Legislature(2017 - 2018)BUTROVICH 205
02/28/2018 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Alaska Minerals Commission Overview of Annual Report | |
| Update on the Alaska Lng Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 28, 2018
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha von Imhof
Senator Bert Stedman
Senator Kevin Meyer
Senator Click Bishop
MEMBERS ABSENT
Senator Bill Wielechowski
COMMITTEE CALENDAR
ALASKA MINERALS COMMISSION OVERVIEW OF ANNUAL REPORT
- HEARD
UPDATE ON THE ALASKA LNG PROJECT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DR. LANCE MILLER, Chair
Alaska Minerals Commission
Anchorage, Alaska
POSITION STATEMENT: Provided Alaska Minerals Commission Update.
ROBERT RETHERFORD, Member
Alaska Minerals Commission
Juneau, Alaska
POSITION STATEMENT: Provided Alaska Minerals Commission update.
FRANK RICHARDS, Senior Vice President
Project Management
Alaska Gasline Development Corporation (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Presented AKLNG Project update.
LIEZA WILCOX, Vice President
Commercial and Economics
Alaska Gasline Development Corporation (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Presented AKLNG Project update.
ACTION NARRATIVE
3:30:10 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3: p.m. Present at the call to
order were Senators Stedman, Meyer, Bishop, von Imhof, and Chair
Giessel.
^Alaska Minerals Commission Overview of Annual Report
ALASKA MINERALS COMMISSION OVERVIEW OF ANNUAL REPORT
3:30:44 PM
CHAIR GIESSEL announced the first order of business to be the
Alaska Minerals Commission update.
3:31:59 PM
SENATOR COGHILL joined the committee.
DR. LANCE MILLER, Chair, Alaska Minerals Commission, said he
also works for the NANA Regional Corporation. The Commission
members are appointed from around the state including rural
areas and represent placer mining, coal mining, metallic mining,
and so forth.
ROBERT RETHERFORD, Member, Alaska Minerals Commission, said he
works for Alaska Earth Sciences, a small group that consults
mostly for minerals and engineering work such as at Sweetheart
Lake near Juneau. He said the commission's goal is to create
strategies that will help mitigate constraints on the mining
industry.
3:33:01 PM
MR. MILLER said the commission's top ongoing priority is
establishment of a stable fiscal policy for the state and making
sure its agencies are properly funded. When you're trying to get
companies to come to Alaska, having a stable environment to
conduct business is paramount.
MR. MILLER said in terms of severance taxes, local companies
work with the local government and reach arrangements like the
payments in lieu of taxes (PILT) in Northwest Alaska. It is
important for local jurisdictions to get benefits from mineral
development. So, they have recommended that a portion of the
state mining tax go back to the affected areas and elimination
of severance tax but not do away with any property taxing
ability. He said the minerals industry is in an upswing and now
is a good time to take advantage of that and make sure they are
collectively welcoming to the industry.
3:35:29 PM
MR. RETHERFORD said the "Stand for Salmon" ballot initiative is
of concern and encouraged members to be fair in looking at it,
but also encouraged them to examine the entire initiative
process, because there is much too much opportunity to stand in
the way of resource development.
There are a lot of concerns over water use, he said, and the
report recommends that the legislature is the best place to
determine what constitutes Tier 3 waters. The primary concern is
that the state uses good science and a fair and balanced method
to deal with the water quality issue and in determining
"instream flow reservations" (IFR).
Finally, the bond pool that the state has set up for the small
placer miners, in particular, should be kept in place, the
concern being that the Bureau of Land Management (BLM) has
suggested no longer allowing it to be used on federal lands. The
thought is that any other steps would be a burden on the small
placer miners and keeping the bond pool will allow them to go
forward while assuring the BLM that they have good state agency
review.
3:39:04 PM
MR. MILLER said the legislature and administration can do some
things regarding federal priorities, especially now, given the
situation at the federal level. Alaska is still young and is due
a large amount of federal land and a large amount of wetlands,
and there is sort of a "federal push-down" on things the state
has to do on all kinds of fronts. These could be "sort of
lumped" into public land closures and BLM resource management
plans (that are very onerous) and might even contradict state's
rights with ANILCA. These are significant issues and the
commission wants to be able to support the agencies that can
then work with the feds on their resolution.
The Sturgeon case about navigable waters is another issue
everyone is aware of and making sure that Alaska has access
through these waterways to public and private lands, Native
lands, and so forth. The delegation is doing a great job in
working these issues, too, but the opportunity is there now to
resolve some of them.
3:41:32 PM
MR. RETHERFORD said public land orders that are left open for
long periods of time and federal land withdrawals similarly put
in place during ANCSA or ANILCA (points 9 and 11) deserve to be
reviewed, and where appropriate, the BLM should release these
lands so that the state and others can use them appropriately.
MR. MILLER displayed an AMA map of mines and mineral exploration
locations stating that Alaska has five metal mines and one coal
mine. The rate of success for moving a mine prospect to a mine
is less than 1 percent. To get to this number of mines, 7,000 to
15,000 occurrences have to be reviewed.
Slide 7 graphed Alaska mineral development timelines and
investments: the five successes were Kensington, Pogo, Fort
Knox, Red Dog, and Greens Creek. The five still seeking success
were Arctic/Bornite, Chuitna, Livengood, Pebble, and Donlin
Creek. The unsuccessful one was Rock Creek. He said it costs an
average of $250-300 million and takes about 16 years to get to
the decision about a mine. The successes are obviously mines in
production: Donlin is a great example. It has been going for 24
years and has made over $400 million.
MR. MILLER said competing for capital on a global stage depends
on what stage the project is in. The exploration stage is high
risk, funding is erratic, and a strong regulatory environment is
critical. In the final feasibility stage (and subsequent
decision to build a mine), the return becomes more predictable
and it is therefore lower risk and the financing is easier to
secure, but the political/regulatory environment is still
critical.
He displayed two graphs (slide 10), one of exploration budgets
from 2012 to 2017 and the other of mining equity capital from
2006 to August 2017. He said Alaska's trend has matched those
graphs (a high of $300 million in 2010/12 and a low of $50
million and up to about $90 million now). So, Alaska is
competing on the global stage.
