Legislature(2007 - 2008)TERRY MILLER GYM
06/09/2008 10:00 AM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB3001 | TELECONFERENCED | |
HB 3001-APPROVING AGIA LICENSE
SB 3001-APPROVING AGIA LICENSE
CHAIR HUGGINS brought SB 3001 and HB 3001 before the
committees.
QUESTIONS AND REFERENCES TO PREVIOUS TESTIMONY
BY SPENCER HOSIE, ATTORNEY FOR HOSIE, MACARTHUR, LLP
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, provided an
overview of the proposed schedule and the Alaska Gasline
Inducement Act (AGIA) requirements through the existing
authority of the Federal Energy Regulatory Commission
(FERC). He added that the afternoon would be dedicated to
addressing issues regarding the liquefied natural gas (LNG)
economics and success.
REPRESENTATIVE ANNA FAIRCLOUGH referenced a previous
statement made by Mr. Hosie regarding the Cook Inlet gas
profits, which she thought had been inaccurate. He had
stated that Alaska could sell the LNG at whatever profit
rate they choose.
10:09:57 AM
SPENCER HOSIE, ATTORNEY FOR HOSIE, MACARTHUR. LLP,
acknowledged that he had misspoken. He misunderstood that a
federal judge concluded such authorization. He apologized
that he had misspoken; the correct answer is that the State
would have to sell at a Royalty-in-Value (RIV) market level.
They will not be able to sell at above or below the market
price. He did not know what rights the State has if
producers refused to sell or refused to sell at a
competitive market price.
REPRESENTATIVE FAIRCLOUGH noted that the general public
voiced the concern and that she wanted them to know that the
Legislature works within a "perimeter of the law",
especially when dealing with resources in order that they
are equitably available to all Alaskans.
She referenced previous comments regarding producers
bringing to market their gas on reasonable commercial terms.
She referenced a letter generated by Exxon. She inquired
about the definition of the reasonable terms, asking who
would decide what reasonable is in order to avoid litigation
with the Federal Energy Regulatory Commission (FERC) or the
Court system.
MR. HOSIE stated that in the event that a negotiated
resolution is not possible, although the optimal outcome,
the Superior Court will address that concern. Regarding
what is reasonable, the commercial aspect question could be
debated in great length. Case law suggests that there must
be some reasonable amount of profitability. The State does
not have to guarantee a rate of return of 35% (percent); he
estimated the State could expect a rate of return between 8%
to 12%.
10:14:17 AM
SENATOR BILL WIELECHOWSKI requested further discussion
regarding the "duty to produce".
MR. HOSIE explained it would be a duty to produce and
market, turning the resource into cash-money. Cycling the
gas through the reservoir provides no cash for the
resurfaced gas. It would neither be the production of the
resource nor a royalty bearing event. The duty to produce
focuses on how the hydrocarbons yield dollars.
SENATOR WIELECHOWSKI directed his comments to recommended
remedies. He asked if the State should determine a failure
of duty to produce, would damages then be limited to taking-
back the leases and/or loss of revenue to the State.
MR. HOSIE responded that both remedies would be available,
yet he hoped to avoid such an outcome. The proposed process
allows the State to receive answers sooner, requiring the
producers more quickly take a position.
SENATOR WIELECHOWSKI interjected that it is a dangerous
position to be placed into, to be put at risk for litigation
that could last for years and result in lost revenue for the
State.
MR. HOSIE acknowledged that it is a high stakes risk for all
parties. Of course, the producers want to own and control
the gas line on their terms. He referenced the situation at
Point Thompson.
10:17:25 AM
SENATOR THOMAS WAGONER referred to the previous discussion
regarding royalties. He pointed out that the current
regulations were negotiated over 30-years ago, which now
amount to a 12.5% royalty. He questioned how that number
compares to current negotiated royalties.
MR. HOSIE explained that the 12.5% royalty was created in
1959 and that under current standards 12.5% is a very low
rate. Current leasing percentages are at least double that
and around 25%.
SENATOR WAGONER encouraged that negotiations with the major
producers begin, given the "robust potential" of the
project. Those considerations should be used in that
determination.
MR. HOSIE agreed, adding that the State made a deal with the
producers in the 1960's and that the State has honored
living with a 12.5% royalty even when North Slope oil has
been very prolific and profitable for the producers. He
added, the producers have an obligation to produce & market.
10:20:23 AM
REPRESENTATIVE LES GARA referenced a letter member's had
received from Exxon. He emphasized that the producers have
a duty to produce gas and that they can not block an
independent gas pipeline by not placing gas into that line.
