuetze if he would reach the
same conclusions if project owners with the State of Alaska are
institutional investors and are not the producer parties.
MR. SCHUETZE said his memo would pertain to other private
backers as well.
REPRESENTATIVE SADDLER asked if it would be futile to apply [for
a ruling] based on the ARRC bond authority.
MR. WOHLFORTH said there is always a possibility, but he is
providing his best judgement. Other bond attorneys might have a
more positive outlook, he said.
REPRESENTATIVE SADDLER asked how much it would cost to make the
application to the IRS.
MR. WOHLFORTH said the real money goes to the attorneys. "We're
talking in the nature of $100,000 plus, and maybe even
$200,000."
2:04:51 PM
SENATOR MACKINNON thanked Mr. Wohlforth for participating as co-
chair on a fiscal policy subcommittee "some years ago." She
said, "It seems like our worst fears during that committee
process as we served together have come true for Alaska." She
noted that Mr. Schuetze said AGPA [Alaska Gasline Port
Authority] had received a private letter.
MR. SCHUETZE said the number is "2000 20001708."
MR. WOHLFORTH said it is not to be relied on as precedent, but
everybody does anyway.
SENATOR MACKINNON said she asked because the governor believes
that there is hope in the AGPA proposal, and the letter may
still be relevant. She said she has heard the soundbite: "It's
our oil. It's our gas." She said she was smiling during this
conversation, because the state will be penalized for not taking
its oil through the pipeline, because "the premise of getting
our fair share that has been argued, at least, in the previous
election cycle, was that it's our oil." This legal opinion
today, however, is that state cannot get a tax exemption on the
state's oil or gas, because a private entity might benefit more
than 10 percent or get more than an incidental benefit "when we
can't monetize our gas and our oil for the people of Alaska,
because someone else has purchased a lease space to try to
remove our gas or our oil."
MR. WOHLFORTH said he does not exclude the possibility-and only
a possibility-that there could be a tax exemption of a portion
of the line that equals the state's 25 percent share.
SENATOR MACKINNON asked if the state could take a segment of the
project to make it more cost effective. The state was originally
partnered with TransCanada, "and we stepped up and said we were
going to take a greater share of the pipeline." She said she
supported that because the pipeline is the backbone with a solid
8 percent rate of return, so it seemed fairly secure that once
there was a gas commitment and shippers, the people of Alaska
would benefit from an 8 percent rate of return through tolling.
"Is there a component of the pipeline that would be more
advantageous or easier to get a tax-exempt portion on?"
MR. WOHLFORTH said he has not considered that question, "but
that would be something to look at."
CHAIR GIESSEL announced that the Legislative and Budget and
Audit Committee has a copy of the AGPA application for the
private letter ruling, and she will put it online.
2:10:55 PM
REPRESENTATIVE TARR noted that yesterday Mr. Meyer put forward
the idea of having one entity own the pipeline, one own the GTP
[gas treatment plant], and one own the liquefaction facility,
but it sounds like Mr. Schuetze is saying there is no
possibility for tax exemption unless each is a wholly owned
state entity. "If the state is one of the owners, and each of
those individual units has other private investment, it sounds
like what you're saying is none of them, then, would be eligible
for the tax-exempt status."
MR. SCHUETZE said yes. "Those individual operating entities for
each part, I would expect that those would be taxable if private
parties were members of them." There is still the issue of if
the income that flows through the state is exempt from income
tax.
^Producer Partner Comments on Transition Issues
Producer Partner Comments on Transition Issues
2:12:53 PM
BILL MCMAHON, Commercial Advisor, ExxonMobil, Anchorage, said he
has 34 years with ExxonMobil, and during his last testimony in
June, he discussed the misalignment that was developing between
the state and the producer parties on entering FEED [front-end
engineering and design] in 2017. The administration was pressing
for certain agreements to be in place by the end of the regular
session without including a fiscal agreement, which is necessary
for entering FEED. Two concepts to progress the project were
then presented, he said. The first was transitioning to a state
LNG project, so that AGDC could enter FEED in 2017. The other
was to pace the four-party Alaska LNG project to match the
current market conditions, while continuing to advance the
regulatory approvals, reduce project costs, and work on the
fiscal and commercial agreements to provide the necessary
information for all four parties to make a FEED decision.
2:15:48 PM
MR. MCMAHON said he wants to set the record straight. At no time
has ExxonMobil said the AKLNG project should stop or be put on
the shelf. Now that the Walker administration has decided to
pursue a state LNG project, ExxonMobil is actively engaged in
the plan to bridge from the four-party joint venture agreement
(JVA) to a state project. Key components include completing the
pre-FEED deliverables and filing the remaining draft resource
reports, which are on track for completion in a few weeks. Next,
a target date needs to be selected for the handover of all of
the JVA lead party responsibilities to the state, and AGDC's
target appears to be sometime in the fourth quarter of 2016.
Lead party handover sessions need to be scheduled, and the FERC
and NEPA progressions need to be handled. ExxonMobil needs to
support pre-FEED data access to the state project. "And, then
finally," he said, "we need to sell the Alaska LNG project LLC
to AGDC," and that will allow Alaska to have access to the land
for the LNG plant. The state will also have to buy from them the
DOE [Department of Energy] export authorization, the AKLNG
website, and the logo.
MR. MCMAHON said AGDC will then be able to establish its
standing with FERC and DOE and demonstrate to potential
investors and customers that the state LNG project is open for
business. Once the project is up and running, and the JVA pre-
FEED winds up and the project management team is disbanded,
ExxonMobil will still have a major role in the development of
North Slope gas by making it available for sale to the project.
The producers have invested billions of dollars at Prudhoe Bay
and Pt. Thomson. Pt. Thomson requires additional investment, and
much of the current equipment installed can be used for gas
sales, including the Pt. Thomson export pipeline. At Prudhoe
Bay, the gas has been used for oil recovery, and by using gas
for oil recovery the working interest owners have provided over
three billion more barrels of oil than originally expected.
2:19:40 PM
MR. MCMAHON said investment is necessary to allow gas to be
produced for a state LNG project, and "we expect AGDC to
approach Prudhoe Bay about potentially handling the by-products
from its gas treatment plant." Before committing to these
investments, ExxonMobil will need robust gas sales and purchase
agreements with assurances that purchasers will pay for
ExxonMobil's gas. The corporation has always been willing to
make its gas available for any project for reasonable terms.
"You've been provided copies of various letters that we've sent
to the State and to AGDC," he said.
