Legislature(2015 - 2016)HOUSE FINANCE 519
10/30/2015 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Presentation: Alaska Lng Fueling Alaska's Future Project Update - by Exxonmobil Development Company | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
House Bill No. 3001
"An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), ch. 1,
SSSLA 2015; and providing for an effective date."
1:31:33 PM
^PRESENTATION: ALASKA LNG FUELING ALASKA'S FUTURE PROJECT
UPDATE - BY EXXONMOBIL DEVELOPMENT COMPANY
STEVE BUTT, SENIOR PROJECT MANAGER, EXXONMOBIL DEVELOPMENT
COMPANY, introduced himself and provided some of his
background. He stated that as the senior project manager
for the Alaska's Liquefied Natural Gas Project (AKLNG) he
worked for the companies that formed the project, including
the state. He relayed that AKLNG was fundamentally
different because it had the state as partner. He explained
that the state had converted a derivative claim on the
revenues from production on the North Slope into its 25
percent share of the project to align the gas equity shares
from the slope shares to the project shares. He continued
that the state paid for 25 percent of the project cost. He
mentioned a recent project update given in Palmer. He
encouraged questions from the committee, and wanted to
engage in dialogue.
1:33:59 PM
Representative Gara thanked Mr. Butt for attending the
meeting and queried Mr. Butt's rank in the organization.
Mr. Butt stated that in Qatar he was responsible for the
startup of the largest LNG trains in the world, and Exxon
was the largest builder and operator of LNG in the world.
Exxon was actively pursuing about three LNG projects in
different parts of the world, and AKLNG was by far the
largest. He conveyed the chain of command relative to his
position in the company.
Mr. Butt introduced the PowerPoint Presentation: "Alaska
LNG Fueling Alaska's Future" (copy on file). He stated that
he was one of about 3,500 people involved in the project,
in addition to several hundred contractors.
1:36:10 PM
Mr. Butt directed the committee's attention to slide 2:
"Alaska LNG - Project Overview." He explained that there
were two anchor fields on the North Slope, Prudhoe Bay and
Point Thomson; which should be starting production early in
2016. Prudhoe Bay held the majority of the known gas on the
North Slope, with about three-quarters of the 32 trillion
to 35 trillion cubic feet of gas between the two fields. He
discussed the Point Thomson gas expansion, and relayed that
operators were working on drilling the 17 well, (a step-out
well), with two other wells completed. He directed
attention to a photo of operators bringing in the modules
that would do the compression and provide about 10,000
barrels a day of condensate. He discussed the parties
comprising the Point Thomson operators: ExxonMobil (62
percent), BP (30 percent), and ConocoPhillips (5 percent).
The operators had invested about $4 billion to bring the
Point Thomson project online, and had a great safety
record.
Mr. Butt discussed the importance of Prudhoe Bay, due to
its size and being the site for the CO2 which would be
processed. He would try to provide information about the
potential success of the project. He directed attention to
a photo of the central gas facility at Prudhoe Bay, where
AKLNG would tie in to get the gas for treatment. He
explained that the Prudhoe Bay operator had used the gas
for reinjection to keep the pressure in the oil line.
Prudhoe Bay had produced between 7 billion to 9 billion
cubic feet of gas per day for forty years. He shared that
the Prudhoe Bay and Point Thomson operator had successfully
worked with the Alaska Oil and Gas Conservation Commission
(AOGCC) to secure permission for gas export for the first
time. He furthered that a facet of the decision was
permission to take CO2 coming out of the AKLNG project and
reinject it back into the Prudhoe Bay field. He discussed
the large amount of CO2 present in the Prudhoe Bay field,
and compared it to other LNG project source fields, most of
which had much less quantity. The CO2 processing was an
enormous undertaking which added to the expense of the gas
treatment plant, and would cost the project $10 billion to
$12 billion. He described the process by which the gas
could be returned to the ground, after an extraction
process at a treatment facility.
1:41:37 PM
Mr. Butt discussed the integration of the AKLNG project and
the fields, and suggested that it was a fundamentally
different construct than traditional pipeline projects. In
a traditional pipeline project such as the Alaska Pipeline
Project (APP) and the Alaska Gas Pipeline (Denali), Federal
Energy Regulatory Commission (FERC) regulations dictated
that the people who built the pipeline were unable to talk
to the people who sourced the gas because it was considered
an anti-competitive act. Since AKLNG was an integrated
project for export, under FERC Section 3 all parties in
AKLNG (who owned the resource as well as the
infrastructure) were allowed to communicate, which allowed
for beneficial project integration and extensive cost
savings. He highlighted the importance of how AKLNG was
different than its predecessors, and thought the most
fundamental difference was how the project was designed for
a higher level of integration and higher level of
alignment.
Mr. Butt continued discussing slide 2, informing the
committee that once AKLNG brought the gas in for cleaning
and treatment, production would equal approximately 3.3
billion cubic feet per day, or about 15 times as much gas
as the state of Alaska used. The gas would provide fuel,
in-state gas needs, and at the bottom of the pipeline there
would be about 2.5 billion cubic feet available for export.
The pipeline would move the gas between the treatment and
the liquefaction plant and was 800 miles long with a
confirmed route. He discussed the size of the pipeline and
related that the project had focused on the 42-inch
pipeline after research indicated it was sufficient. The
state had requested that the AKLNG project review a larger
diameter (48-inch) pipeline. The project had received the
42-inch pipe materials for testing from a mill in the Lower
48, and the 48-inch pipe materials were ordered from a
pipeline in Asia. He noted that AKLNG was continuing to
work with Lower 48 suppliers to see if a company could be
found to make 48-inch pipe, which as of yet was not
possible.
1:44:37 PM
Co-Chair Neuman asked if there were projects in the United
States that had used 48-inch pipe. Mr. Butt stated that
there were two that he knew of. He thought there were
additional factors to consider than just the diameter of
the pipeline. He asserted that the AKLNG pipeline was
different than any other pipeline in the world; and
consisted of five different types of pipeline based on the
presence of continuous permafrost, discontinuous
permafrost, and other geologic factors in the pipeline
route. He discussed the strain-based line that was needed
to span the area between the Brooks Range and the Alaska
Range. The project's 42-inch line was 22 to 25 percent
heavier than any other 42-inch pipeline built. If AKLNG
were to go to a 48-inch pipeline, it would be 60 to 65
percent heavier than any other 48-inch pipeline built
because the wall thickness was so great due to high rates
and pressures on the line. He relayed that every joint of
the pipe had to be custom made and custom formed from 4-
foot wide pieces of plate steel; after which it would be
moved, coated, welded, joined, and set in the ground.
1:48:11 PM
Co-Chair Neuman remarked that there had been amendments to
SB 138 to account for the cost of upgrades to highways and
bridges that would handle the extreme weight of the project
materials. Mr. Butt agreed, and stated that the effects and
expense were open for analysis and review. He relayed that
the preliminary front-end engineering and design (Pre-FEED)
stage of the project would include testing of project
execution capabilities (infrastructure), and the project
had regular meetings and discussions with the Department of
Transportation and Public Facilities to discuss the
ramifications. He did not think the issues were resolved,
and thought they needed further examination. He discussed
the different transportation needs for the two pipe sizes,
and specified that it would take approximately 150 thousand
truckloads of pipe to move a 42-inch system, and would take
230 thousand truckloads to move 48-inch pipe. He continued
that as the project design and size of pipe changed, so
would the potential effects on transportation systems. He
summarized that there was still much to be discussed and
decided pertaining to mitigating the effects on
transportation.