3:45:29 PM
MR. MILLER said slide 11 graphed combined commodity index
(including oil, wheat, and everything) cycles back to 1749. The
distance between the spikes shorten in more recent times and
that is presumably as a result of news traveling faster. Slide
12 graphed zinc prices from 1970 to 2016 and he noted that there
were four price spikes in that time including the one we are in
today. This is just how the mining business is; you want to
capitalize on the spikes and be able to ride out the lows. For
example, when Red Dog came into production in 1989 was a period
of high prices. Then prices went down into the "Valley of
Death," which is the reason it didn't get payback for 14 years.
Had their spike continued, the payback would have been much
quicker like predicted. Global events can change metal prices,
but they really trend with supply and demand. Basically, when
metal stocks are up, the commodity price is low and vice versa.
The consumption of basic metals is going up globally, and China
drives a lot of it, but it is going up in the U.S. and the rest
of the world, too.
MR. MILLER asked if anyone knew what the per capita consumption
(including for cars and vitamins) of zinc is annually. He
answered four pounds.
3:48:40 PM
He categorized the types of mining companies into Placer,
Juniors, Mid-Tiers, and Majors. Placers are important although
their investment strategy is family livelihood. Collectively,
they add up to the equivalent of one large mine for Alaska
economically.
Juniors' characteristics are high risk exploration or betting on
the management; Mid-tiers' are betting on the project, and
Majors are usually the more fully integrated companies.
He elaborated that Juniors are the discoverers of new deposits.
They are something like the pharmaceutical or biotech industry
where Bayer, for instance, doesn't do drug development but they
work with start-ups with the goal of buying them out. It's a
good parallel with the mining industry, much more so than oil
between independents and majors.
Juniors have small market capitalization, depend on equity
markets, and high risk. Examples are Nova Gold, Trilogy Metals,
Donlin, Millrock, Constantine, International Tower Hill,
Northern Dynasty, and Solitario. And they are critical for
feeding the whole system to make sure there is an ongoing supply
of metals.
3:50:23 PM
The Mid-tiers are a small percentage overall and can have market
caps up to a few billion dollars. Examples are Hecla and Greens
Creek, Usibelli Coal, Hudson's Bay, Lundin, and Coeur d'Alene
with Kensington.
3:50:45 PM
The Majors are often vertically integrated and have large market
caps, but also have access to cheaper money. They have a global
footprint. Examples are TECK, Barrick, Anglo, RTZ, BHP, MMG,
Glencore, and Kinross.
MR. MILLER said Alaska's projects fit in with the juniors and
the majors. A lot of the management for the Juniors came out of
the Majors, so they bring that major experience with them. It's
just in the last 20 years that the Majors have quit doing
exploration, themselves. So, there are often strategic
alliances.
3:51:52 PM
MR. MILLER said Canada has had some major infrastructure
initiatives: the Yukon Bridges and Roads Program for $360
million; B.C. has the Hydro Northwest Transmission Line for $700
million-plus, and Ontario has a roads infrastructure project
versus Alaska where typically the mining company builds its own
roads, and often with public benefit. Examples are Juneau Hydro,
the Copper River Railroad that one can still bike on, Hatcher
Pass, and the DeLong Mountain Transportation System (DMTS). So,
one can say of the U.S. approach that industry pays for it.
3:52:54 PM
He said there are lots of examples of community benefits (slide
20). He said there was a bit of a downturn between 2012 and
2014, which resulted in industry employee numbers dropping from
120 to 50 - really because exploration dollars dried up. And
mining is critical for good paying rural jobs.
MR. MILLER noted that NANA actually broke the billion-dollar
mark for distribution to other Alaska Native Corporations (ANC)s
through 7(i) and 7(j). NANA received about $1.7 billion and
distributed over $1 billion last year.
3:53:48 PM
The Frasier Institute's Global Mining Investment Attractiveness
Ranking (slide 21) ranks Alaska in 10th place out of 91 global
areas as being an attractive place for investment and the reason
is because Alaska's mineral potential is ranked 5th in 91. But
Alaska ranks 41 out of 91 in the issues around uncertainty of
existing regulations and policies, and that is all in the
legislature's court. Alaska is a great place to do business, but
a lot of it is because of its geology.
Not wanting to leave on a bad note, Mr. Miller related a
positive story about the Haines Consensus of 1982, legislation
that came out of a conflict over resource development. The
signatories were lumber companies, Lynn Canal Conservation,
SEACC, U.S. Fish and Wildlife Service, Audubon, and the Alaska
Miners Association Haines Branch, and that's when the Chilkat
Bald Eagle Preserve and the State Forest Plan were founded. This
is a case that has been good for Constantine Metal Resources
Ltd., because some thought and planning has gone into the idea
that multiple uses can co-exist.
SENATOR STEDMAN said the commission has been a little too soft
in push back on the salmon initiative and suggested they be more
aggressive. He suggested being cautious of groups coming
together, because in the Tongass he has found that two out of
four or five conservation groups will sue you in the end.
3:56:56 PM
MR. RETHERFORD said the Council of Producers has put up a lot of
money into fighting the salmon initiative.
MR. MILLER said the initiative is bad not only for what it would
do for mining and for rural economic development, even some
fishing organizations are not supporting it. Maybe the
legislature could do something to address the initiative process
overall.
SENATOR VON IMHOF noted that she was going to follow up with an
email to the commission with a list of four questions.
CHAIR GIESSEL thanked them for their service on the commission.
^Update on the Alaska LNG Project
UPDATE ON THE Alaska LNG PROJECT
3:58:52 PM
CHAIR GIESSEL announced the continuation of the AKLNG Project
update from the end of January. She said today they weren't
going through the rest of the 60-plus-page power point; instead
committee members would ask questions. She also had the letter
AGDC wrote responding to the one she and Senator MacKinnon
submitted after their first meeting.
4:01:24 PM
SENATOR STEDMAN asked for him to comment on the letter from the
Federal Energy Regulatory Commission (FERC) and the potential
delay of the site selection between Valdez and Port Mackenzie.