2:20:12 PM
MR. MCMAHON noted that in July, ExxonMobil sent a letter to
Keith Meyer that included an offer to reengage on well-head gas
sales negotiations. In December 2015, ExxonMobil sent a letter
to Governor Walker saying its gas was available for well-head
purchase by the state. In October 2015, the corporation sent a
letter to Marcia Davis and to Rigdon Boykin with an offer to
negotiate a gas sales and purchase agreement. Finally, "you can
go back to 2008 after receiving inquiries from Senate and House
Democrats, ExxonMobil provided letters on our willingness to
sell or ship gas on commercially reasonable terms" for the AGIA
pipeline.
MR. MCMAHON stated that last year Governor Walker sought
assurances from each producer that they would make gas available
if they are no longer part of the LNG project. ExxonMobil
immediately established a negotiating team, executed
confidentiality agreements with the state, and had several
preliminary meetings. With the advent of a state LNG project,
ExxonMobil remains ready to negotiate gas sales and purchase
agreements-under commercially reasonable terms. "And, of course,
ExxonMobil has had confidential, bilateral gas marketing
conversations with the state as contemplated under Senate Bill
138," he said. The conversations have been on hold, but the
company stands ready to restart them. ExxonMobil remains
committed to commercializing the natural gas resources on the
North Slope and is willing to work with any interested parties
to explore all options.
2:22:36 PM
DAVID VAN TUYL, Regional Manager, BP Alaska, Anchorage, said BP
has always seen a tremendous opportunity for getting Alaska's
gas to market, and it still does. The opportunity for gas is of
such a scale that it is unique on the planet. Alaska gas is the
single, biggest undeveloped resource in BP's portfolio. If it
can get the gas to market, BP can sell over 1 billion barrels of
oil equivalent. "That is huge to BP," he said. This can become
Alaska's reality. In 1977, oil producers all thought Prudhoe Bay
gas would be sold into Lower 48 markets within five years. When
the market was deregulated, gas price collapsed, and the project
was put on hold. The timing was not right, and it is absolutely
better that Prudhoe Bay gas was preserved in this way. "We were
all blessed with a silver lining." Commissioner Cathy Foerster
of the Alaska Oil and Gas Conservation Commission (AOGCC) said
if BP sold gas in the early 1980s, Prudhoe Bay would have
produced only 8 billion barrels of oil, and other fields likely
would not have been developed. The gas was used to increase oil
recovery, he said. "We have produced, to date, over 12 billion
barrels of oil." There are still about 2 billion barrels more to
produce, and there are over 4 billion barrels of oil equivalent
in gas. This Prudhoe Bay gas combined with gas from Pt. Thomson
can underpin an Alaska LNG project, and BP has invested billions
of dollars at those fields and continues to invest to help make
gas available.
2:26:39 PM
MR. VAN TUYL said there have been other attempts to monetize
North Slope gas. This current effort began in 2011 when gas in
Asia was over $15 per million BTUs. Governor Parnell asked BP
and others to work with the state to determine the feasibility
of a new project-called AKLNG-that could get gas to Asia in mid-
2020. In January 2014, the parties signed a heads-of-agreement
and asked the legislature to pass SB 138. The confidential
bilateral gas marketing conversations between BP and Alaska were
important. He said BP is willing to make its gas available to a
project under commercially reasonable terms. It has spent over
$600 million, and AKLNG continues to make good progress.
2:28:36 PM
MR. VAN TUYL said that the shale gas revolution in the Lower 48
has changed the gas supply picture. The cost of supplying Alaska
gas to Asian markets is estimated to be too high to compete.
That's the reality, and in its current form, the project does
not compete, but there are game changing opportunities for
Alaska LNG that are worth pursuing. He said LNG is a commodity.
"We want to be able to make a competitive offer." He said BP
understands the state wanting to move ahead. It also understands
Alaska's fiscal needs, and Alaska should know that BP wants to
move the project forward. The FEED phase will cost a lot and
deserves a careful evaluation before BP commits. "We don't want
to rush into the largest energy project in North America only to
end up losing lots of money," he said, and now is not the right
time for BP to make a commitment. He suggested reducing the cost
of supply with a state-led project, "and we support the state's
efforts." He said BP is determined to find a way to lower the
cost of supply.
2:30:56 PM
MR. VAN TUYL suggested a more commercially-efficient structure,
and it is not unusual for a large project to restructure as it
matures. A state project could be the best structure. Why?
"Well, we heard from Wood Mackenzie yesterday that if the AKLNG
project were restructured with the utility-like toll, it would
represent a major step-change in cost of supply," he stated.
State ownership could provide that structure. That step alone-
converting the upfront capital into a toll over time-could allow
the project to compete globally. He said it was clear that the
many details will matter. State ownership could lower federal
taxes. As a tax-exempt entity, the state may be able to deliver
this important cost reduction, he said, but, obviously, a tax
exemption is very much fact dependent. The state-led approach
allows the state to shape its policies to improve the
competitiveness of the LNG project, he added. Since BP thinks
the state-owned structure can improve costs, it has been working
with the other parties to achieve a number of things, like
transitioning, finding other concepts that have been successful
in global LNG projects, transferring information, and providing
access to assets so AGDC can file a successful FERC application.
2:33:14 PM
MR. VAN TUYL noted two things important to BP: project financing
and efficient advancement and delivery at or below its estimated
cost. The company is considering what form of support it will
provide. "We want the project to seamlessly continue and
maintain momentum." If the project is successful, BP can sell
its gas. The project's success is good for BP, the state, and
many Alaskans, but the core facts are the same. Prudhoe Bay is
one of the world's most prolific basins. The Pt. Thomson gas
condensate field is producing now and has even more gas to play
for. "We are aligned on our need to continue to look for
opportunities, to reduce the cost of supply for Alaska LNG, to
provide a solid future for BP Alaska and the state."
2:35:48 PM
DARREN MEZNARICH, Project Integration Manager, ConocoPhillips,
Anchorage, said he is leading the company's efforts to monetize
North Slope gas. ConocoPhillips supports the completion of pre-
FEED work, which is expected to be done in the next few weeks.
He noted the significant contribution of the project team;
however, ConocoPhillips is unlikely to directly participate in
FEED for the project in 2017 due to the significant economic
headwinds and other challenges. If one or more of the parties,
including AGDC, wants to proceed, ConocoPhillips is willing to
cooperate in a transition, including the sale or other transfer
of ConocoPhillips assets related to the project.
MR. MEZNARICH said the state and AGDC have indicated an interest
in continuing under AGDC's leadership, and ConocoPhillips is
working with all parties to facilitate that transition. The new
concept of a state-owned project and tax-exempt entity is a
paradigm shift, and they recognize the creativity of the state
and AGDC for offering these concepts, which may improve the
project's competitiveness; however, there are many questions.
Also, AGDC has identified a series of questions they are
pursuing to prove out the concept. These types of management
questions seem reasonable if the legislature and administration
make decisions as the project moves forward.