He acknowledged that the producers would bring forward a
more formal proposal for the gas line. He questioned if
that information would undercut the argument that the gas is
not economic to produce.
MR. HOSIE affirmed that if the producers take the position
that a gas line would be economic without substantial State
concessions, then they would have the duty to go forward
with the project. The issue is whether the State will be
expected to "sweeten" the pot through economic concessions.
He acknowledged that the Exxon response letter "moves the
ball forward", which he believed recognizes the duty to
produce. If the gas is profitable, it cannot be ware-housed
forever.
10:24:14 AM
SENATOR HOLLIS FRENCH acknowledged that litigation is not
the preferred course of action, however, he realized that
the other possibility of a failed open-season in the face of
high natural gas prices and no bids, could occur. He
inquired what would be different in terms of litigation, on
a produced claim versus the Exxon-Valdez case.
MR. HOSIE acknowledged that there could be a resulting
lawsuit, causing a "black-hole" for Alaska; however, the
manner in which AGIA was written does provide the means to
avoid such a lawsuit. If a third party is willing to build
the pipe line and the producer's contest that, it would
create a different and a more simple remedy and the subject
to that production of the gas, should be reasonably
economic. The lawsuit would be restricted to economics. He
reiterated that AGIA allows the State to bring a short and
simple case and that the issue then becomes not be "if"
there will be a pipeline, but rather "when" and on what
economic terms.
10:27:42 AM
SENATOR CON BUNDE predicted that the moment TransCanada hits
the Alberta line, court suits will result.
MR. HOSIE responded that he had not studied pre-existing
liabilities and the prospect for litigation on that front.
10:28:36 AM
SENATOR KIM ELTON recalled that Mr. Hosie had indicated in
previous testimony that the Alaska North Slope (ANS)
producers want to own and control the gas line. He
mentioned the anti-trust issues that will result. He more
quickly questioned what will happen if the ANS producers
want an equity stake in the TransCanada-Alaska project.
MR. HOSIE explained the risk of down-streaming revenue,
including a production tax and royalty load. If producers
can move the dollar and take it down-stream as a dollar for
pipeline profit, then the profit does not pay royalty or
severance tax. The shifting occurs when the profit is
recognized between the production business to the pipeline,
then the same line of revenue becomes more valuable when the
producers have taken it down-stream. Down-streaming revenue
has been the subject of 20-years worth of litigation in the
lower 48-states. He emphasized that a producer controlled
pipeline could be a "real" risk. If the pipeline is third-
party controlled, the incentives are different.
10:32:01 AM
REPRESENTATIVE CARL GATTO presented a scenario in which the
pipeline is built and in 10 years time when the gas actually
hits the grid, the price of gas is $12 dollars. He
questioned how that could affect the price in North America.
MR. HOSIE could not predict the effect to the cost of gas.
REPRESENTATIVE GATTO recognized that the world will know the
value of the new gas when it arrives. He questioned if
there exists an advantage to those that own the gas to hold
it back.
MR. HOSIE explained it is a different question regarding
whether Exxon needs the gas now, in light of what is
happening with the worldwide production. He reiterated that
Alaska is a safe place to "warehouse" gas.
10:36:20 AM
REPRESENTATIVE RALPH SAMUELS referenced the Amerada Hess
case that lasted for 17 years. He observed that lawsuits
take a long time and that long litigation does not help
anyone. He stated that the TransCanada proposal does not
offer shippers, the necessary protection from cost overruns.
The reality is that the more the gas costs, the more the
company makes. Cost considerations must be addressed.
MR. HOSIE acknowledged that there will be a cost overrun
risk; however, he understood that with the TransCanada
proposal, the risk runs with the shippers. The end question
remains whether given the costs, does it continue to be
economic to ship it. He reiterated the need to avoid
litigation adding that royalty agreements have eliminated
ongoing festering litigation with oil companies as result of
previous litigation.
10:40:26 AM
REPRESENTATIVE SAMUELS reiterated that time is not on the
State's side. Governor Palin believes that AGIA is the best
process, but many legislators believe that time is of the
greatest concern. He commented that both the State and
TransCanada have put their "skin in the game". He asked how
confident Mr. Hosie was that the process would take only two
to three years. He indicated that the State of Alaska's
economy can not "tolerate a ten year delay".
MR. HOSIE emphasized that no lawyer can guarantee how long a
case will take and that the true test of that would be to
ask if the lawyer would be willing to take the case on as a
contingency-fee basis. The goal is to encourage producers
to answer the questions regarding the economics.
10:44:05 AM
REPRESENTATIVE JAY RAMRAS asked about the loss of liquids
from failure to reinject on the North Slope.