4:02:42 PM
FRANK RICHARDS, Senior Vice President, Project Management,
Alaska Gasline Development Corporation (AGDC), referenced slide
45 and said the FERC letter was another environmental data
request, the fourth one since AGDC had filed their application
in April 2017. Their first tranche of 801 questions came out in
June, July, and August 2017. AGDC responses went out in tranches
through September, October, and November 2017 and were finalized
in January 2018.
Then, low and behold, AGDC got another request from FERC in
February for more environmental information. AGDC's position is
that a "tremendous wealth" of environmental information already
exists from along the route through previous Environmental
Impact Statements (Environmental Impact Statement (EIS)
conducted on a North Slope gas project. In addition, AGDC has
been working on their Supplemental Environmental Impact
Statement (SEIS) on the Alaska Stand Alone Pipeline Project
(ASAP), a project that has a gas treatment plant (GTP) and a
pipeline that is coincidental to the locations of the GTP and
pipeline for the AKLNG Project. That environmental process has
been led by the Army Corps of Engineers over the last three
years, and AGDC is about to receive it from them next month. It
is their position that FERC, as a federal agency, could leverage
the work that has already been done and advance and launch the
schedule, but that hasn't been done. Instead AGDC gets another
data request consisting of 289 questions about three levels of
information: some are just refinement of previously provided
information, some are requests for new information, which they
will have to compile, and the third level questions ask for some
very detailed analysis, similar to the alternatives analysis,
for both the Port Mackenzie site or the Valdez site for an LNG
plant. That is going to require quite a bit of work, and they
want a clear understanding from FERC what will be acceptable, so
they don't find themselves receiving a letter like this again.
MR. RICHARDS said AGDC will reply to FERC next week with a
schedule for returning replies and follow it up with a face-to-
face meeting to get clarification on the larger category items
such as the alternatives analysis.
4:07:32 PM
CHAIR GIESSEL said when the State of Alaska had four partners,
20 sites were considered for the export facility. They were
honed down to five and then Nikiski was selected. She asked if
they have access to all that work.
MR. RICHARDS replied that she was referring to the site
selection work that was done in 2012 by the Southcentral LNG
Project, the predecessor to the AKLNG Project, and yes, they
have access to the site selection analysis. It came to them at
the conclusion of the pre-FEED (front end engineering and
design) Joint Venture Agreement (JVA). At the time, the project
management team made the determination that Port Mackenzie,
specifically, was an incompatible site because it was deemed to
be a working port with a goal in the master plan of being a port
that would have both import and export capabilities. They felt
that site couldn't have a working dock face co-located with an
LNG plant. So, it was disregarded. Then they looked for an
alternative site nearby - north or south - and chose a
demarcation point, which they called Point Mackenzie, and that
is what was considered in the site selection study. It fell out,
because of the issue of incompatible land use potentially with
the uplands and the shallow bathymetry at the actual LNG berth
site.
4:09:32 PM
MR. RICHARDS said he believed FERC wants to make sure that the
alternatives analysis for Port Mackenzie is the same as what was
done for Nikiski and the other sites in Resource Report 10 and
he wants to make sure there is no additional work to consider.
SENATOR STEDMAN asked what delay he thought would be involved,
if any, in responding to the alternative sites issue.
MR. RICHARDS replied the analysis of Valdez will take several
months, but the section of gas line to Port Mackenzie is a small
segment of the route where it intersects with the Wild and
Scenic Rivers of Delta and Gakona, and those designations
weren't in place when FERC did its original Environmental Impact
Statement (EIS) on the route leading to Valdez. So, now those
land use issues around will have to be analyzed and that will
take several months. However, he needs to find out how much more
information FERC wants - a tremendous amount of on-site field
work, a few technical borings, or bathymetry work - because that
needs to be done in the summer time.
MR. RICHARDS said he had a good meeting with the manager of the
Mat-Su Borough, his auditor, and one of the council members to
discuss the Port Mackenzie alternative. The Mat-Su Borough was
allowed to become an intervener, which means will be able to
receive information as it comes available and be part of the
conversation. The Mat-Su Borough offered AGDC any and all
information that was available in their records to be able to
help with this process, and AGDC will leverage that once they
know what FERC needs.
4:13:04 PM
SENATOR VON IMHOF said on one hand, it makes sense to utilize
work that has already been done and apply it to the FERC
process, but his reply states "the information that is not
required by the state or other agencies and will not be
provided." What if FERC says even though the state and local
agencies don't require it, we do? How would he respond?
MR. RICHARDS replied that the FERC letter also wanted plans that
had not been developed yet under the normal national
Environmental Policy Act (NEPA) process, such as the wetlands
mitigation plan or the cultural resource management plan. AGDC
is going to do those plans in the general course, but FERC wants
them now. The state's former partners agreed to providing those
plans at the time of application and AGDC has met a trail of
agreements and has to follow through with them. They will
respond with what FERC needs, but need a better understanding of
an appropriate level of response.
4:15:43 PM
SENATOR VON IMHOF asked why he thinks FERC is asking for these
items now, if he thinks it's unusual, and if he feels that fast-
tracking the application process is missing important normal
hurdles.
MR. RICHARDS replied that FERC's attorney says FERC is litigated
on almost every decision they make, and they want legally
defensible documents. His understanding is the previous project
management team outlines and specifics of the plan would be
provided at a future date. FERC wants to know that the format of
the plans will meet its standards and that AGDC is going to
follow through and complete what is needed for the federal
authorizations.
AGDC is in the process right now of ending the Supplemental
Environmental Impact Statement (EIS) for the ASAP and working
with the Army Corps on the wetlands mitigation plan - they have
gone through the NEPA process and the public process - and just
received the jurisdictional determination by the Army Corps for
the wetlands that are going to be impacted by the project.
Seventy percent of the ASAP project represents the AKLNG
pipeline and the court has accepted the wetlands mapping. Now,
mitigation has to be identified for those impacts and their goal
is to use that process in their FERC discussions.