MR. MEZNARICH said ConocoPhillips is willing to make its gas
available on commercially reasonable terms, and it expects to
support AKLNG through its ongoing North Slope investments. He
recognizes that the legislature has questions as it considers
this plan going forward, and ConocoPhillips' actions are
intended to help the legislature and the administration get the
necessary information.
2:38:19 PM
REPRESENTATIVE SADDLER said he heard Mr. Van Tuyl say that state
ownership was the best course of action and asked if there are
any factors other than the state's desire to progress in the
face of the economic conditions that make the switch to a state-
owned project the best course of action and why that wasn't the
first concept.
MR. VAN TUYL said he will answer why BP didn't look at this
different structure first if it now appears to be the best.
Typically, he explained, in any major energy project, BP looks
at an equity model and emphasizes alignment in interests among
the parties. That is the pathway set out in the HOA and that is
what was envisioned under SB 138. He said BP spent $600 million
and then found out that the project does not compete, which was
compellingly shown by Wood Mackenzie consultants yesterday.
MR. VAN TUYL said he also made it clear in testimony that that
alone doesn't say it is time to stop. This incredible resource
is available, and BP wants to get it to market. If that method
doesn't work, is there another way to be competitive in the
global marketplace? "It looks like we've identified, at least,
an option that was outlined by Wood Mackenzie in a tolling model
that seems to, at least to us, to be worth pursuing." That is
why BP will continue to cooperate and see where this potential
might lead. Regardless of the commercial structure, BP needs to
make sure the project is financeable and technically executable,
which is really important for mega-projects. This pathway is
worth pursuing, he said, because the stakes are worth it.
2:41:18 PM
REPRESENTATIVE SADDLER noted that the two tax attorneys told the
committee that getting tax exemptions for this project could
take a year or more. He asked what BP could do in that year if
the process was held in abeyance while the tax exemption
questions are answered.
MR. VAN TUYL answered that much work needs to be done in framing
out the specifics of this structure. While a tax exemption would
be a great benefit, it is not the only biggest benefit. Wood
Mackenzie's work showed that 80 percent of the benefit was
derived from the tolling structure, and the balance was from
federal and state taxes. Is it an avenue worth pursuing? Sure,
but there are technical challenges and details that have to be
worked out in specificity to be able to make a cogent request to
the IRS to enable such a ruling. "You have to do quite a bit of
homework to earn the right to ask to begin with."
2:42:59 PM
MR. MEZNARICH added that ConocoPhillips still sees the producers
as participating in the project. Wood Mackenzie estimated $10
billion in upstream investments, so there would be that
investment as well as making the gas available. "It's not like a
stoppage of the upstream participation," he clarified.
MR. MCMAHON said he thought the State of Alaska could do three
things during that time, including pursuing the NGA Section 3
application. He explained that the AKLNG participants understood
that the regulatory process was a critical path for this
project. Another thing that could be pursued during this time is
to secure gas supply for the project through either purchases or
tolling agreements. And then, finally, for customers to be able
to use the project, either by selling gas or tolling, they will
need to understand the fiscal terms so that they have confidence
that when they receive a check for gas or when they receive an
invoice for tolling that they know what they are paying for and
that it is not eroded by changes in taxes.
2:44:32 PM
SENATOR DUNLEAVY asked for clarity for the average person on the
street. Is the project envisioned under SB 138 now dead because
of economics? From the producer's perspectives, is the project
not moving forward as a result of the work done in the pre-FEED?
MR. VAN TUYL answered that BP's perspective is that the project
struggles to compete in the global marketplace.
SENATOR DUNLEAVY said that some can interpret "struggling" to
mean it is dying; it's dead. He said he would get calls from the
average person on the street asking, "What did they say?" So,
the project is dead, and now "we" are talking about looking at a
different way of doing it?
MR. MCMAHON responded that the nice thing about the gated
process is the checking points after each major expenditure. "We
spent $500 million on pre-FEED," and now ExxonMobil is looking
at what the commercial structure will be for governing FEED, the
fiscal terms, and how cost of supply competes against other
projects around the world. At this juncture, ExxonMobil needs to
stay in pre-FEED before making an affirmative decision to move
into FEED. This was discussed in February, and one thing the
company offered at that time was to continue to stay in pre-
FEED, keep the four parties' interests together, and work
through until all parties say yes to move into FEED. An
alternative was discussed where the state could move into FEED.
MR. MCMAHON stated his understanding that AGDC intends to build
on all the work that has been done in pre-FEED. It is the same
LNG plant, the same gas treatment plant, and the same pipeline
that connects Prudhoe Bay and Pt. Thomson. What will be changing
are the participants, project funders, and how the gas is going
to be accessed. Under the four-party arrangements all parties
have gas, all four invest, and all four have capacity, and now
AGDC is looking at a structure "where they will have to access
gas to go through a 100 percent state-owned project."
2:48:18 PM
MR. MEZNARICH said he does not see this as dead. "We are not
going to give up on this resource. The resource is too big for
all our companies; it's too big for the state, so I'm never
going to say it's dead." The technical work is done and now
ConocoPhillips has to look at the economic headwinds and the
agreements, which are not ready. It is not economic right now,
so the company is trying to find a way to move forward.
2:49:09 PM
SENATOR DUNLEAVY said no one is giving up on the resource,
because it's there, but the envisioned project is not going to
move forward. "I don't see you folks investing the money into it
at this point as it was envisioned." It is important to say that
Alaska is probably the only sovereign that chases you guys to
make you do something. All over the world there are resources
that the producers see that they want to develop, "and it just
seems that there are times in Alaska, and this is, I think, what
we're seeing unfold here in the last two days, is a situation
where it is not economical from your perspective, which is
understandable. The question is going to be, if it's not
economical from your perspective, how is it economical from the
state's perspective?"
2:49:56 PM
REPRESENTATIVE HERRON noted that Mr. McMahon referred to
mischaracterizations and that he wanted to set the record
straight, but he testified that he very much supports this
project moving ahead although it is state led. "Is that true?"
MR. MCMAHON replied, yes, that is true.
REPRESENTATIVE HERRON asked if he is talking to contractors or
other people to help in this transition.
MR. MACMAHON answered that the conversations he is involved with
on this transition from a four-party to a state LNG project have
been primarily with AGDC to make it a smooth handoff. He knows
that Steve Butt and the project team are having similar
discussions to make sure that the technical work can be handed
off seamlessly and efficiently, as well as the regulatory work.
Of course, the AKLNG participants do have contractors involved
in that work, and some of those contractors are involved in
those conversations. "We do have the full team, both commercial
and project, working to build a successful bridging to a state
LNG project," he explained.