MR. HOSIE explained from a duty-to-produce and market
perspective, the evidence is that the gas has to be re-
injected to maintain reservoir pressure; it would not be
economic to produce that gas now. If it is not economic, no
duty-to-produce exists. The issue was not addressed in the
Stranded Gas Act negotiations regarding whether there is
sufficient gas and how the economic value is determined. He
added that if reservoir performance is a "red light issue",
why then does the Denali plan exists. He reiterated that if
for fact the gas can not be off-taken and must be re-
injected to maintain reservoir pressure to insure oil
condensate production, the gas could not be economically
produced. Then there is no duty to produce it.
10:48:21 AM
REPRESENTATIVE RAMRAS understood this is the situation the
State currently is in at Pt. Thompson and that is a failure
in the duty of the producers.
MR. HOSIE clarified that the producers know the reservoirs
and have internal documents that capture those conclusions
on these issues. Under their willingness to move forward
under the Stranded Gas Development Act (SGDA) and with
appropriate concessions, indicates that the producers own
internal analysis, suggests that gas reinjection and high
pressure maintenance is not a gas line problem. He
encouraged "trust, but to verify" all business
considerations.
10:50:24 AM
REPRESENTATIVE PAUL SEATON referenced legal duties
stipulated in the AGIA proposal.
MR. HOSIE encouraged that query be redirected.
10:51:42 AM
AGIA-LEGISLATIVE SPECIAL SESSION, INCENTIVES & MANDATES
FOR PIPELINE EXPANSIONS, JUNE 9, 2008.
(Copy on File)
GREG HOPPER, BLACK & VEATCH, addressed the expansion
principle of the pipeline, explaining that the prospects of
expansion bring the State of Alaska a great deal of value.
He provided an overview of the handout: AGIA-Legislative
Special Session, Incentives & Mandates for Pipeline
Expansions, June 9, 2008. [Copy on File].
He pointed out the most important provisions within AGIA,
address the expansion:
· The bi-annual open season offerings, which allows
the shippers to plan and reduce risk premiums;
· Capital structure certainty, which helps to lower
the rates for the shippers; and
· The rolled-in rates, which share the benefits of
scale economics and levels the playing field.
SENATOR HUGGINS inquired if Mr. Hopper intended to address
in detail, the capital structure certainty.
MR. HOPPER advised that capital structure is regarded as the
combination of debt and equity within the project. As
required by AGIA, the capital structure for the original
bill was 70% debt and 30% equity. For the projects moving
forward, TransCanada (TC) has proposed that the expansion
would be compromised of a 60% debt, 40% equity component.
He maintained that if there were a third party shipper, they
would want to know the potential rate of the project and the
capital structure.
SENATOR HUGGINS questioned which percentage structure would
prevail.
MR. HOPPER responded that TransCanada had submitted the
60%/40%. He could not comment further.
MR. HOPPER noted the benefit to the shippers, which allows
them to plan the drilling and exploration for future
production activities. He defined the difference between a
producer on the pipeline and involvement by a third party.
The producer is the one that is substantially controlled by,
operated or owned by a producer, as compared to a joint
venture or independently owned project.
MR. HOPPER continued:
Development includes:
Cost controls
Operating control, including a seat at the table
Capacity certainty
Expansion timing
Strategic involvement
Expansion includes:
Outlet for increased equity production
MR. HOPPER discussed the concept of investing for a rate of
return; that information had not been included in the
handout. Inter-state pipeline companies as a general rule,
make less money than the producers do. The producers and
shareholders expect higher rates of returns. Research in
inter-state owned pipelines indicates little evidence of
producer owned expansions. He acknowledged that there have
been questions raised regarding the relative comparison of
producer-owned pipelines to the entirety of pipelines in
North America.
11:02:06 AM
MR. HOPPER pointed out seven producer owned pipelines,
measuring a capacity between 3.5 - 8 billion cubic feet
(bcf) per day. Each of those seven had some producer-
ownership interest or was developed by producers. When
comparing that number to the total deliverability, the
inter-state pipeline grid becomes approximately 149 bcf per
day. By and large, producers do not invest in inter-state
pipelines and of the pipelines where producers hold the
majority interest, no expansions were found as proposed. He
continued of the 149 bcf per day delivering pipeline
capacity, serves about 50-70 bcf per day of actual
consumption in the United States (U.S.), which implies there
is more pipeline capacity needed either up-stream or at the
city delivery points.
11:04:29 AM
SENATOR HOLLIS FRENCH requested a memorandum including the
aforementioned figures. He pointed out that there is no
example of a producer-built pipeline, expanding to
accommodate for a third-party shipper, which is a "sobering
consideration" for Alaska.