Co-Chair Neuman asked about the potential weight of trucks
transporting materials for the project. Mr. Butt thought
that the trucks could handle 12,000 to 15,000 pounds each,
depending upon the size of the truck and the size of the
load. He added that the weight calculations would be worked
into project logistics studies.
Representative Gara discussed the amount of gas needed for
reinjection during oil production. He asked about CO2 in
lieu of gas being used to support oil production.
1:50:59 PM
Mr. Butt responded that the gas had been used by the
Prudhoe Bay operator to sustain oil production for 4 years.
He clarified that the practice had presumed different
ratios of the amount of oil and the amount of gas in the
reservoir, and as the reservoir had matured, there was much
more gas than oil. He stated that there was no benefit to
putting the CO2 back in the ground, and referred to a
practice in West Texas where the reinjected CO2 physically
bonded to the oil and reduced its viscosity, but utilized a
different type of oil. The project did not think it would
use the CO2 for tertiary or oil production benefits, and
the Prudhoe Bay operators subsurface teams had looked the
best way to move forward. The project considered the CO2
for pressure support, and thought the ground was the best
place for the CO2 because of a potential greenhouse gas
effect. He highlighted the importance of the AOGCC ruling
that gave the Prudhoe Bay operator the right to reinject
the CO2 in Prudhoe Bay.
1:52:50 PM
Representative Wilson asked about the quality of the gas
coming out of the ground after having been reinjected. Mr.
Butt relayed that the operators had been doing a great job
taking the gas out of the ground, and putting the gas back
into the ground; and had done so almost four times. He
discussed the concept of "stripping," which happened in the
process of taking the gas out of the ground, whereby
lighter liquids associated with the gas were removed and
sold through the Trans-Alaska Pipeline System (TAPS). The
gas produced for AKLNG was called "dry," indicating it had
been stripped, and there was no sellable product with in it
such as butane or pentane.
1:54:43 PM
Representative Wilson asked if the stripping process
included propane. Mr. Butt responded that propane could be
recovered under the vapor pressure limits in TAPS. He
stated that there was very little propane in the gas; after
being stripped, blended with the crude oil, and sold as a
blended stream. He discussed ethane, which was also present
but was difficult to remove from the gas. He thought
knowledge of the gas composition was another factor that
enhanced communication and was favorable for success of the
project; and noted that other previous projects did not
have the same benefit due to being restricted by FERC 7.
The APP and Denali gas treatment plants were about a third
bigger than the Prudhoe Bay plant, to the cost of an
additional $2 billion. The previous projects had operated
under constraints that AKLNG was not subject to. He
discussed the liquefaction facility, which made the gas
cold and would then shrink by about 600 times and
facilitate the gas for export. The plant was built
primarily for the benefit of the reduction of volume of the
fluid.
1:57:30 PM
Representative Edgmon mentioned a recent article about a
giant field discovery in Egypt. He thought Mr. Butt had
mentioned the advantage of knowledge of the gas content,
which would provide greater certainty regarding future
business contracts. Mr. Butt explained that the certainty
was more related to the location of the gas, therefore
additional well drilling was not needed. As long as Prudhoe
Bay continued to operate well, there would be a good oil
stream and operation providing the gas. He continued that
AKLNG as an infrastructure was very expensive, however
accessing the gas to fill the infrastructure was relatively
cheap. The benefit was the certainty and the cost.
1:58:58 PM
Representative Guttenberg discussed the time span of TAPS
and mentioned the relationship with Alyeska and the
development of the North Slope, which he thought was
unique. He inquired about the differences in facilitating a
final product with four project partners. Mr. Butt thought
that the TAPS owners and equity participants were very
different than the AKLNG ownership equities in the fields
that provided the product. He referred to transfer points
at the ends of the pipeline, where the product was being
sold from one group of investors to a different group of
investors. He asserted that every time there was a transfer
point in a system there was taxable events, questions about
value transfer, and often there was value leakage. If the
amount of gas owned at the top of the pipeline was
equivalent to the amount of project they owned in the
middle, there would not be value transfer points or
opportunities for value leakage. Rather, AKLNG would be
physically connecting the equity shares of the fields in
the North Slope to the buyers. He referred to AKLNG having
learned from TAPS, and discussed past litigation about
values and points of difference with regard to what should
have been done differently. In consequence, the system
would ensure that the parties involved in AKLNG did not
need to go through points of value transfer or value
leakage.
2:01:34 PM
Representative Guttenberg mentioned that AGDC had been
asked quite a few questions about setting up a subsidiary
corporation to do certain things. He referred to mixing
project funds in different proportions and wondered how
many would be needed order for AKLNG to operate.
Mr. Butt thought that it was the state's choice as to how
it wanted its project shares represented. He thought that
simpler project structures were better, and highlighted the
importance of having all the project partners working
together.
2:02:54 PM
Representative Guttenberg noted that in some cases he had
seen project sponsors invest in different components of the
project, at times through a financing company or subsidiary
corporation. He wondered if the practice was typical for a
project such as AKLNG.
Mr. Butt responded in the negative, and suggested that what
Representative Guttenberg had described was a complex
system in which many different parties came in, and could
lead to value leakage. He iterated that a core design
element of AKLNG was to try and understand the state share
of the gas, because the three producers purchased the right
to produce the hydrocarbon, and preserved the right through
continuing to operate consistent with the leases. The state
had a derivative right to the revenues generated by the
production. He furthered that the intent of AKLNG was to
transfer the derivative right into a volume of gas so that
the four parties could work together. He thought the
scenario of different parties paying for different project
components was not consistent with the overriding concept
of alignment that the project was striving for, and did not
promote success. He referred to the very narrow profit
margins in the LNG market, and reminded the committee that
the current price of LNG was half that of the previous year
at the same time. He emphasized that the ability to be
successful in the LNG business depended upon being
efficient and keeping costs down.
2:05:51 PM
Co-Chair Thompson asked how the state had achieved 25
percent equity in the project. Mr. Butt explained that in
2011 and 2012, there was much discussion regarding how the
project might work. The project partners had discussed past
projects in which the state was not a direct participant,
and in which all four parties were not participating at the
same time. The past projects were examined as learning
opportunities - none of the projects had been effective and
it was clear to the partners that better alignment with the
sovereign was needed. He noted that successful LNG projects
around the world had the state as a partner, and gave
examples of joint ventures. He discussed tax structures and
the state's royalty claims at Prudhoe Bay and Point
Thomson, and relayed that the combination of claims on the
revenue stream added up to 21 or 22 percent. Through many
discussions with the state and project parties, the
derivative shares were translated into a gas share of the
AKLNG project.
Co-Chair Thompson asked if there was 3 percent added to the
states share to make the total equal 25 percent. Mr. Butt
replied that 25 percent was a little more than the
derivative shares had added up to, and the amount was part
of the negotiation process to have all parties ready to
move forward.