REPRESENTATIVE HERRON asked if there are other entities outside
of those two groups of people.
2:52:08 PM
MR. MACMAHON said no.
REPRESENTATIVE HAWKER noted that Mr. Meyer at AGDC discussed the
actual marketing of Alaska's gas, and it sounded like he said
that AGDC is actively marketing gas, not only the state's gas,
but he referenced marketing "a company's gas," which he didn't
name, and that other companies might want AGDC to market their
gas. He asked the witnesses if they agreed with the state for
joint marketing.
MR. VAN TUYL answered that the short answer for BP is that
marketing of gas is a sensitive issue subject to U.S. anti-trust
laws and other law, and BP takes it very seriously. If there was
implication that there was some sort of a "joint marketing
arrangement," it is nothing that BP would be involved with. He
heard the testimony and didn't know if Mr. Meyer was referring
to marketing of gas or, more generally, marketing of the project
and of an awareness of the project.
MR. MCMAHON responded that he has just explained how ExxonMobil
continues to make its gas available to the State of Alaska and
AGDC. Perhaps, Mr. Meyer was relying on those offers from
ExxonMobil.
MR. MEZNARICH agreed that marketing is sensitive to talk about.
ConocoPhillips feels that JV [joint venture] marketing would
have been the best method for the project to have a single face
in the market and jointly work together. But there is no
agreement now to pursue joint venture marketing.
CHAIR GIESSEL thanked the witnesses and said their testimony
will be available to the public online.
^enalytica: Nikos Tsafos
Legislative Consultant Comments: enalytica
2:55:20 PM
CHAIR GIESSEL welcomed the next witness.
NIKOS TSAFOS, Legislative Consultant, enalytica, Washington,
D.C., noted that enalytica is a consultant to the legislature,
contracted through the Legislative Budget and Audit Committee.
He said this is a big project, and if it gets built, it will be
around for a really long time, "and stuff's going to change."
People will come and go, as will investors. The gas might be on
line in 10 years and run for 20 years, "so we're talking about
getting our money back by 2046." He said that 2046 forward is
kind of the same thing as 1986 backward, and in 1986, there was
a Northwest Shelf project in Australia that had just made a
final investment decision where investors were looking at
getting their money back in 20-25 years. The Cold War was going
on; Chernobyl had not happened. China was just opening up, and
the European Union was about 10 members. There was no Google or
cell phones, and this Northwest Shelf project would have to
survive through all that. He said that Kenai goes back to 1969
and shipped its first gas during the Vietnam War. His point is,
he said, is that "stuff is going to happen; you're going to have
to pace yourself." It is difficult to manage this process if
every time the commodity goes up or down, everyone throws their
arms in the air and wants to start over. It takes patience and
powering through.
2:58:50 PM
MR. TSAFOS referred to a state-led project and said there is
merit in an expanded state role, and he has no philosophical
objection. He has worked with national oil companies and state
institutions around the world, and some are great and some are
terrible. "There's nothing beforehand that tells you how it's
going to end up." There are things the state can bring to the
table that are really valuable and worth exploring. Listening so
far, he said, he has way too many questions about how this will
work, who is taking on what risk, and how things will play out;
therefore, it is important to remember the core principles.
3:00:43 PM
MR. TSAFOS referred to Slide 3 of his presentation. He said
Option 1 is where AKLNG becomes a state-owned tolling project.
He clarified that he is speaking to his interpretation of "what
is going on," and it is not necessarily exactly what is on the
table. Alaska LNG has a treatment plant, an 800-mile pipeline,
and a LNG facility, with 75 percent owned by the producers and
25 percent owned by the state. "Throw that [plan] out," and now
it is 100 percent owned by Alaska. As the owner of the
infrastructure, the state will find people to use it and get
long-term commitments. They will pay "your tax." If the state
decides to take its gas as gas, the royalty-in-kind, and the tax
as gas, then the state may sign up with itself. The departments
of natural resources and revenue could sign up with AGDC to use
the facility, and they could pay a tax. These contracts-whether
they are with the producers, departments, or other folks-can be
taken to banks or investors when asking for money.
MR. TSAFOS stated that Option 1 relieves the producers from
spending between $45 and $65 billion, because the state will.
Like deciding between buying and renting, it depends on what the
numbers are. He said renting a house could have much less
stress, so companies who ask their board for 30 percent of $45
billion will get different responses than asking for 30 percent
of $10 billion, which is what Wood Mackenzie said is the
upstream costs. Additionally, Option 1 takes away some of the
project complexity. The state will not sue itself over property
taxes, for example, so payment in lieu of tax is unnecessary,
but there will still be proportion questions for the state and
local communities. The state has to do that anyway, "you just
can get rid of the producers … so that simplifies things." The
need for fiscal stabilization may change. "If you spend $45
billion, you want fiscal stabilization," but spending $10
billion over 15 years, may lower the demand for stringent
stabilization. He said he is just speculating, however. None of
this does anything about the cost of supply, except maybe a
federal income tax exemption. "I don't know what your take-away
was from the previous presentation [on tax exemptions]. My
thinking was: I have no idea."
MR. TSAFOS noted the above benefits, but if this is an
uneconomic project, all the state has done is take over an
uneconomic project. Option 1 shifts some responsibility from the
producers to the state, and how much it shifts really depends on
the structure. There are ways to protect the state, he stated.
In Indonesia, the state owns the liquefaction facility, but it
is operated by a consortium of the suppliers. The suppliers'
goal was to make sure the facility worked well, so they wanted
"to be in the room," and it works for them. Option 1 has some
benefits, but it does not go very far, he summarized.
3:06:30 PM
MR. TSAFOS turned to Option 2, which is similar, but the state
is "starting to treat the formula to really do something to the
cost of supply." He said the committee was essentially provided
that information from Wood Mackenzie in trying to make the
project more economic, but there are risks. The state could
lower its return to 7 percent-or keep lowering it until it
works, and that is not a good position to be in. At this point,
there is a delta between the price and the cost, and the state
is the one that will absorb the delta. He asked what kind of
return is acceptable. It is easy to build a $50 billion project,
"if you're willing to lose $50 billion." Knowing the desired
return is a really good conversation to have.
MR. TSAFOS said that the price of LNG will go up again, and when
it does, because the state has lowered the tariff to match the
current price, all of the money will go to BP, ExxonMobil, and
ConocoPhillips. The state will be very upset and will try to
raise taxes to get that money back. In this structure, the state
has no production tax, and "you're not really making any of the
upside." After taking all of the risk and accepting a low rate
of return, the money will all go to the producers, and that will
not be sustainable. It is important to talk about risk and
return and how to balance it. "How do we talk about that?" He
urged the state to really bring the producers on board and say,
"Okay, what are you guys doing to make this more competitive?"