4:18:59 PM
CHAIR GIESSEL referred to the AGDC letter of response and
remarked on how tiny and fuzzy the print is. It's hard to read
the timeline, but it looks like FERC will publish the
Environmental Impact Statement (EIS) schedule on March of 2018,
which is in a couple of weeks, and it looks like that time isn't
going to be met. What can he tell them about the plan going
forward?
MR. RICHARDS apologized for the very small font and said this
timeline was an aspirational goal and the average timeline for
getting to the point of publishing the NEPA schedule is about a
year. FERC's letter says they want more information. Once FERC
receives the requested information, they will determine if it is
sufficient to provide a publication of that schedule and the
preliminary draft of the Environmental Impact Statement (EIS) is
being written now, which is a positive. That gives AGDC a
timeline to follow through their metrics, which can mean a final
environmental impact statement (FEIS) within 12 months.
CHAIR GIESSEL said she appreciates aspirational goals, but it
may have given Senator von Imhof the sense of rushing and asked
if that moves the other goal posts down to less than one year,
as well.
4:22:57 PM
MR. RICHARDS responded he would get them a better print out and
clarified that Q1 would be between January and March 2019.
CHAIR GIESSEL asked if he felt that was realistic.
MR. RICHARDS answered they feel that it is potentially doable,
because of the tremendous amount of work that has been done,
which includes"
- publication of a FEIS by the Army Corps on the ASAP project
that has gone through the environmental analysis
- consulting with the federal permitting agencies
- having other authorizations in place including:
- the 404 permit
- the incidental harassment authorization from National
Oceanic and Atmospheric Administration Fisheries
- the air permit, which is being worked on right now
4:23:27 PM
LIEZA WILCOX, Vice President, Commercial and Economics, Alaska
Gasline Development Corporation (AGDC), Anchorage, Alaska,
supplemented that answer saying another part of the timeline, in
equally tiny font, represents the commercial timeline of the
project. She agreed with Mr. Richards that they want to present
a permitting schedule that can be achieved. The commercial
timelines can go along with the 12-month process or if the March
date slips, it can go with a different process, because that
approval is usually conditioned precedent to any of the
definitive agreements becoming effective. So, there is an
ability to mitigate the impacts of a more-lengthy permitting
schedule up to a point in the commercial process.
CHAIR GIESSEL asked how finalizing an agreement with an
investment bank and the due-diligence process with that bank be
done when we don't have details of the project yet? Are
investment banks interested in giving the project money at this
point?
MS. WILCOX replied that the investment bank would be engaged in
the planning of the equity and debt raising for the project.
Yes, they do have quite a bit of information on the project;
pre-FEED has been completed and hundreds of millions have been
spent. There is a plan for construction of the project and an
estimate; customers are interested. The next step is absolutely
planning for the equity and debt rates for the project that will
be executed in stages.
4:26:36 PM
CHAIR GIESSEL thanked her and asked if she was referring to
slide 54, because she stated that pre-FEED is completed and now
they are in the de-risking regulatory stage.
MR. RICHARDS said that was correct; AGDC identified the stage
gate process when they took over the responsibility for this
project in January 2017.
4:27:37 PM
SENATOR BISHOP asked how much more money it will take to answer
the latest round of questions.
MR. RICHARDS replied that the budget is being built right now.
FERC needs a response next week, which will identify the
schedule as well as the deadline for responding to the first two
categories of questions. They hope to meet with FERC as soon as
possible to build out work efforts that will be needed to meet
the third tranche. The same engineering companies that helped
design the project are being used to respond to the questions.
Responding to earlier questions cost about $3 million/month.
SENATOR BISHOP asked if the mitigation damage payments under the
Obama administration had changed under the Trump administration.
MR. RICHARDS responded that they hadn't got to the point of
putting dollars on actual mitigation, yet. However, the approach
has changed within the Army Corps in regard how the applicant
can define impacted wetlands. For instance, Alaska has
approximately 737 miles of pipeline route and the gas treatment
plant (GTP) on the North Slope for the ASAP project. That
represents about 204,000 acres of project area and 102,000 of
that is wetlands. They are going to have to work with the Army
Corps and figure out how much of those are high-value wetlands
that will have to be mitigated and the Corps is allowing them to
look at impacts of wetlands in discrete watersheds; for
instance, Prudhoe Bay or the Susitna River. Then they will give
AGDC a threshold: if the entire watershed has been impacted by 2
percent then they will require mitigation. Since there isn't
much development in Alaska, a small number of watersheds will
require mitigation. Then they will have to iron out how much it
will cost.
4:32:57 PM
CHAIR GIESSEL referenced a bar graph on slide 6 and commented
that it looks like they do make projections of cost.
MR. RICHARDS responded that that bar graph represents work that
would be ongoing and provides ranges for those projects over the
2018/19 timeframe. They identify the major work effort that is
synonymous with the FEED level of effort, called Class 3, to be
able to advance the project definition and ultimately get to a
point of acquiring lump-sum, turn-key estimates with
contractors. That graph is an indication of what they anticipate
the funding needs will be during this timeframe. One activity
called the core regulatory team is the core team from both the
ASAP and the AKLNG project. That is augmented with outside
contractors to provide the specific answers as needed.
CHAIR GIESSEL asked what the (slide 6) bar graph adds up to.
MR. RICHARDS answered the lower right-hand corner displays
ranges between $84 million and $790 million. It will depend on
their ability to execute the work and to be able to initiate the
work with the major contractors in a timely fashion. This bar
graph is a projection of the next 18 months.
SENATOR VON IMHOF went back to the last three bullet points on
slide 54:
1. Have you identified and secured parties interested
in the equity investment in the infrastructure
project?
2. Have you identified and secured lenders?
3. Have you secured large engineering, procurement,
and construction (EPC) companies to manage the
construction project?
She said the unlimited receipt authority for the Alaska
Liquified Natural Gas Fund issue is floating around the capitol
building and asked if that authority is needed to be able to
raise that $700 million quickly.