2:08:04 PM
Vice-Chair Saddler asked about a royalty in-kind (RIK)
decision, and wondered (from Exxon's perspective) if it was
essential to the progress of the project. He further
queried as to whether it was still possible for the project
to move forward if the state did not make the RIK decision.
Mr. Butt explained that the RIK decision was a commercial
decision. He referred to slide 5, which differentiated
activities as commercial work (done by the co-venturers and
the state), and work in the scope of the Joint Venture
Agreement (JVA) project team (done by the AKLNG project
team). He related that RIK was framed as an important
element of the project during discussions on SB 138 [oil
and gas legislation passed in 2014], as it gave the state a
share of gas rather than a derivative right to a claim on
some volume of revenue.
Vice-Chair Saddler was unclear about Mr. Butt's explanation
and was unsure if he was saying yes or no. Mr. Butt thought
it was very important that the state made a clear decision,
and it would be part of enabling some of the broader
commercial discussions that needed to happen (outside true
AKLNG project work).
Vice-Chair Saddler summarized that Mr. Butt was
communicating that the answer was "close to a yes." Mr.
Butt agreed.
2:09:49 PM
Representative Pruitt expressed interest in the FERC 3
discussion, and thought it was compelling that the AKLNG
producers and line operator/owners could have discussion.
He referred to data on the North Slope and wondered if
there was something to prevent project parties from using
the data in the future if the AKLNG project were not to go
forward.
Mr. Butt clarified that the North Slope data was held by
the Prudhoe Bay operator on Prudhoe Bay, and the Point
Thomson data was held by the Point Thomson operator on
behalf of the working interest owners in the units. He
thought the true North Slope data was outside the purview
of the AKLNG project. He wondered if Representative
Pruitt's question specifically pertained to data around the
project and how it flowed to the JVA participants. He
specified that it depended upon the location of the data,
because the state had different agreements with two
different representatives. Mr. Butt conveyed that he was
not party to the agreements, and could not speak to them.
2:11:54 PM
Mr. Butt advanced to slide 3, "Alaska LNG - Project
Overview." He recognized the project's safety success
record, and reported that the project had completed the
summer field season without a single safety incident. He
mentioned the 250 field employees, 80 percent of which were
Alaskan, and many of whom were archeologists and
scientists. He discussed the building of a safety culture,
setting up a long term system in which people were aware of
risks and how to work safely.
Mr. Butt estimated the project spending to date to total
approximately $430 million to $435 million, with about $110
million spent on concept design, about $305 million spent
through the end of September, with estimated monthly
spending at about $30 million. He thought that through the
end of 2015, spending would be over $500 million. He
relayed that the project had about 80 percent of the design
work completed; before and not including the project had
agreed to do additional work on the 48-inch system, which
was a design scope change. The summer field work was
complete. He explained that the work program and budget
(WP&B) had been completed and submitted to the project
partners. He clarified for the committee that on December
4, 2016, all parties remaining in the project were required
to make an affirmative election on the WP&B for 2016. In
the event that any partner elected to not invest in the
project and move forward, the project would go in to wind-
down stage or would cease.
2:15:14 PM
Mr. Butt referred to previous presentations, noting that
there were key messages that had been consistent in every
project review for the last three to four years. He
emphasized that the integrated AKLNG project was much
bigger and more complex than just a pipeline. The pipeline
itself was comprised of five very complex and different
pieces of the pipe, each one more complex than any pipes
built in the Lower 48. The gas liquefaction and treatment
facilities were major project components, and constituted
75 percent of the total project cost. He proposed that
Alaska and Rhode Island were analogous to comparing AKLNG
and other pipelines in the world. He emphasized that to
have a product that could access multiple markets, the gas
must be liquefied and cleaned. Unlike past projects such as
APP and the Denali Pipeline, AKLNG could mobilize the gas
for transport instead of having fixed point pipelines that
may not terminate in an area with a market for LNG. After
moving the gas to favorable markets, AKLNG could hopefully
get long-term agreements to secure the project, but would
also have flexibility.
Mr. Butt reminded the committee that being regulated under
FERC Section 3 [the federal standard applicable to export
projects] allowed for full integration of the project. He
continued that AKLNG had been able to get export
authorizations; the project had both a free trade agreement
for export and a non-free trade agreement for export. There
were only about three other projects in the United States
that had the same distinction, and AKLNG had been able to
secure the authorization through a lot of support from the
federal government. He recognized the Alaska delegation for
their efforts and reported that the project had started
meetings with the federal administration starting in 2012,
resulting in hastened authorizations. He reiterated the
benefits of integration between the resource and the
project.
2:18:49 PM
Mr. Butt continued by explaining that within TAPS there
were transactions, without the level of integration from
being regulated differently. He stressed that AKLNG was
regulated differently and permitted differently, which
allowed for greater efficiency in design and regulatory
work. He restated that past projects in the state did not
have the same strength.
Co-Chair Neuman asked if there was a different type of
project configuration other than integrated.
Mr. Butt responded that there were projects in which there
were several different parties that owned different things,
and each party sold in a chain. He pointed out that under
some such scenarios every single transaction was a taxable
event, and each party wanted some compensation for their
element of the work. He furthered that in the Lower 48,
there were a lot of FERC 7 pipelines that were similar to
TAPS. In the LNG business it was very uncommon to have a
non-integrated project due to the project complexity and
reliance on long-term contracts. He summarized that in the
LNG business, non-integration configurations were very
uncommon, but in other businesses it was very common.
2:20:25 PM
Vice-Chair Saddler remarked on the niceties of FERC
regulation, but thought the implications were not
abundantly clear. He inquired about FERC 3 regulation
allowing for design integration; and understood that under
that scenario there was one entity, no value leakage at
each transaction point, and a simpler program to complete.
Mr. Butt agreed, and added that under FERC 3 an entity
would be shielded from anti-trust laws, under different
regulations, and with different types of access governed by
different competition law.
Vice-Chair Saddler inquired about a distinction between the
AKLNG project and past LNG projects. He wondered if Mr.
Butt could make a summary statement or outline the elements
that would represent differences in the AKLNG project and
previous projects.
Mr. Butt discussed the Yukon Pacific project, which had
advanced farther than other projects in the 1980's, and had
received an environmental impact statement (EIS). He
furthered that the project had relied on CO2 venting, did
not have a lot of investment for CO2 removal, and could not
put any of the CO2 back into the ground. The project also
had no mechanism to integrate with the upstream. There had
been many unresolved technical challenges, and Yukon
Pacific was never able to move the project forward. He
mentioned other projects which had looked at having
different parties own things separately, and reiterated the
costliness of making value transfers at different junctures
in a project. He suggested that such a model would only
work when there was a tremendous amount of value to be
shared between the many additional parties. He restated the
efficacy of having four parties at the table who had either
purchased the right to the gas or had a right to the gas
through the constitution; and as such, the parties governed
how the project worked. The more parties and more forms of
compensation paid to broader groups, the more likely it was
that a project would not be successful.
Mr. Butt pointed out a bullet on slide 3, and highlighted
"cost of supply", which he described as the ultimate metric
for the competiveness of any LNG project. He emphasized
that AKLNG competed in a very complex global market; buyers
were considering how to do the best for their economy and
future generations. Buyers were excited by new sources of
demand, and did not want to pay any more for the commodity
than they had to.