It should not just be the state accepting a low rate of return;
the producers need to commit to doing something, because if the
state makes the project economic by lowering its return, the
producers do not have to put any effort into reducing costs.
3:10:06 PM
MR. TSAFOS turned to Option 3 on slide 5: "the scary scenario."
It is unnecessary and super scary, he said. It is called the
merchant plan in the LNG business, where the state would still
own everything, but rather than charging a toll, the state would
just buy the gas. There are endless ways to do this, but the
state could buy the gas at the wellhead and sell it in Nikiski.
In one scenario, the transactions are linked. For example, the
state buys the gas at the Henry Hub price and sells it for Henry
Hub plus x. In that case, the state is performing an unnecessary
function, because if that makes sense, the producers will do it
themselves. The only question is whether x is a good enough
number, and that can be tweaked by lowering the rate of return-
so, really, it is completely useless to do this.
MR. TSAFOS said, alternatively, the state could buy at Henry Hub
and sell the gas at an oil-linked price. This is probably the
scariest of all options. It is a cross-commodity risk that no
oil company would take on. "I'm not saying that you're going to
do this, partly because nobody would lend you money to do this,"
but he gave an example: The project is running and the state
buys 75 percent of the gas at Henry Hub. It is financed on debt,
because outside of the permanent fund, Alaska does not have any
equity. The state pays a little property tax and runs the
facility. If the state then sells this gas to Japan at the
market rate of $7, Alaska would be about $1 billion or $1.5
billion in the red for the year. He said, "Cash, not profit."
The state would need that much money just to pay the bills. He
purported that no one would do this, but there might be a chance
that this is being contemplated.
MR. TSAFOS noted that he has said this before: If the producers
are willing to sell you the gas, don't buy it. If they are
willing to sell the gas to the state, it means that they think
they can get a better deal than if they had built the project
and sold it on the market. The only way the corporations will
sell the gas to Alaska is if it is unprofitable. "Don't buy it."
3:13:28 PM
MR. TSAFOS said his final topic is the duty to produce. "It's
sneaking up on us." When he thinks about the duty to produce, he
assumes a court has ordered someone to produce and sell the gas.
He cautioned that he is not a lawyer, but he assumes also that
there is someone that has to buy the gas. A court would be
telling Alaska to buy it. He provided the following scenario: In
round numbers, there are 30 TCF [trillion cubic feet] of gas on
the North Slope, and Alaska has 25 percent. So, Alaska would buy
the other 75 percent, or 22.5 TCF. If Henry Hub was $3.00,
Alaska would pay $66 billion and would have to build another $50
billion worth of infrastructure, "so on Day 1, you're minus $116
billion." He said he is not saying this will be the structure,
but when starting down this path, this is where it will lead,
and he cautioned the state to be careful what it gets into.
3:15:20 PM
MR. TSAFOS turned to "Core Principles" on Slide 6. He said if
the LNG project is led by the state, it really needs a
credibility boost. He noted that he hangs out with people in
this industry, and people often ask him if "that Alaska project"
is ever going to work. When he says that ExxonMobil is the lead
party, that there are 80 people on the project management team,
and the parties are spending $700 million on FEED, people
conclude that if anyone can make the project work, it's
ExxonMobil. The question now is if the state can pull it off. He
stated that there is a slight deterioration in confidence, so
Alaska needs a plan to address that.
MR. TSAFOS turned to the topic of outsourcing risk. Outsourcing
construction risk depends on the costs, and there is the
question of what happens if things go wrong. A lawsuit in
Australia has been mentioned here, and there are other projects
where contracts go wrong in spite of an agreement. "At least the
lawyers are going to make money," he said. If the state has to
pay 25 percent or so to fix the price, then what is the benefit?
The idea that someone else will take the risk and that it will
be cheap, "I think really has to be demonstrated." What about
other folks willing to participate for a low rate of return? He
said this has been a cornerstone [of the new plan] that there
are all these infrastructure funds, pension funds, and others
"that are really going to look at this and think it's great." He
said he has about six responses to that notion.
MR. TSAFOS said, first, he looked at who owns LNG around the
world, and he may have missed something, but he found three
instances of an infrastructure-type fund that have really
invested in LNG facilities. One is the Yemen Pension Fund
investing in Yemen LNG, and it is not applicable, he said. China
Investment Corporation is a Chinese sovereign wealth fund that
manages the foreign reserves that are accumulating through the
trade deficit. It bought a 10 percent share in Atlantic LNG in
Trinidad in 2011, 12 years after the project came on line. It
was part of a corporate deal with GDF Suez (now called Engie).
The third example is the Yamal LNG in Russia, where China's Silk
Road Fund, another sovereign wealth fund, has taken a 9.9
percent share of Yamal LNG as part of a broader financing packet
of Chinese banks to Yamal and as part of Chinese NOCs [national
oil companies] buying Yamal gas and equity. He said that is the
only example that looks a little bit like "what would happen
here." There are not many examples, so Alaska needs to really
talk about exactly who these players are.
MR. TSAFOS noted that TransCanada wanted a 12 percent return
without taking any risk. The legislature had asked enalytica if
12 percent was legitimate, and after looking at FERC regulated
pipelines, enalytica concluded it was. The range was from about
9 to 18 percent return on equity, and weighted average cost of
capital, when debt was added, was around 10 percent. Canada
regulates return on equity, and it is about 8 or 9 percent.
3:21:07 PM
MR. TSAFOS said his third point, "when I look at the Wood-Mack
number, it comes down to about $4, if you eyeball it, if you do
the 8 percent rate of return plus a 70/30-remember that dark
blue thing." Mathematically, that is totally legitimate;
however, the Corpus Christi LNG facility developed by Cheniere,
which is completely greenfield, is charging $3.50 for
liquefaction. There is no pipe or GTP [gas treatment plant], he
added. "This is essentially what you hope a third party would
be." In earlier deals, Cheniere was more desperate so it charged
as low as $2.25 and $2.49 for brownfield, and by the time it got
to greenfield, it was $3.50. He said he would like to see more
data before understanding the likelihood of someone offering a
$4.00 tariff for this entire facility, because "that's not
really the number that I see out there."
3:22:54 PM
MR. TSAFOS turned to construction risk. He said he asked a noted
LNG company why it was building a project on its balance sheet.
"Why can't you just bring in an infrastructure fund and have
them buy some of the equity and take it off your balance sheet?"
The answer he was given is that the company will not take
construction risk, but when the project is up and running,
proven, and operational, it will sell off 10-20 percent, and
"we're going to keep operatorship, there will be contracts, and
at that time we may be able to monetize and sell down." Mr.
Tsafos pointed out the Queensland Curtis project in Australia.