MS. WILCOX said she wanted to go to the first bullet - Have we
secured customers sufficient for financing - and said a Gulf
Coast LNG project developer recently told her that the offtake
contracts are key to securing the financing. This has been
AGDC's position (LNG sales would secure the financing). The
bullets are listed in the normal order of a project's
progression, but some of activities are done simultaneously. So,
if interest is shown from customers, some of the money can come
into the project at that time. For example, Venture Global is
developing a Louisiana project that over the last two years has
raised about $470 million in equity through 6 or 7 placements.
They are now going through FEED. The project is for about half
of the project total of 30 million tons, and the only offtake
agreement announcement she has seen is for 1 MTPA.
MS. WILCOX said AGDC has done its marketing and has identified
parties that are interested in purchasing LNG from the project.
And this year they are working to secure those agreements and
bring them to a definitive point. At the same time, they are
starting to plan for the equity raise that would cover the FEED
costs up to $700 million. To the extent they can accept that
money from the outside sources, it would help those potential
equity investors make the determination of whether they want to
invest. Those investors will also ask if they will be able to
invest in the project after that without another vote of the
legislature, a key question the state has to resolve.
SENATOR VON IMHOF said what she heard is that at this time she
can't answer the bottom three bullets, because they are still
working on it, and yes, they would like unlimited receipt
authority in order to easily raise that money to aid in moving
the project forward.
MS. WILCOX answered that was a good summary of what she said,
and she recognizes that it is very much the decision of the
State of Alaska and the legislature as to how to approach that
question.
4:38:36 PM
SENATOR STEDMAN asked if the legislature gives unlimited receipt
authority to AGDC, will it take the project through
construction, all else being equal and everything rosy.
MS. WILCOX answered there are a number of touch points and
approvals the legislature would have to make along the way
detailed in the answers to the letter they submitted. One of
them is a best interest finding (BIF) on the royalty in kind
(RIK) issue, which defines the state's contribution of gas to
the project without which the project doesn't work. The state
has a number of other issues to resolve to the extent that it
makes any investment decision to participate in the project. It
does not have an unlimited ability to go forward. The chief one
is the RIK decision.
CHAIR GIESSEL pointed out that those answers are on page 5 of
the letter under the heading of Gas Supply Field Cost Allowance
Agreement and Joint Venture Marketing and Other Gas Disposal
Agreements. Sentences there say the "need to be approved by the
legislature" and "will require legislative approval."
4:41:00 PM
SENATOR STEDMAN said their eyes have been struggling with the
timeline and the financing and wanted it printed out in bigger
font. He asked if they were concerned about having enough funds
available to deal with the FERC requests. "It's all full speed
ahead without our financial assistance?"
MR. RICHARDS replied that slide 6 showed a range of numbers and
if they didn't receive a significant influx of cash to be able
to advance into the major FEED spend, they then would have to
fall back into achieving a regulatory program and acquiring the
federal permits. They feel they have built a budget to be able
to take them through the Q2 of 2019 at current expenditures and
that includes bringing on the financial advisor who will take
care of the regulatory advancement, the DOTPF expenses, and the
ongoing commercial engagements.
He said it won't be enough for the next major definition phase.
AGDC wants to work with other investors to see if they are
interested in bringing money to the table. If the money comes in
for the project, part of the challenge will be what stage-gate
they will follow. When AGDC and whatever its partners end up
being get to the final investment decision (FID), the
legislature will have the opportunity to identify their concerns
and objections if necessary.
SENATOR BISHOP asked if they have enough cash to theoretically
get deep into 2019 right now.
MR. RICHARDS answered yes.
SENATOR BISHOP asked if Mr. Richards would want to bring an
authorization back to this body to accept funds from potential
partners or buyers of gas to get to FID.
MR. RICHARDS said that was correct. As he said before, they have
entered into a Joint Development Agreement with Sinopec, the
Bank of China, Ltd., and CIC Capital Corporation, and their hope
is to have a definitive agreement by the end of 2018.
4:46:00 PM
MS. WILCOX added that in order to make definitive agreements
with interested investors, the project will need to know what it
can offer in terms of contributions and terms, and that is very
dependent on the decisions made by the State of Alaska. They
anticipate an active engagement process with the legislature to
flesh that out.
SENATOR BISHOP said the DNR commissioner will need that
information, as well, to make the RIK decision.
MR. RICHARDS said that was correct.
SENATOR STEDMAN said a consultant talked a few days ago about
the synergy that would be created in this project if some of the
Chinese companies came forward. He pointed out that China could
retire coal plants and clean up its air, which would lead to
healthier cities, and those gains that are harder to quantify in
the negotiations. The Chinese are also interested in supplying
modules faster and at a lower cost and then delivering them to
the project and manufacturing the pipe. He asked if those issues
are part of the discussions.
He also noted Mr. Richards' past work on bridges and roads at
the Department of Transportation and Public Facilities (DOTPF).
4:48:50 PM
MR. RICHARDS replied that he was an advocate at the DOTPF for a
multi-year program to make sure there were adequate roads and
bridges for the project. As to Chinese participation in the
project, the JVA, with ExxonMobil in the lead, took a "concerted
look" at modularization of the major plants and where the best
quality steel was for the most cost-effective rate. It included
a very detailed review of modular construction in China, because
it is producing large modules now for international oil company
developments and offshore oil platforms and meeting their
standards. For instance, two weeks ago he went to a plant owned
in a joint venture by Fluor and the China National Offshore Oil
Corporation (CNOOC). It has a 2 million square foot module
fabrication yard and can produce modules in excess of 30,000
tons. Their assembly facility can bring in the raw product, work
on it, develop it, erect it, and then put it on a barge in very
short order and to the exacting standards of the international
oil companies.
4:51:07 PM
A recent study done by Fluor looked at strategic sourcing
options and AGDC looked at countries like China, Japan, and
Korea, because they produce not only the steel but the modules
necessary to manufacture the plants looking for ways to reduce
the overall cost of the project. Fluor identified potential
savings of almost $1.4 billion on the project utilizing some of
this methodology.