2:24:24 PM
Vice-Chair Saddler discussed other projects and mentioned
the Denali Pipeline Project, the Alaska Gasline Port
Authority Project, and the SGDA Pipeline Project. He
wondered if Mr. Butt wanted to discuss distinctions between
AKLNG and the three projects. Mr. Butt related that the
Denali Pipeline Project was an agreement between two of the
producers to try and work together to make a pipeline
between the North Slope and the Lower 48. He thought the
Denali project had worked hard, spending approximately $100
million; and pointed out that many of the same people were
involved in the AKLNG project. He emphasized that AKLNG had
learned from the Denali project; but it was difficult for
Denali to be successful since they did not have all four
parties involved, and did not have the ability to work in
an integrated manner. He added that APP had shared the same
challenges and had spent $330 million. Neither Denali nor
APP had advanced in the federal regulatory process as far
as AKLNG had with completed resource reports, a pending
EIS, a docket with FERC, and secured export authorizations.
Mr. Butt discussed other projects, and suggested they were
independent projects in which the projects were completely
separate from the resource owners. The independent projects
physically had purchases and sales at the top and bottom,
which led to value transfer and an opportunity for taxation
and value leakage. He reiterated the importance of trying
to be as integrated as possible, matching the equity in the
project and the equity in the fields. He thought the
simplicity of projects with integration would mitigate the
high level of skepticism and mistrust created by seeing
projects that had started and stopped without achieving
success. He thought the projects that Vice-Chair Saddler
mentioned were structured in a way that was less likely to
be successful than AKLNG.
2:27:09 PM
Co-Chair Neuman referred to the value leakage that Mr. Butt
had mentioned. He wondered if one of the producers were to
withdraw from the AKLNG project, would it bring the profit
margin down enough to make the project non-economic.
Mr. Butt thought that if one of the producers withdrew, it
would not change the economics of the project. Rather, the
situation would present a challenge as to how to preserve
alignment without having all the parties that own the
source of gas as part of the project. Additional concerns
pertained to getting the gas into the system and keeping
the project going. He summarized that Co-Chair Neuman's
question had many possible answers. He reiterated that cost
of supply was the most important metric.
Co-Chair Neuman asked that if one of the producers were to
withdraw, would AKLNG need to be reauthorized for FERC 3 or
be authorized under FERC 7. Mr. Butt replied in the
negative.
2:28:25 PM
Representative Wilson asked about the 2016 WP&B, and
wondered what the state share of the budget would be on
December 4, 2015.
Mr. Butt responded that the project budget included
approximately $211 million for very specific tasks, $30
million for conditional items with pending variables (e.g.
48-inch pipe materials) for a total budget of $240 million;
and the state's 25 percent share was about $60 million.
Vice-Chair Saddler thought many Alaskans were interested to
know if they would be able to get in-state gas. He asked
about current provisions for off-take and wondered if any
pending decisions about off-take would be made before the
Pre-FEED stage was concluded.
Mr. Butt thought that most people wanted to know how the
project would impact their energy bills. He specified that
SB 138 contemplated five off-take points, and that AGDC had
been looking at many different designs for the number of
off-take points. He thought the number of off-take points
was less important to the project than flexibility in the
initial design, since once the project was built it would
not be easy to change. He furthered that LNG was a flexible
product, and the state had most of its population near the
coast. He continued that once LNG was transported on the
water; it was for the state, Alaska Industrial Development
and Export Authority (AIDEA), and other groups to decide
which of the many ways to transport the gas. He stated that
his role on behalf of the project was to determine how to
take the resource from the North Slope and build the
infrastructure at the lowest cost to supply. He added that
the off-takes were outside his purview and he may not have
been the best person to answer.
Vice-Chair Saddler commented that his understanding of the
design process was that the producers wanted a low-cost
delivery of their supplies; whereas the people of the state
wanted to ensure they had the opportunity to have gas
delivered at multiple locations, which was costly. He
wondered if Mr. Butt could characterize the status of the
decision regarding off-take points.
2:31:21 PM
Mr. Butt thought the question would be best answered by
AGDC, since it had examined many options for off-take
points. He furthered that AKLNG had picked the route of the
pipeline where there was the lowest environmental impact,
which gave the highest probability of being successful. He
thought there was a lot of flexibility around off-takes
that could be discussed.
Representative Munoz asked about the request of the
administration to have gas pledges from the producers by
early December 2015, and wondered about the impact of the
requirement if it was not met. Mr. Butt commented that the
pledges were a commercial or marketing issue, which was
outside the project purview. He restated the recurring
themes of alignment, risk, and cost; stating that he had
talked about the three subjects in every presentation. He
considered questions such as the gas pledges to be
concerned with alignment, and alignment was needed to get
the costs low enough for project success. He thought that
such questions should be bilateral discussions between the
state and the other party, and restated that they were
outside of his purview.
2:33:05 PM
Representative Munoz indicated she would follow up on her
question at a later date.
Representative Kawasaki wanted to clarify the meaning of
the December 4 election. He thought he had gleaned from
testimony from TransCanada that if the legislature were to
take no action and no bills were to pass at present,
TransCanada might be in a position to vote "no." He
wondered if at that point all progress on the project would
cease. Mr. Butt answered in the affirmative.
Representative Kawasaki stated he did not want the project
to cease in that manner, but wondered how the project would
unwind if it were to happen.
Mr. Butt clarified that the project had only done a little
thinking on the eventuality of project cessation, and
thought it was important to focus on the success case
scenario. He reported that there was always secondary
planning in place. He shared that TransCanada and AKLNG had
been building some detailed plans as to how TransCanada
might transition out its AKLNG employees over time.
Representative Kawasaki asked about the hypothetical fate
of the information and data that had been compiled for the
AKLNG project (from the Alaska Gasline Inducement Act
(AGIA) and other sources), in the case that the project
ceased.
Mr. Butt specified that the data that came in to the
project was owned in different places by different parties.
He furthered that any old data would either held by the
parties or the derivative parties; and the final outcome
would depend upon the type and origin of the data in
question.
2:36:26 PM
Co-Chair Thompson wondered if the state was spending too
much time working on project cessation scenarios and
withdrawal agreements, and asked if it might be slowing
down the process. Mr. Butt did not think it was his purview
to tell the different parties how to invest resources;
however, successful LNG projects focused on getting costs
down and working together to solve problems. He posited
that any time project partners were not working together to
resolve problems and get costs down was time not spent
towards a success goal.
2:37:16 PM
Representative Edgmon wondered how, in a period of long-
term depressed commodity prices, the project would go
forward. He discussed risk and referenced third quarter
earnings that were vastly different than earnings the
previous year. He thought the project may have to succumb
to budget cuts if the trend continued. He acknowledged the
project partner alignment, but thought perhaps the project
could become a casualty of reductions in terms of global
operations.
Mr. Butt concurred with Representative Edgmon's
suppositions. He noted that the ability to move the project
forward was represented in upcoming slides. He reiterated
that as the project moved forward the costs would go up,
and it was necessary to have confidence that the project
would be a profitable venture. He pointed out that LNG was
selling for half the price it was a year previously. He
referred to public data that had been provided by enalytica
pertaining to the cost for AKLNG to generate a volume of a
million BTUs of LNG. He discussed the cost of LNG
production and quipped that if a project was losing money
on a unit cost basis, it shouldn't try and make up for it
in volume.