It is a BG-led project (now owned by Shell), and it built a
massive pipeline gathering system. It built the pipe and sold it
to a pipeline company after it was operational. It was fully
contracted with tariffs and was sold for about $6.4 billion.
Turning to "this question of 8 percent," he said the permanent
fund makes about 5 to 6 percent, and about 20 percent of it is
US treasuries, which do not really earn anything. To get to an
average of 6 percent, "there's lots of stuff that are way
higher," so it is difficult to justify an 8 percent return with
a commitment to a project of this complexity. He said he is not
saying it is impossible, but most of the data points that he has
gathered makes him question whether there is a strong appetite
for this type of investment.
MR. TSAFOS turned to the topic of veto rights. He has noted a
huge emphasis in Alaska about "not letting anyone hold you
back." However, no one is going to just come along for the ride
without having a say. No one will buy into a $45 billion project
and surrender their right to say no. He said the question is not
having veto rights, "it is how much you have a veto over."
Building the project is the only thing that no investor would
ever surrender. "It's hard for me to see a restaurant deal where
you would surrender to your two partners that have 60 percent
the right to build the restaurant, and you have no right to say
whether you want to do this or not." There is no way an investor
would do that, so either you do it alone or you do it with
others, and they have veto [rights]. It is difficult to see any
middle ground, he stated.
3:26:42 PM
MR. TSAFOS turned to financial engineering. The return is
supposed to be driven by the project risk, not by who is
investing. When permanent fund investors look at an investment,
they do not ask how it can make a 6 percent rate of return, they
ask, "What is this investment?" If it is a US Treasury, there is
a lower threshold than a bridge in the jungle. Rate of return is
a project level concept. Additionally, when someone borrows,
expected equity has to increase. "If I go into a project, and I
put in 20 percent equity and borrow 80 percent … it means that I
am not going to see any money until the bank gets paid, and if
it's 80 percent leveraged, there is a good chance it might be
years I don't get any money, which means that the risk of that
20 percent is much higher than if we'd done it 50/50." He
referred to his corporate finance textbook, which basically
says, "Don't think that you can just lower the cost of capital
by adding debt." By adding debt, you have to increase the return
on equity, he explained.
MR. TSAFOS said that it all comes back to risk and return. If
Alaska will accept an 8, 10, or 12 [percent rate of return],
what is the upside? What will it get out of this? Why have state
ownership? There is a spectrum from the current structure to the
state taking over the project, and he can think of about six
permutations between those two options. "We've gone from one to
the other, and I have no idea why we're not doing any of the
things in between." At the beginning, it seemed to be a way to
avoid delay, he said, and Alaska is now looking at a mid-2018
FEED decision, which seems like some of the companies "could
have gone there on their own." It is not clear why Alaska has
gone to this extreme. "I'm not really a big fan of windows; as
you saw from Wood Mac, it is not really a window, it's a wedge,
and it always keeps growing." He described it as an opening that
can just get wider. "If I try to sell you gas for 2040, it's a
really big window, because no one's there." There is no one on
the other side to buy it, because no one cares about 2040.
Trying to make a window is an invitation to make bad decisions.
Ten or twelve years ago, someone might have claimed there was a
window to build a pipe to the Lower 48, and Alaska would have
lost considerable money if it had.
3:31:03 PM
MR. TSAFOS referred to a letter from ExxonMobil to AGDC where it
seems like there is a 2017 work program and budget. Before that
is all tossed out, it would be interesting to know what is in
that. "How far did it get us? What kind of progress did you
make? Can you build on that?" He said he would love to know more
about that and if there is something between where the project
is right now and where the state takes everything over. There
are options between those two, and he wants to know why Alaska
is not pursuing them.
MR. TSAFOS spoke to organization. Frankly, he said, for the
three years he has been [on this project], the same one or two
people have been representing each of the producers, but on the
state side, there have been numerous people representing its
interests. But in all that time, Steve Butt of ExxonMobil has
been representing the project. He said he understands political
changes, but there have been many others. He suggested
understanding the organizational plan. Mr. Butt said that there
are about 150 people working on the project, and when it gets to
FEED, there will be up to 600 people. "Where are they? Who's
going to pay for all these folks?" That is something to talk
about. He said it is difficult to go to the market with 10
permutations of the plan.
3:34:53 PM
MR. TSAFOS turned to questions about financing plans and tax
exemptions. It has been two years since the Joint Venture
Agreement and almost two and half years since SB 138, and "I
don't think we have any better idea about the answer to these
two questions than we did on SB 138." He spoke of all the
discussions and studies that occurred without gaining more
information. The testimony an hour ago on tax exemptions was the
first new information on taxes. "It's been two years, right? At
the same time the project has gotten a DOE export application
started, FERC has bought up half the Kenai. There's kind of like
steps to that process, and you have to go there." Regarding tax
exemptions, he asked about the compatibility of telling the IRS
not to tax AGDC because it is basically the state, and then when
dealing with the debt, claiming that AGDC is on its own. Another
question he has is if the tolling structure gives all the upside
to the producers, would it be a private benefit? If Alaska is
buying and selling gas, unlike infrastructure, is it really a
core state function?
3:36:37 PM
MR. TSAFOS asked who the target investors are. There seems to be
a lot of emphasis on the ability to attract investors, and he
would like to see more case studies where this has worked. He
said he wants to revisit the risk sharing strategy, which is
key. "How far are you willing to go to get this [project]?" Who
will share the risk, and how are they doing their part? But he
cautioned not to forget the upside-it is easy to be pessimistic,
because the price of gas is low and the state is in trouble, but
this is a 30-year endeavor and prices will go up. All of the
committee discussions are about making the project competitive
at the low end and allowing the producers to capture all of the
upside. That doesn't sound right, he concluded.
3:38:08 PM
REPRESENTATIVE TARR noted that the state now shares the risk
equally with each of the producers with all parties wanting the
project to come in under budget. What is really troubling is
putting the state at risk. She asked Mr. Tsafos if a state-owned
project would put all of the risk on Alaska.
MR. TSAFOS said Alaska would likely not have 100 percent of the
risk. The market could tank, for instance, so the producers will
have some risk. Or the state could raise taxes if the producers
make too much money, but, really, the overwhelming amount of
risk will shift to the state. To pass risk to parties other than
the producers, the state will have to pay for it in the form of
higher costs, higher debt, or giving up equity, for example.
SENATOR MACKINNON asked if the length of gas contracts has
changed. When these discussions started, Mr. Tsafos said that
contracts that were coming due for renewal in the 2020s were
typically 20- to 25-year contracts. Does that hold true today
with the flood of gas on the market?