He said China does have the capability of producing the modules
and of producing steel plate that could be rolled into pipe. The
concern now is with potential tariffs coming on board for
offshore steel production into the United States (U.S.). The
U.S. doesn't have steel manufacturing to produce the grade of
steel necessary for that pipe, and that has been identified to
the Trump administration. But the U.S. has plants that can roll
that steel into the 42-inch pipe and they are engaged in
conversations with those pipe mills to make sure they can meet
the standards that are called for in the contract. So, they are
looking for the synergies between offshore production and U.S.
manufacturing capabilities to make sure they are in line with
bringing a project in that will be at the lowest cost but meet
the requirements, standards, and specifications that are in
place.
MR. RICHARDS said China is actively engaged in cleaning up its
air and has closed many coal plants shifting them over to gas-
burning turbines. Because China made this massive push, it
created a shortage of LNG, but it's evident when you go to
Beijing you can now see the blue sky. When you leave Beijing and
go to manufacturing areas, there are still coal-fired power
plants and you can see the smog and taste it when you breath.
Unfortunately, because of prevailing north east winds, the U.S.
gets a lot of that residue coming into its air space and
hopefully, China cleaning up its air is another environmental
benefit for Alaska.
4:53:59 PM
MS. WILCOX directed her comment to Senator Stedman and said
other than the EPC agreements, a number of other agreements need
to be defined and finalized later in the year. Those agreements
relate to how much LNG will be taken from the project by the
parties, the pricing associated with that, the financing, how
much of the debt could potentially come from the Bank of China
or other Chinese banks, and whether there will be an equity
investment made in the project by the China Investment
Corporation (CIC), China's sovereign wealth fund, that invests
all over the world. In other words, a package of agreements need
to be termed up before the end of the year. The Chinese are
doing a fair amount of due diligence, because this project is
new to them. They are very interested and have been to the North
Slope before, although the number of representatives was small.
4:55:44 PM
SENATOR STEDMAN said it appears that this integrated network
that China has is going to create a lot of synergy versus the
capitalist system in the United States with different companies,
and that should be remembered in price negotiations. A lot of
money can be made building the modules versus just a straight
equity or debt investment.
He said several years ago when they were looking at the
different projects, one of the big concerns was lead time for
manufacture of quality pipe delivered on time. He asked Mr.
Richards to touch on that. And because the rolling manufacturer
he visited was in Arkansas, he assumed the project wouldn't be
shipping steel from China through the Canal through the Gulf and
then back and up and asked what his thoughts were on that.
MR. RICHARDS answered that AGDC is engaged in active discussions
with both steel and pipe manufacturers, trying to come to a
short list of companies that can meet their specifications and
product delivery timeline. The ASAP went through a similar
process in looking at strain-based designed steel. They talked
to folks in Japan and Austria for steel production, and to an
Indian company called Welspun Group for rolling. Welspun was so
interested in the project that it flew steel plate from Austria
to their pipe plant in India, rolled it, and then provided it to
AGDC in Houston for testing. So, they are talking to multiple
mills around the world about capabilities for meeting the
specifications. ExxonMobil had some test pipe delivered
previously, but it didn't meet the standard.
He knew of two mills that can roll the 42-inch pipe; one is in
Arkansas and the other is in Panama City, Florida. The steel
plate could come from Austria. It could come from China or
Japan, but right now there is a 30 percent tariff on that pipe,
so it's not economic.
When they get to the point of launching a project and put that
long lead item in place, AGDC will have to put orders in with
multiple mills and not just "hang our hat" on one mill. It's a
tremendous volume, in excess of 800,000 tons, of pipe, and they
want to make sure of having a delivery mechanism in place to get
that pipe into Alaska pipe storage yards and on to the right-of-
way to execute the project in a timely fashion. The delivery
time and the ability for those manufacturers to deliver the pipe
is going to depend on where the project fits in the world's
project queue, and a big decision point is if AGDC wants to
reserve AKLNG's place in the queue by providing them with an
assurance that the pipe will be there. That is being worked as
he speaks.
SENATOR VON IMHOF said the supply and demand forecast is on
slide 38, but she thought a project of this size warranted a bit
more analysis. A year ago, she asked for a map of the different
projects that are coming on line that identified which ones
should be ready to go between 2023 and 2027. She wanted to know
where they are located, how big they are, how close they are to
tide water, who is financing them, and how they compete with
Alaska's project. She thought this supply-side analysis should
be at the beginning of every presentation.
On the demand side, there are four or five significant
publications around the world that constantly analyze changing
market conditions and model inputs out into various years. They
provide high, medium, and low probability, and she thought that
should also be updated each year with inputs and assumptions
identified. Those things make a difference in whether Alaska's
project is competitive.
SENATOR VON IMHOF said, Taiwan is missing from slide 38, which
was presented a month ago and she asked what happened to it.
"That's kind of a big deal." She has asked these questions for a
year in various iterations and asked if the work is too much,
irrelevant, or erroneous; or does he just not agree that is what
needs to go into a presentation.
5:04:46 PM
MS. WILCOX responded that she absolutely agrees that the project
needs to compete in the global sense. The market is large and
growing and there are lots of agencies and analysts looking at
very detailed assumptions on the project, but many of the
individual project assumptions are still opaque to the outside
world, because each project is different, and many are privately
owned. She believed that they had provided information on
project costs and drivers but explained that each of the other
projects is different: some are all equity-owned, some include
upstream, some don't include upstream; they are clearly all very
different.
A number of publications analyze all of that information, and
AGDC over the last year, partly prompted by her questions, has
stepped up its efforts to analyze and look at those
publications. One of the services they have purchased is IHS
Markit and they attended their December conference to build up a
relationship, so they can ask questions, particularly from the
customers, and get answers. A member of her team put together a
summary of all the projects coming on line and the 96 million
tons worth of projects under construction.
MS. WILCOX said they could "take another crack at" the
statistics in the next presentation and show more detailed
slides on what is available, but the rest of it is somewhat
speculative. Many projects are proposed and estimates on which
ones will come on line are constantly changing. It depends on
what funding each project secures, what customers they develop
relationships with, and how much ground it will gain over a
year. Their focus over the last year has gained more ground in
the market, so that people actually know about it and know it is
worth something and worth buying from. The analysis has not been
ignored. Even if analytical companies have details and AGDC has
a subscription service that gives them that information, it's
not something she could put on a public slide project-by-
project.