Representative Edgmon asked about direct competitors to the
AKLNG project; and asked Mr. Butt to characterize what was
happening in British Columbia and whether it was considered
a direct competitor. Mr. Butt mentioned new projects in
Western Canada, the Gulf Coast, East Africa, the Pacific
Rim and Australia; and remarked that they were all vying
for growth in the LNG markets. He specified that currently
the LNG market was about 270 million to 280 million metric
tons annually. He hoped the AKLNG project would start in
2024 or 2025; and estimated that as energy demand grew
(with population growth) the volume of LNG demanded would
be in excess of 400 million tons. He concluded that there
was growth in the LNG market, and stated that it was the
fastest growing sector of the energy market due to its
flexibility. He continued that LNG had the lowest carbon
emissions of fossil fuels, and had some structural
advantages. He thought the state was as invested in the
project outcome as he was; and emphasized working on cost
reduction, alignment, and risk reduction. He discussed
geographic advantages of the AKLNG project; such as colder
temperatures resulting in greater yield, and the close
distance to the Asian market with lower shipping costs. He
thought the challenge was overcoming the treatment costs,
managing the CO2, and managing the 800 miles of pipe. He
reiterated that there was active competition to the AKLNG
project, but emphasized that project participants had a
high level of commitment.
2:44:05 PM
Representative Gara asked if there was any realistic hope
that China's announcement to reduce CO2 emissions might
have a positive effect on LNG prices. Mr. Butt thought all
such factors mattered, and added that population growth was
also an important factor in driving the demand of LNG. He
discussed the forecast population growth and environmental
challenges in China, and suggested that the factors boded
well for the future of LNG. He emphatically restated that
the only way to ensure project success was to establish
alignment between the four resource parties, preserve
alignment in the project, and work together to drive down
costs.
2:45:52 PM
Vice-Chair Saddler asked what Alaskans should infer from
Exxon's recent application to AOGCC to go to gas expansion
operation at Point Thomson (as opposed to cycling and
condensate production). Mr. Butt commented that the intent
was to find a way to use the resource at Point Thomson to
support a gas export scenario such as AKLNG. He continued
that there were different ways to do it, and thought
cycling was self-defeating since a great deal of fuel was
used to move molecules around, and at some point the
product being moved would not pay for all the fuel that was
being used. He emphasized the importance of when and how
energy was moved out of resources such as Point Thomson. He
recognized the Prudhoe Bay operator for maximizing oil
production through their good work in maintaining reservoir
pressure and gas reinjection at Prudhoe Bay. He commented
that there was less and less oil remaining, which is why
AOGCC had supported Prudhoe Bay offtake as well as Point
Thomson offtake. He thought the exciting part of the AOGCC
ruling was that they also allowed for CO2 reinjection.
2:47:27 PM
Representative Guttenberg discussed the upcoming decision
as to whether AKLNG would hire a gas marketer who had
expertise in the field to aid in decision making. He
inquired about the timeline for the decision, and wondered
how it would affect the project if the state did not have
the expertise to make the decision. Mr. Butt reminded the
committee that he was not a marketer, and did not feel
qualified to tell the state when and how to bring in a
marketer. He pointed out that the project partners all had
marketing professionals that could communicate with the
legislature (although not to each other). He referred to
the sensitivity of marketing activities under antitrust
law, which carried personal as well as civil penalties. He
suggested that the legislature open dialogue through the
marketing organizations available to it through the
project.
2:49:30 PM
Co-Chair Neuman asked what point in the project would be
appropriate to start the process of marketing gas. He
thought it might be very early in the project process to
start marketing.
Mr. Butt turned to slide 6, which illustrated the
phased/gated process of AKLNG project management. He
discussed early-phase project activities and asserted that
before moving from the Pre-FEED to the FEED stage of the
project, more information on commercial agreements and
commercial viability was needed. Even more such information
was needed when moving into the final investment decision
(FID)/Construction phase of the project. He thought the
amount of marketing information needed would be relegated
to the comfort level of the project partners as they moved
through the project phases. He reiterated that there were
marketing professionals available to talk with the
legislators one on one (larger sessions pertaining to
marketing advice could be considered collusion). He pointed
out that if the state elected to have its role be as a
direct marketer, the relevant discussion could also be
considered collusion. He asked what Co-Chair Neuman thought
was needed (in terms of marketing information) to move from
one project phase to another.
2:51:38 PM
Mr. Butt reviewed the project team, which he described as
incredibly experienced (slide 4). He described that there
were about 135 people working in four different offices: an
office in Anchorage managing regulatory issues and
community affairs, an office in Calgary where the pipeline
was being designed, an office in Houston where the LNG
plant was being designed, and an office in Denver where the
gas treatment plant was designed. He explained that the
teams were in place in the chosen cities due to design and
contracting expertise in place in each location. He pointed
out that it was much more cost efficient to move a small
number of project team people to where the contract
expertise was.
Mr. Butt discussed the integration of the AKLNG team, and
the process of how AKLNG jobs were staffed. He referred to
the principle of "the best player plays", and elaborated
that there were organizational charts with specific job
descriptions with clear deliverables and resourcing
requirements. He outlined the staffing process by which
project roles were filled, where managers from each project
partner constructed lists of qualified employees to
potentially fill roles in the project. He discussed
integration of employees from all the partners using
balance and succession plans. The project sought balance in
the team (for diversity of ideas and diversity of
experience) and succession planning. He added that the
TransCanada transition would function through the same
process.
2:56:05 PM
Co-Chair Thompson asked if the members of the project
management team were required to sign a confidentiality
agreement.
Mr. Butt stated that the employees signed secondee
agreements because every member of the team had full access
to all lead party systems, processes, and tools. The
employees did not share such information with their parent
companies or other companies. He emphasized that the
agreements were very important to AKLNG, considering non-
disclosure agreements in particular. He used the example of
the company that provided the chemical to separate the CO2
from the gas, which had one of the most strict
confidentiality agreements that could be found. He
explained that the motivation for such a strict policy was
the protection of their chemical formula.
Mr. Butt discussed blanket confidentiality agreements - he
qualified that individuals signed agreements back to the
corporations. He related that he had signed only one
confidentiality agreement; indicating that as an employee
of ExxonMobil, he would honor all confidentiality
agreements of ExxonMobil. He explained that the
confidentiality agreements of a company were binding to
every individual in the company.
2:57:40 PM
Co-Chair Thompson understood that AGDC had not signed a
confidentiality agreement, and wondered if the corporation
was limited in access to some confidential information.
Mr. Butt stated that there were open discussions pertaining
to the agreements, and two weeks previously there was a
regulation posted for public comment by AGDC. Each of the
project partners sent a representative to raise concerns,
and the project team also sent its technical manager to
raise concerns. He continued that AGDC had already signed
several non-disclosure agreements, and it was future
agreements that were open to question.