MR. TSAFOS explained that the average duration of contracts are
going down. People want shorter contracts and flexibility, but
new projects are still generally anchored with long-term
contracts. He stated that some folks sign up for long-term
contracts and then regret it. It happened in the Gulf Coast with
some companies. At times a project will get a 20-year contract,
but a middleperson will sign the contract and control and
distribute the gas. He does not know of any project since a few
years ago that took FID [final investment decision] without any
contracts. Most are still anchored by 20-year contracts.
SENATOR MACKINNON stated, "If contracts for already-in-existence
projects or gas that's being produced elsewhere in the world is
going to shorter contracts, then we go to a middleman-my guess
is. People continue to refer to these flexible terms, and we
have had some indication on what those might be. It might be a
destination where you drop and deliver the product. It might be
the quality of the project if you mix the molecules
differently." She asked about the flexible terms that have been
referred to in the last two days.
MR. TSAFOS said there are a number of things that buyers mean by
"flexibility." The biggest source of flexibility is destination.
Generally, if a buyer no longer wants a contract and wants the
gas shipped elsewhere, the buyer has to break the contract.
Destination flexibility removes that clause, which is illegal in
Europe, because it is anticompetitive. "Asia hasn't gone there
yet, but they're waking up to it." Basically, it allows a buyer
to sell unwanted gas to someone else without consulting with the
seller, he said. Volume can also be flexible. In a typical
contract there is "downward" flexibility, and a buyer usually
has to make that up later. The flexibility would be in the
ability to take less if the buyer does not want it. In the Gulf
Coast, for example, if someone buys LNG at a certain price plus
a liquefaction fee, the seller may say that the liquefaction fee
is how it pays its debt, so that part must be paid; however, the
buyer is not forced to take and pay for all of the gas. In other
words, "You still have to pay the tariff, but I'm not going to
force you to take on a cargo that you don't want." That is a
form of flexibility that buyers really like, he stated.
3:46:03 PM
SENATOR MACKINNON said the price could dive or spike incredibly.
Sometimes there are relationships and risk and reward on both
sides of that contract, "so is price …?"
MR. TSAFOS said the price is negotiated, and it comes down to
how the price is set and the price boundaries. If Alaska were to
ask for a minimum price, the buyer may agree but then hold down
an increase if gas prices go up. That is a form of risk sharing
where the seller wants a price to be protected from the
downside, and the buyer gets protection at higher prices.
SENATOR MACKINNON said her understanding is that the global
supply of gas is starting to stabilize-demand is beginning to
meet supply. Will Alaska see a discounted rate for the project
to get a 20-year contract when using a third party financer?
MR. TSAFOS said he does not know. In the Gulf Coast, there is no
price difference for a buyer who is buying the gas for someone
else. The price depends on the market, and generally there are
four-year or five-year cycles of high and low pricing. It is
really down now, but that is what determines the price. There
are times when companies choose to make disadvantageous deals to
be the first to capture a market or such.
SENATOR MACKINNON said the producers have said they need a 20-
year contract from the state. They are asking for financial
conditions that constrain the state through a vote of the people
of Alaska to a fixed price. Please comment.
3:50:42 PM
MR. TSAFOS said he suspects that their requirement for fiscal
certainty will change if their capital commitment goes down to
$10 billion over 10 years relative to $50 billion over 5 years.
He said he is only speculating, but a bigger commitment would
call for more certainty. If the producers are shipping through
Alaska's facility and the price goes up, all the profits go to
them, so there will be a great temptation to increase taxes.
With buying the gas, there is no upside or downside-there is
just a transaction that might not have the same exposure to
potential tax changes. The tolling model shifts revenue to the
resource, so if the price goes up, the resource makes all the
money, and that would be good for everyone-except Alaska.
REPRESENTATIVE JOSEPHSON referred to the change in the gas team
lead for the Alaska administration. Even though this new pathway
could affect the ultimate timeline, do you agree that there is
nothing the administration has done that is prohibiting FEED
from occurring as originally scheduled next spring? The
committee hears repeatedly that Alaska's partners are not ready
to enter FEED, and the administration has not done anything to
cause that.
3:53:02 PM
MR. TSAFOS said he is absolutely correct. The question is how
the state responds to the producers' decision to not go to FEED.
REPRESENTATIVE JOSEPHSON said his colleague made comments about
the new director of AGDC that troubled him. "We voted for the
power to hire him by a vote of 52 to 3, and I think the record
should reflect that." He said that Mr. Tsafos has made some good
arguments for the state to be cautious. He noted that AS 31.025
empowers AGDC to do what it is doing, and the legislative role
is the power of the purse. He asked if Mr. Tsafos believes that
nothing that AGDC is suggesting in this pivot is prohibitive.
MR. TSAFOS said that the legal interpretation of SB 138 is above
his pay grade.
REPRESENTATIVE JOSEPHSON noted that Mr. Van Tuyl said, pretty
effusively, that the state-led project could be the best
structure going forward, "and I think he was the most effusive
of the three." What do you make of his testimony relative to
your very compelling precautionary statements?
MR. TSAFOS said he has no qualms with what Wood Mackenzie
presented yesterday. "I started off by saying I think there's a
good merit for the state to consider a bigger role. I have no
objection to that. I think that makes a lot of sense." His
message today is that, "If I was taking over a $50 billion
project I would be a lot more worried than I feel folks are
worried." There is so much that comes with it, and most of the
things that have been offered as reassurance have yet to
reassure him. He said he does not necessarily disagree with Mr.
Van Tuyl, but he is not sure if a state-led project is the best
way. There are possibly other ways Alaska could approach this.
It is a whole other world that Alaska is getting into, and until
more questions are answered, be skeptical.
REPRESENTATIVE SADDLER noted that Mr. Tsafos is an informed
observer of the oil and gas industry. This process has stage
gates that assume that every step is going to have a decision to
continue the project. It called for the four parties to spend
about a half million dollars to get reliable answers about
whether to continue or to stop. The producers seem to be saying
"no" or "not yet," but the administration is insisting on saying
"yes, now," and proposing to change the structure. He said there
are a lot of questions that need to be answered before agreeing
to support that change. He asked, "Do you see any justification
for changing the structure other than the slow down and the
charge toward FEED?" Are there any technical, political, or
global market changes that might make this a wise move?