She said they would continue their efforts to bring more
detailed analysis into the picture, but the broad situation
remains largely the same: in 2026 there is a significant amount
of uncontracted capacity in the market. She knows this because
there haven't been a lot of contracts announced for that
timeframe over the past year. However, around the world, about
96 million tons of projects are under construction that would
seem likely to fill that capacity. The remaining uncontracted
portion for the 2026 timeframe is 20-40 million tons depending
on which demand forecast one believes, but it grows rapidly
after that. There has been only one year in which the LNG market
hasn't grown. After 2026, the market continues to open up
rapidly. According to IHS Markit, that level of uncontracted
capacity that currently doesn't have FID projects going into it
by 2030 grows closer to 100 million tons, and this is the wedge
AGDC is trying to fit its project into.
5:11:13 PM
CHAIR GIESSEL remarked one of the key points Senator von Imhof
frequently underscores is risk, and LNG competition is one of
the risks that this body has to take into account in determining
whether this project is competitive and should go forward. They
are also focused on the regulatory and permitting in progress.
"As you ask us for virtually unlimited receipt authority, we
have to think about what that means for the State of Alaska as
we act as the board of directors," Senator Giessel said.
SENATOR BISHOP said a pipe mill in Calgary can roll 42-inch pipe
and asked if they had done any rough take-offs at bringing a
mill into Port Mackenzie. Because the mill he toured in Calgary
was actually quite small.
MR. RICHARDS said he was on that tour of the pipe mill with him
and that the AGDC team had not actively engaged in that concept
and neither did the ExxonMobil-led project management team.
They looked at the capacity to be able to produce the quantities
needed, and that was probably one of the things that was used to
screen it out. But they need to consider that opportunity again
as an option under the strategic sourcing strategy. Port
Mackenzie has the available land and an existing dock face that
could handle that product, but they hadn't studied what the cost
would be.
SENATOR BISHOP asked if he had worked out an arrangement to
operate the gas treatment plant (GTP) in Prudhoe Bay.
MS. WILCOX replied that the AGDC project will need to have a
high number of touch points with the Prudhoe Bay operator
including access to the lease, and all of that is subject to the
how the producer participates in the project to monetize their
gas. She presumes that when it comes to a construction timeline,
they will have the ability to enter into the necessary
agreements to access the dock, the GTP lease, and all the
receipt information that is necessary for facility sharing and
things like that. She knows they have a list of things they are
thinking about.
5:16:03 PM
SENATOR COGHILL asked her to explain how purchasing natural gas
would be done either directly or through an affiliated
intermediary and the likelihood of getting the volumes needed
from the leaseholders up there.
MS. WILCOX said the basic mechanics of volume break down the
same as they did in the previous project. The project has two
large fields that are discovered and are considered a reliable
source of supply for the gas project. Prudhoe Bay has about
three-quarters of the resource; Point Thomson has about a
quarter of it. In order to construct the three-train project,
all of that would be needed to achieve the economics in order to
compete in an "eight-dollarish" world of LNG, which is what the
long-term LNG pricing is looking like right now.
They also think there is an ability to do a first phase with a
two-train project if investors can be found willing to do that,
because the smaller the initial investment is the better. For a
two-train project you could either have a mix of gas coming from
both fields or start with one and continue with another. In
order to do that with an affiliate, one could use a merchant
model where a merchant buys the gas and then sells it at the
other end of the project. Here, they are looking at a hybrid of
the merchant and tolling models. So, an affiliate of AGDC or
another entity owned by the State of Alaska could purchase all
the gas, toll it through the project, and sell it to the LNG
buyers in Nikiski. It would pay tolls to the owner of the
infrastructure, which could potentially be the State of Alaska
(that at the moment owns 100 percent of it) and that tolling
revenue could finance the project. The tolling revenue would
ultimately be secured by the off-take agreements. So, the off-
take agreements would have a pricing structure that would cover
the toll and the gas purchase. Then the gas purchase price is
passed on to the upstream including the State of Alaska. In that
situation, last year's capacity solicitation had a fairly low
response for the tolling part (parties that are willing to pay
the toll and sell their own LNG into the market). Through that
solicitation, they found that the project didn't have the
critical mass of parties willing to sign up to pay those tolls.
But it has parties willing to sell the gas, have someone in the
middle pay the tolls, and then sell the LNG. So, that is the
structure they are working under at the moment. It doesn't
preclude other parties with the gas from taking a tolling
position on the project and just slicing off part of the
capacity and making that part of the revenue stream that
underlies project financing.
5:21:34 PM
SENATOR COGHILL asked because of the interest in getting money
from Chinese investors who could somehow be involved in the toll
structure and buying the LNG, could that result in the state
finding itself in a real structural pinch. Could the Chinese
vertically control the whole system?
MS. WILCOX replied that they could if they bought some of the
existing upstream resources. They would kind of be in the same
position as maybe one of the producers that markets LNG all over
the world.
SENATOR COGHILL said his only concern is that the state would be
squeezed out of any value. The Chinese will leverage every
dollar they can, and Alaska might not have the same leverage.
MS. WILCOX agreed and said having a party that is owned by the
state purchasing the gas adds a layer of protection. Their
mission is to sell the gas at the maximum price possible
including the state gas.
5:23:40 PM
SENATOR STEDMAN asked for help on the answer to question 8 of
the letter. It looks like they have decided to use a placement
agent versus a financial adviser to avoid dealing with the Dodd
Frank Wall Street Reform Customer Protection Act.
MS. WILCOX replied that the reason AGDC would bring in a
placement agent instead of a financial advisor is because the
Dodd Frank Wall Street Reform Customer Protection Act says a
municipality (how AGDC would be classified under that act) can't
hire a financial advisor and allow them to continue on as an
investment banker or as a placement agent. The issue being that
any large company that would be willing to come in and would
have an interest in raising money for this project ultimately,
if they come on as a financial advisor would lose that
opportunity. So, the pool of interested financial advisors
becomes fairly small and goes down to the companies who wouldn't
have the capability or the experience to be a placement agent.