Mr. Butt emphasized that it was very difficult for AKLNG to
see how to proceed if AGDC did not sign future non-
disclosure agreements. He discussed the necessary
documentation during the Pre-FEED stage, including a
deliverables document to include definition of project
specifics. He thought there would need to be one document
available to those who had signed agreements, and another
document redacted for others who had not. He provided a
hypothetical scenario in which AGDC was in the room during
a discussion, and the discussion could not proceed if it
contained confidential information. He stated he had never
seen it done, and thought it would increase costs.
Mr. Butt thought that the word "confidentiality" often had
negative connotations, and sounded like there were things
to be hidden. He asserted that the agreements were about
preserving the competitiveness of the project. He
emphasized that if the state wanted the project to be
successful and globally competitive, it had to have access
to the best goods, services, and people; and that was a
standard on all LNG projects anywhere the world. He
reiterated that parties would not work with the project if
they feared their company's livelihood and future would be
at risk. He summarized that the project really wanted to
have an open environment where everyone would be able to
work together and see all the information. He restated that
the confidentiality concept was all about making an
environment where AKLNG could be a competitive project.
3:00:42 PM
Co-Chair Thompson did not think that there would be a
workable solution if AGDC did not sign a confidentiality
agreement.
Co-Chair Neuman asked if AGDC's failure to sign an
agreement had already slowed the pace of the project.
Mr. Butt thought that Co-Chair Neuman posed a great
question, and stated that the situation absolutely impacted
the pace of the project. He was unsure if it had slowed the
project down, but thought that time spent on
confidentiality agreements was time that could have been
spent on more relevant and productive discussions on the
project. He acknowledged that the Pre-FEED stage was about
working together and finding alignment; but the more
difficult the process was, the harder it was to move
forward.
3:01:32 PM
Co-Chair Neuman had heard that the confidentiality
agreement was confidential.
Mr. Butt stated that he believed that the language in the
confidentiality agreement in question was subject to the
signature on it, and was part of the information that any
signatory did not release. He expressed respect and
understanding about the need for information, but avowed
that the project needed to very thoughtful about any
information it put in the public domain. He thought there
needed to be a process to sort through the problem.
3:02:43 PM
Co-Chair Neuman asked if the WP&B was confidential, and
wondered what individuals or groups with the state could
review it.
Mr. Butt specified that the WP&B was a JVA document that
had been released to the state gas team, who were all
signatories to the confidentiality agreement. He qualified
the document as "a road map" on how to build an LNG
project, and was something to be protected. He thought the
project needed to find a way to have enough transparency in
the process that people could have confidence, yet not
compromise competitiveness.
3:03:49 PM
Representative Edgmon asked who made up the Alaska gas
team.
Mr. Butt stated that there was a broad range of people who
represented the state on other issues. He advanced to slide
5: "AKLNG Project Scope" to answer Representative Edgmon's
question. He pointed out the yellow "swim lane" box which
represented the AKLNG project team, and included a list of
all the issues the team managed under the project. He
stated that he was accountable for the issues listed;
including advancing the regulatory process, advancing the
design process, and driving costs down. He elaborated on
some of the acronyms listed on the slide and summarized
that the items had to do with procuring entities to do the
next phase of work. The work was shared by project
partners, and the phase [Pre-FEED project scope, under JVA]
was where the partners could agree on how to move the
project forward while driving down cost.
Mr. Butt continued that the state gas team was represented
by the blue swim lane box depicted on the slide, including
commercial activities outside of the JVA and project team.
He explained that the configuration [activities executed by
co-ventures and the state] was because different parties
had different ideas and different methods. He qualified the
activities as commercial work, and reported that there was
probably an additional 100 or more people doing the work.
He specified that the state gas team was primarily
representatives to the blue swim lane, representing the
state on commercial issues, and issues that the state
viewed as important to frame the project for success. He
detailed a number of the technical employees that AKLNG
worked with on both sets of activities.
3:06:07 PM
Representative Edgmon referred to slide 4, and asked about
positions on the organizational chart that were staffed by
employees of TransCanada. He wondered how the positions
would be addressed if TransCanada left the project. Mr.
Butt stated that the roles would be filled using the same
principle as the rest of the team positions, and as the
project moved from the 15 TransCanada employees supporting
the project to zero, every position would be open to the
nomination process.
3:07:06 PM
Representative Edgmon asked if there was a chance that the
vacant position could be filled with non-Alaska designated
employees.
Mr. Butt answered that the right people would be selected
after balancing and shaping of the team, and emphasized
that the best candidates were preferred. He clarified that
everyone the participants put up for the jobs would be
considered.
Representative Edgmon stated that he better understood the
value of TransCanada. He mused that the pipeline project
manager was from TransCanada, but it was not a foregone
that the replacement candidate would be an Alaska-
designated position. Mr. Butt replied that it was possible,
and it would not be known until the candidates were
examined.
3:08:11 PM
Vice-Chair Saddler asked about the aforementioned non-
disclosure agreements signed by AGDC, which he thought
sounded like a confidentiality agreement. He thought it was
understood that AGDC was not signing confidentiality
agreements.
Mr. Butt clarified that AGDC had signed some
confidentiality agreements in 2014 that were still in
place.
3:08:55 PM
Vice-Chair Saddler asked if Mr. Butt (as the project
manager) was concerned about the kind of structure the
state used to hold its share of the project.
Mr. Butt had not considered the matter, and stated that he
was agnostic. He expressed care that the project stayed
aligned, and expressed sensitivity to Representative
Edgmon's earlier question. He emphasized that AKLNG wanted
people from each partner involved in the project, and it
was in the best interest of the project. He thought the
staffing process was very simple, and was unconcerned about
how the state carried out its process.
Vice-Chair Saddler asked if Mr. Butt had any objection to
AGDC stepping in to assume TransCanada's role.
Mr. Butt stated that there were some great folks at AGDC,
and felt confident that there were individuals that could
fit into some of the roles. He described familiarity with
AGDC staff.
Vice-Chair Saddler discussed the pace of progress and
whether the project was moving forward according to
established milestones. Mr. Butt thought that the following
slide might address Vice-Chair Saddler's question.
3:11:09 PM
Mr. Butt turned to slide 6, "Project Development Phases,"
which illustrated the phased/gated process used to manage
large projects. He revealed that he would discuss what
happened in each project phase, and then would talk about
the significance of the project gates. He signified for
Vice-Chair Saddler that once he addressed the two topics,
he could more adequately discuss how milestones fit within
the overall process.
Mr. Butt elaborated that that each of the project phases
were intended to make the project more understandable, more
certain, and reduce risk. The concept select phase was
where the "how" of the project was defined; key questions
as to line size, location of gas and LNG plants, and plant
size were addressed. The current project phase was pre-
FEED; wherein the project endeavored to drive down costs,
advance regulatory work, and ensure the system design would
work and be executed. He highlighted that the system was
incredibly integrated, and used an example of the system's
sensitivity to small changes to illustrate the importance
of designing the components together. The FEED stage
involved taking the simple and rudimentary designs and
making them more complex and with specifications for
building that included a high level of detail. The final
phase was execution, in which the project reached the FID
stage and the project was actually built. He summarized
that each of the phases had a gate for the purposes of
completing work before moving on to later stages.