3:57:42 PM
MR. TSAFOS said he buys the cost of supply issue. At the same
time, the Wood Mackenzie work shows that nothing breaks even, so
$45 oil equivalent does not work, because it is not a
sustainable price. His understanding from reading public
statements is that all three producers have different
perspectives about going into FEED. "I don't think anyone really
wants to go into FEED, but I think they have different views as
to how much they would like to keep working on this." He
referred to a letter from ExxonMobil that says there is a 2017
work program budget, and "I don't want to put words in their
mouth, but if I'm ExxonMobil and I prepare a budget, I assume I
like the budget, otherwise why would you prepare it and put it
forward?" He also has read from AGDC that the JVA says if two
parties want to go forward, they can go forward, but if only one
party wants to go forward, the JVA gets dissolved. He said he is
trying to explore that space between where the project is and
where it is headed, and there is a lot in the middle. For
example, the main benefit of a state-led project is a tax
exemption. Otherwise, the producers would be better than the
state at finding third party investors; they can do better at
selling the product to the market; and they can find contractors
better than the state. So, he said, he is thinking that rather
than take over the project on the premise of an unsure tax
exemption, "why don't we figure out what we can keep spending?
Can we make sure that they don't ship Steve Butt off to
somewhere else?" He suggested having Mr. Butt see what else he
can come up with, as he has already gotten the project to the
lower end of the $45 to $65 billion cost. "Send him back to do
some more homework, and you do your homework." There is plenty
the legislature could be doing, including the question of tax
exemptions. He understands that the state is looking at a FEED
decision in the middle of 2018 with the state-led scenario,
"which you could probably get to anyway, at least with some of
the parties if you were to keep working this approach." He said
there is a huge space in between, "and I don't really know what
happened to that space."
REPRESENTATIVE SADDLER said Representative Hawker encouraged
everyone to read the industrial megatrends book. The book taught
him that "you can be driven by time, in which you trade money
for time, or you can be driven by money, which you would play
for time. So, trying to adhere to a firm timetable irrespective
of the global considerations exposes you to tremendous financial
risks."
REPRESENTATIVE HERRON noted that the attorneys said that the IRS
tends to regard anything that makes or saves money for a
political subdivision as an essential government function.
Interestingly, Mr. Tsafos' Option 2 showed that a 12 percent
return is important for the viability of the project. Shaving
that down would be problematic, he opined. Option 3 dealt with
Alaska buying and selling gas, and based on what the attorneys
said, he wondered if that is an essential government function
that makes or saves money. "Are those a couple of holes that we
must consider?"
MR. TSAFOS said absolutely. Those are two of the many questions
that Alaska should figure out.
4:02:19 PM
SENATOR DUNLEAVY noted that Mr. Tsafos was around during the
construction of this bill. He asked, "Are we getting to the end
of what was embedded within this law?" He asked if SB 138 still
allows different options to be explored and to keep spending
money, or does SB 138 need to be revisited?
MR. TSAFOS said the discussions of SB 138 did not include this
option. That does not mean SB 138 negates it, but it was not
"what we were sitting around talking about." Is SB 138 dead? It
seems to be in its last gasps, he said, but there are things
that can be done to save good parts of the process, like the
alignment with producers. "You had three of the best companies
in the world having your back, and now they're on the other side
of the table." Judging from testimony, SB 138 seems to have come
to an end, "but I don't really understand why."
SENATOR DUNLEAVY said the checks and balances in SB 138 got him
to reluctantly vote yes, because of the history in Alaska of
projects that just don't pan out or are not thought out. "We've
reached that gate where it appears that at various levels the
private partners have basically said they're not comfortable
investing more in this concept that was envisioned under 138."
If the vision and concept is changing, we can have that
discussion. He has concerns that the bill is open-ended and
allows almost anything to be contemplated.
4:06:49 PM
MR. TSAFOS said specific checks and balances were in the
legislation. For example, contracts longer than two years had to
come back to the legislature, but the members were not
contemplating this concept deviation. The blueprint is
different, and it would be nice to know what the new one is.
4:07:29 PM
CHAIR GIESSEL said she posted a letter for yesterday's meeting
from the Department of Law that opines on whether SB 138 allows
this level of flexibility. The letter says that it does, but it
points out that the legislature has controls put in place.
4:07:59 PM
SENATOR MACKINNON said she does not believe that the legislature
ever voted on President Meyer. We vote on board members who
actually hire [the president]. It has already been stated why
the producers may feel like the state has not fulfilled the
obligation to go into FEED. The enalytica contractor has stated
that there is not fiscal certainty and there are some other
things that the state hasn't done "in the form of PILT and other
things that we haven't come forward with," but there are also
things that the producers have not done, like the gas balancing
agreement and some other things. There are equal fingers to
point at each other for completion prior to going into FEED, she
said. There is a JVA with a small group of people who advocates
for the parties that remain-the three producers and the state.
The management team is much larger.
MR. TSAFOS said there are about 130 people on the management
team that report to Steve Butt.
SENATOR MACKINNON said today the committee heard that ExxonMobil
has 80 people on that team who need to transition to the state.
She asked how many people on the team are from the state.
MR. TSAFOS said he does not know, but he saw one company
breakdown during the TransCanada negotiations. At that time,
AGDC had zero people on the team.
SENATOR MACKINNON said her point is that she wants a pipeline,
but she wants it to be competitive, and she wants Alaska to
responsibly take on any transition that the administration is
proposing. It is a huge ask of the legislature given its current
involvement in that management team.
4:11:26 PM
CHAIR GIESSEL said this concludes the two-day meeting on the
transition to a new Alaska LNG plan, which will take place next
month. She thanked participants. She said she will submit
additional questions from committee members to AGDC.
4:12:50 PM
There being no further business to come before the committee,
Chair Giessel adjourned the meeting at 4:12 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Tax Issues Raised by the AKLNG Project Document - Manley & Brautigam 2016.pdf |
SRES 8/25/2016 1:00:00 PM |
Tax issues and the AKLNG project |
| enalytica, AK LNG State-led project (slides), August 2016.pdf |
SRES 8/25/2016 1:00:00 PM |
Enalytica analysis AKLNG |
| enalytica, AK LNG State-led project, August 2016.pdf |
SRES 8/25/2016 1:00:00 PM |
enalytica analysis AK LNG.2 |
| Jermaine Dunnagan Owens Memo to LB&A 8-22-16.pdf |
SRES 8/25/2016 1:00:00 PM |
JDO Opinion on Taxation for AGDC new concept plan |
| Remarks by Bill McMahon to SRES HRES 08-25-2016.pdf |
SRES 8/25/2016 1:00:00 PM |
ExxonMobil Testimony |
| ExxonMobil Letters to Alaska_Gas_Sales.pdf |
SRES 8/25/2016 1:00:00 PM |
|
| BP Legislative Testimony_08-2016_R9_as delivered.pdf |
SRES 8/25/2016 1:00:00 PM |
BP testimony |
| AGPA PLR 2000.pdf |
SRES 8/25/2016 1:00:00 PM |
Tax Documents AGPA |
| AGPA application to IRS 1999 (2).pdf |
SRES 8/25/2016 1:00:00 PM |
Tax exempt application AGPA |