So, the advice that you get is what you get with those companies
that are more consultants than actual investment bankers.
Therefore, AGDC considered it a lot more efficient and
beneficial for the project to open-up the field to actual
investment banks that could lead the placement of equity and
debt. That is the selection process they have conducted.
5:26:07 PM
SENATOR STEDMAN asked if there are any right-of-way sections
they don't have access to or have not tied down tight. He also
wanted her to touch on the 400 acres in Nikiski, which he
assumed is the site location, and if they have a forward
contract or any agreement tied down on that - to get rid of the
rumors.
MR. RICHARDS answered that HB 4 identified the legislators
intent for DNR to provide the pipeline right-of-way necessary to
AGDC to build the pipelines across state lands, and they have
done that at no cost. The federal right-of-way comes to them as
the end result of the Environmental Impact Statement (EIS),
which is a record of decision, which is the granting of the
federal right-of-way by the Bureau of Land Management (BLM) to
AGDC. When the final SEIS is achieved for the project, they will
have obtained the federal right-of-way across federal lands.
That leaves about 40 miles of private lands that AGDC will have
to acquire right-of-way leases to. They are currently engaged in
that process with one of the owners, Ahtna Native Corporation,
who controls 38 miles of land south of Denali National Park by
the community of Cantwell. It is a major effort because it is
the largest private landowner that either project will have to
enter into an agreement with.
The final bit for the AKLNG project will be some private parcels
on the Kenai Peninsula before getting into the Nikiski LNG site
where a large amount of acreage was purchased by the Alaska LNG
LLC (consisting of BP, ConocoPhillips, and ExxonMobil), which
AGDC was not a party to, thinking that AGDC, as the
representative for the state would come in at a future date.
AGDC is in discussions and negotiations with that LLC for
acquiring the rights to that land to be able to show FERC that
they have control, which is one of the key points FERC will
want.
5:30:12 PM
SENATOR BISHOP said we're not the only project in town and there
will be competition for material, manpower, and contractors. Is
someone looking at that? And at Alaska labor?
MR. RICHARDS answered he understands their keen interest in
making sure Alaska has the skill set and labor trades to be able
execute the project. As for the equipment, they went through an
exercise of hiring pipeline contractors, both Alaskan and Lower
48, and heavy civil contractors, to be able to help them in
looking at the execution of the project and ultimately coming up
with a cost for it. It was a very valuable exercise, because
they talked about the wide-ranging opportunities specifically
regarding equipment. It was educational in hearing from the
pipeline contractors who would come to Alaska and have to
mobilize a huge fleet if it was owner-supplied equipment.
Certainly, they do have a core fleet in the Lower 48 but
suggested that the owner supply the equipment to make sure the
it is available in time to get that equipment constructed,
delivered, and on the right-of-way ready to execute the project.
This is a consideration as they go through their construction
execution planning efforts.
5:33:55 PM
The other ancillary part to that is having parts available to
this large fleet spread out across 800 miles and that the
contractors won't have to compete for those parts.
MR. RICHARDS said they have been working the Department of Labor
and Workforce Development (DOLWD) on the development of a plan
for making sure Alaskans are going to be to have the training
opportunities to be skilled to be able to work on the project.
AGDC is identifying the skill needs and when they will be
needed, the build-up of crew sizes, and the sequence of when the
labor crats would be necessary across the spectrum of the
project from the North Slope to Nikiski. Because of the large
work force that will be necessary, available skilled, trained,
and qualified Alaskans are going to work on this project; it's a
benefit to the project to use Alaskans rather than outside
labor.
CHAIR GIESSEL thanked both speakers for being willing to ad lib
answers to the committee's adding that they could come up with
another 15 hours-worth. Going forward, they are interested in
the project structure. However, somethings are missing on their
timeline: for example, where the legislature and the DNR come
in. As she looks at question 9 about the progress of DOTPF on
analyzing the impacts, the first sentence says DOTPF has advised
that the existing roadway structures can handle the increased
loads the pipeline construction project will add. She was here
during construction of the Trans Alaska Pipeline System (TAPS)
and knows that "those roads got really torn up" and she wasn't
sure our roads are actually prepared for that. She was thinking
specifically of the bridge over Hurricane Gulch. She wanted to
know more about where DOTPF fits into this and what their plan
is going forward.
CHAIR GIESSEL said the committee also wants continued
information about the project structure and Senator von Imhof's
request for an economic overview of supply and demand into the
2020s. She reminded committee members that they could submit
more questions in writing and thanked the commissioners for
writing the answers down as something the committee can refer
back to.
SENATOR BISHOP asked if they ever anticipate bringing a
potential client to the committee.
MR. RICHARDS replied that he had considered it.
MS. WILCOX said she had not thought about it, but it's possible.
They have held meetings with DNR and interested customers and
depending on the decision points that come in this project,
there may very well be a place for other project participants to
come in front of the committee just as they used to when the
producers were investors in the project.
5:39:48 PM
CHAIR GIESSEL adjourned the Senate Resource Committee meeting at
5:39 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Senate Resources - Hearing Agenda - 2 - 28 - 2018 .pdf |
SRES 2/28/2018 3:30:00 PM |
|
| AK Minerals Comm - Fact Sheet - 2 - 28 - 2018.pdf |
SRES 2/28/2018 3:30:00 PM |
Mining |
| AK Minerals Comm - 2018 Report.pdf |
SRES 2/28/2018 3:30:00 PM |
Mining |
| AK Minerals Comm - Presentation to Senate Resources - 2 - 28 - 2018.pdf |
SRES 2/28/2018 3:30:00 PM |
Mining |
| AK LNG Update - Response from AGDC to Senators Giessel & MacKinnon - 2 - 28 - 2018.pdf |
SRES 2/28/2018 3:30:00 PM |
AK LNG |
| AK LNG Update - PowerPoint - AK Gasline Dev Corp - 2- 28 - 2018.pdf |
SRES 2/28/2018 3:30:00 PM |
AK LNG |
| AK LNG - Letter from FERC to AGDC - 2 - 15 - 2018.pdf |
SRES 2/28/2018 3:30:00 PM |
AK LNG |