Mr. Butt drew attention to the "Project Influence Curve"
graph on slide 2, which he thought illustrated the
importance of the gates. The graph moved through the same
color range as the project phases to illustrate the passage
of time. The blue line represented actual spending. In 2012
and 2013, the project [in the green Pre-FEED phase] had
spent about $30 million per year doing high-level design.
In the current Pre-FEED phase, $30 million per month was
spent to do the more detailed design. He estimated that in
the FEED phase, the project would spend $30 million per
week as detailed specifications were tested, and many more
contractors were doing more design. The FEED phase would
provide confidence for the final phase of FID, where it
would spend $30 million per day to procure and construct
for the project.
Mr. Butt drew attention to the red curved line on the
graph, which defined the ability to influence the project.
He pointed out that as the project moved through the
phases, the ability to make changes and influence details
diminished. In the beginning phases the project was working
off paper, which was not very expensive and provided the
ability to influence the design. He recounted the FERC
resource reports and permit applications that had been
filed and stated that once the permits were filed it became
very difficult to change things. After defining and
permitting items, which were reviewed and approved by the
regulator, degrees of freedom were diminishing. He pointed
out that the red influence curve dropped quickly through
the FEED phase, and once in the FEED phase the ability to
move things dropped a great deal since the design of the
project was largely set. Instead of continuing with design,
the FEED phase was concerned with how to construct the
project. The detailed analysis included logistics studies
and labor studies; and as the project lost the ability to
change things and spending went up, the project had made
good decisions. The gates were used to enable the good
decision-making.
3:17:39 PM
Mr. Butt reiterated the significance of the blue spend
curve, and thought it was important that the project did
not move through the gates until it was ready. He thought
using the specific term "milestones" [in reference to Vice-
Chair Saddler's question] could be potentially problematic,
and revealed that studies of mega-projects had indicated
that schedule-driven projects were prone to failure. He
furthered that the failures were due to not moving through
gates and making decisions in a timely manner.
Vice-Chair Saddler asked if the project was generally on
track.
Mr. Butt stated that the project was absolutely on schedule
to complete the Pre-FEED stage by mid-year 2016, and the
FEED decision by mid-year 2017; which was what was
committed to in the Heads of Agreement. He restated that
date-certains and milestones were not what was done in mega
project designs; the project was driven to the completion
of the work in the gated process rather than driven to the
dates.
Mr. Butt continued that AKLNG was very confident that it
was on schedule to do the work, and thought that with the
addition of the 48-inch pipe work (which would add 6 to 8
months of work to the pipeline team) all other work would
be completed around April 2016. The information from the
completed work would be used in the resource reports, which
were critical to keep the regulatory work moving forward
and eventually feed into the application. He summarized
that the project was working toward dates, but concerned
itself with progress.
3:19:48 PM
Representative Pruitt asked if the gates were set in stone.
He referred to conversation regarding items that would
potentially be moved from the FEED to pre-FEED stage, and
wondered if it was common practice. He inquired if there
was a point at which project items were not able to be
shifted in such a way.
Mr. Butt stated underlined the significance of what
activities were listed in each phase, because over time the
ability to make changes decreased. In the event that any of
the four parties wanted to consider an element for
completion earlier than its phase indicated, it was
incumbent on the other participants to try and find a way
to reduce the risk. He reiterated that everything in the
project pivoted back to alignment, risk, and cost.
Mr. Butt thought the shifting of items between stages was
not without consequence. He theorized that if money was
spent in the pre-FEED stage rather than the FEED stage
(where there was more certainty) it could create the risk
of having to pay for the work twice if there was a change
in design. The project tried to use the gated process to
reduce uncertainty, but the gates were not set in stone. He
referred to hundreds of years of combined experience in
leadership teams that established a process through which
tasks were ordered for maximum benefit. He did not want to
spend money on commercial issues before moving through the
gates, so as to not spend money answering commercial
questions that might no longer be relevant.
Mr. Butt referred back to the gated model on slide 6, and
suggested that anything moving from the dark blue gate
(later in the process) into the light blue gate (earlier in
the process) increased costs. He emphasized that partners
could not move tasks across the gates without having enough
information to be comfortable.
3:22:47 PM
Co-Chair Neuman referred to slide 5. He wondered if AGDC
represented the state on the AKLNG project team pre-FEED
project scope, and if it had seen the WP&B.
Mr. Butt stated that AGDC had received the WP&B at the same
time as everyone else; and additionally, there were AGDC
representatives who were involved in creating the WP&B. He
expressed that he had a great deal of respect for the
corporation's technical committee representative Fritz
Krusen, who had helped to build the budget.
Co-Chair Neuman asked if AGDC had to sign agreements prior
to the creation of the WP&B.
Mr. Butt stated that AGDC was covered under the JVA as a
project participant.
Co-Chair Neuman asked if AGDC would have to sign
confidentiality agreements before December 4, 2015.
Mr. Butt understood that most of the agreements in question
were already done, and referred to new regulations and how
they would impact AGDC's ability to sign agreements going
forward. He understood it was open to public comment. The
questions were read into the public record, and AKLNG was
waiting for a response. He qualified that AGDC was working
hard on the issue.
3:24:30 PM
Representative Gara referred to slide 6, and discussed
project phases. He surmised that 90 percent of spending
occurred when the project was ready to be executed. He
wondered if Mr. Butt had observed other projects in which
decisions about project viability were made after the pre-
FEED stage rather than the FEED stage.
Mr. Butt had seen projects that completed the pre-FEED
phase but did not clear the gate to the FEED phase after
finding that it was not economic to proceed due to project
costs or regulatory environment. He stated that there were
a lot of projects that completed the pre-FEED stage more
than once in order to cut costs, and had seen it done with
a savings of 30 percent after engaging with the learning
process in pre-FEED activities. He emphasized the
importance of the gated process and the reduction of
project uncertainty before increased resource commitment.
3:26:47 PM
Representative Kawasaki referred to the supplemental
request in SB 3001, which asked for additional positions
(including a marketer) in order for the AKLNG state team to
work. He thought that part of the justification was to push
some of the FEED decisions into the pre-FEED stage, and
asked Mr. Butt if he considered it to be a wise decision
from a project perspective.
Mr. Butt stated that Representative Kawasaki asked a great
question, but did not feel it was a question he could
answer. He reiterated that if the request was what it took
for a project partner to get enough alignment to be willing
to move through the process, then he thought it was
important to make it work. He thought the only way for a
big project to be successful was to preserve the alignment
and address such issues. If any one of the partners needed
information earlier (that was traditionally worked in
FEED); he respected the decision and thought it was not his
position to question it.
3:28:05 PM
Co-Chair Neuman commented that all the project parties
worked to solve a problem that any partner might have. He
thought the coordinated effort towards problem solving was
a good policy.
Representative Kawasaki was curious if the other project
partners to AKLNG were looking at marketing or asking
similar questions as the governor.
3:28:51 PM
Representative Pruitt asked if there was concern about the
new regulations related to the confidentiality agreements
that would change or invalidate previously signed
agreements with AGDC members or other project team members.
Mr. Butt stated that his understanding was that the
agreements that had been signed would be honored. The
project had discussed the matter with AGDC, and the
corporation was going to honor the existing agreements. He
recounted that AKLNG had read questions into the public
record pertaining questions about how to execute project
work when there was not a free flow of information. He
wanted a free flow of information, and thought
Representative Edgmon had raised an important question -
whether state legislators would see everything. He thought
it was important for legislators when speaking to those
working on the state's behalf; so as to provide comfort
that the work was proceeding as planned. He discussed the
importance of having an integrated team, and enabling the
spending decision-makers to be able to communicate about
the project particulars. The alternative to alignment and
integration was increased costs.
3:30:49 PM
Representative Guttenberg referred to a course some members
had taken that studied the successes and failures of
megaprojects. He had learned that project managers were a
key component of the success of projects, and described
them as "generalists" who had worked in a variety of
project areas. He suggested that Mr. Butt was currently in
such a position; and would have understanding of why
project decisions were made, changed, and how they came
about. He thought Mr. Butt was well respected and wondered
if he saw himself as the AKLNG project manager for the
long-term.
Mr. Butt was happy to work on the project as long as the
project parties thought they were getting good results. He
reminded the committee that no employee lasted forever, and
that was why there was a succession clause. He felt that
one of the greatest testimonies to the quality of the AKLNG
team was that they did not need him. He likened his job to
driving a Zamboni (making the ice as smooth as possible for
maximum speed); and doing air traffic control (making sure
everyone takes off and lands on time and nobody bumps in to
each other mid-air). He stated that he enjoyed his job.
Representative Edgmon thought the overall project costs
were between $45 billion and $65 billion. He referred to
the Trans-Alaska Pipeline, and recalled that the project
cost eight times more than what was originally projected.
He asked about Mr. Butt's level of confidence in the budget
for the AKLNG project staying within the projected range.
He referred to a presentation by enalytica the previous day
that suggested the project had a greater likelihood of
success if it was closer to the $45 billion level than the
$65 billion level.
Mr. Butt praised the project team, and had every confidence
that the team was comprised of the right people with the
necessary experience. He relayed that the lead party in the
AKLNG project had just completed another project (with a
large gas plant, large LNG plant, and a 600-mile pipeline)
ahead of schedule and under budget. The project had been in
remote and difficult terrain, and the pipeline had crossed
two mountain ranges. He expressed that he had a healthy
respect for the unknown, and it was the unknown that caused
projects trouble. He referred back to the gated process as
a means of driving down cost and ensuring project success.
3:35:47 PM
Representative Edgmon referred to Mr. Butt's mention of
contingency plans and suggested that the supply of LNG was
overtaking the demand. He wondered if there was a scenario
under which AKLNG had to build the project for much less
than $45 billion.
Mr. Butt responded that the project was currently working
on how to take large sections of the cost structure out
without losing any reliability or compromising safety. He
discussed significant recent changes in systems and
materials, through which the team had found a way to save
$1.5 billion from the project cost estimate. Additionally,
the team had found approximately $500 million in savings
through fiber optics, and was looking for more. He relayed
that the pipeline team had found different ways to size and
build the roads, and thought they could cut $1 billion from
the initial estimate for gravel. He explained that the
savings were offsetting pressures from elsewhere; such as
labor (a huge pressure), camp management, personnel
transportation, and pipe acquisition. The team was
continuing to work the process to drive down the costs.
Representative Edgmon referred to an earlier comment by Mr.
Butt that approximated that the pipeline was 20 to 25
percent of the entire AKLNG project cost. He wondered if
the pipeline was the largest cost variable subject to the
most fluctuation.
Mr. Butt responded that every piece of the project had cost
pressures, and the pipeline had large execution risks
(because of the large size and need for so many people). He
thought designs and drivers were commonly areas of big cost
overruns in big plants. He specified that three quarters of
the cost of AKLNG was outside the pipeline. The probability
was that there would likely be cost overruns in the plants
rather than the pipeline. He thought it was important to
get the design correct so there was no cost overruns, and
mentioned the importance of the execution plans. He thought
there had been many similar projects with no cost overruns.
He recounted that all the LNG trains his company had built
in Qatar were built under budget, and all the LNG trains in
Papua New Guinea were built under budget. He reported that
Point Thomson was being built under budget.
3:38:56 PM
Vice-Chair Saddler asked Mr. Butt to discuss the potential
risks and rewards for the state's project partners in
AKLNG.
Mr. Butt stated that if there was true alignment, and the
state put up 25 percent of the project cost, and received
25 percent of the revenues; the parties who put forward 75
percent of the cost would get 75 percent of the revenue. He
mentioned that there would be tax differentials that would
skew the numbers, but he considered a ratio of 3 to 1 to be
a fair estimate of the breakdown between the state and the
other partners. He emphasized having a project system in
which everyone was working together and when prices went
up, there was more profit to share.
Vice-Chair Saddler asked if there were any other benefits
for the parties in delaying the project.
Mr. Butt did not feel qualified to answer Vice-Chair
Saddler's question, but did not see how it would benefit
anyone to delay the project for any capricious reason. He
emphasized that the project parties had put up $430 million
to get the results they had received, everyone had worked
in good faith, and there was investment in Point Thomson.
He reiterated the importance of keeping the costs down, and
moving through the gates; and thought that all the parties
wanted to have enough confidence to get through the gates.
He thought that there were different issues raised by each
of the parties, but the process and the way to resolve the
issues was the same.
3:41:49 PM
Mr. Butt scrolled to slide 7: "Alaska LNG by-the-numbers,"
which illustrated results of some of the project teams. He
wanted to discuss the community outreach events that the
project had engaged in; he thought that there had been over
100 events. Project staff had talked with thousands of
Alaskans and hundreds of Alaskan business on how the
project worked. There had been a lot of positive meetings
with Native corporations, Native villages, and tribal
entities; and he had been pleased by the level of support.
He highlighted the photographs on slide 7; which showed
work on the project, including a recent community meeting.
3:42:57 PM
Representative Gara asked about the purchase of 570 acres
in Nikiski. He recalled debate from the two previous years
about whether or not Nikiski or Valdez would be the
terminus for the project. He wondered if the final decision
had been made on the terminus in Nikiski.
Mr. Butt thought that all parties were aligned on the
terminus location in Nikiski. The site had some very good
geotechnical characteristics. He referred to a book that
would be provided to the committee; which included a
summary of all the sites that were considered, as well as
how the decision was made. He felt that all the partners
were comfortable with the terminus location.
Co-Chair Neuman reviewed the agenda for the following day.
3:44:46 PM
Representative Wilson asked if the committee would hear
from the attorney general.
Co-Chair Neuman specified that the committee had put in a
request to hear from the attorney general on the following
Monday.
HB 3001 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AKLNG Legislative Update 30Oct15 v1 2xBU.pdf |
HFIN 10/30/2015 1:30:00 PM |
HB3001 |
| HB 3001 10.30.15 Governor Walker on AKLNG Authority.pdf |
HFIN 10/30/2015 1:30:00 PM |
HB3001 |
| HB 3001 AGDC Transfer Letter.pdf |
HFIN 10/30/2015 1:30:00 PM |
HB3001 |
| HB 3001 Memorandum on AGDC Authority 10 26 15 (2).pdf |
HFIN 10/30/2015 1:30:00 PM |
HB3001 |