11:05:42 AM
REPRESENTATIVE MIKE KELLY commented on cost controls if one
of the stipulations for producers was requesting an initial
equity ownership; he asked the statistics.
MR. HOPPER provided two examples:
· The Alliance Pipeline project, internationally
proposed and developed largely by the producers; and
· The Destined Pipeline built for off-shore projects
in Mexico, tying into the inter-state pipeline and
essentially backed by producers in the eastern Gulf
of Mexico.
REPRESENTATIVE KELLY inquired if such an argument could
provide an equity position to the producers for a "seat at
the table".
MR. HOPPER agreed that could happen.
11:09:00 AM
REPRESENTATIVE BERTA GARDNER requested clarification
regarding a previous statement addressing two expansion and
access proposals associated with the Denali project.
MR. HOPPER responded that AGIA provides certainty for
expansion, which does not pertain to the Denali project.
SENATOR HUGGINS inquired if the Denali provisions had been
carried over.
11:11:40 AM
REPRESENTATIVE SAMUELS questioned if any producer had
turned-down opportunities for expansion of third party gas
or if the market place had led to those decisions.
MR. HOPPER was not aware of any expansions, negotiations or
projects, which lead to expansion. The Federal Energy
Regulatory Commission (FERC) website only indicates
expansions currently planned.
REPRESENTATIVE SAMUELS observed that the Alaska pipeline
would be a "monopoly". There are federally guaranteed
protections now in place. He asked if that was an accurate
characterization.
11:13:34 AM
DON SHEPLER, CONSULTANT, GREENBERG TRAURIG, noted that he
would later address the expansion provisions as contained in
the 2004 Statute. He agreed with the assessment made by
Representative Samuels. There is a network happening within
the lower 48 pipelines and with the existing provisions in
federal law, it provides FERC the authority to compel
expansion. An expansion right does not necessarily offer
comfort to a potential shipper.
MR. HOPPER interjected that he had not spoken with the
Denali producers and did not know if the Administration had
already had that conversation.
MARTY RUTHERFORD, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, noted that she had spoken with the Denali
producers. She indicated that ConocoPhillips has stated
that they would not be available for third party enhanced
open-access provisions of AGIA. She offered to follow up on
that conversation with the Denali group.
11:16:13 AM
SENATOR WAGONER recommended a description of the advertised
differences for the public's information.
MR. HOPPER focused on the inter-state pipeline arena,
regulated by the FERC and inter-state commerce. There are
also "intra-state" pipelines that are not regulated by FERC.
Producers now do operate and flow on those systems. He
noted his comments relate only to returns on equity and only
on the inter-state pipelines.
11:18:29 AM
REPRESENTATIVE MIKE HAWKER observed that the issues have not
changed over the past six years with regard to ownership
expansion and restrictions on that expansion. He questioned
if there exists stranded gas from refusal of a producer
pipeline to seek expansion.
MR. HOPPER did not know.
11:20:11 AM
SENATOR HUGGINS referenced cost controls. He asked for
information on those controls that apply to TransCanada with
regard to other producers.
MR. HOPPER indicated that the primary point is that if there
is a "seat at the table"; hopefully, it provides a greater
measure of certainty that the cost of the project would be
driven by design and construction and then provide some
certainty of the best price.
11:22:06 AM
MR. HOPPER reviewed Slide 3: Pipeline V & the Producer
Returns on Equity. He observed that gas pipeline regulated
rates of "return on equity" (ROE) generally recognize lower
levels of operating risks than other industries. The slated
proposals on inter-state pipelines before the FERC,
generally ranged around 14% or less on ROE's. After that
experience, FERC lowered the ROE's based on subsequent rate
cases. In a contract, exploration and production company
shareholders require relatively higher (15% - 20%+) ROE's to
compensate for higher perceived risks.
11:23:59 AM
MR. HOPPER discussed Slide 5: What a producer pipeline's
incentive is to expand pipeline capacity for non-owners.
· ROE's typically will not meet a producer's required
rates of return on capital;
· Potential for increased competition in lease
acquisitioned reserves development;
· Call on capital that is needed for other purposes;
· It is not what they want to do; (core competence)
and
· Regulatory complications.
11:25:53 AM
SENATOR WIELECHOWSKI questioned any producer's incentive to
build a pipeline.
MR. HOPPER referenced Slide 4. He indicated that once the
project is complete, the dynamic changes. The dynamic for
expansion does not carry the same stipulations as the
initial build makes.
11:27:07 AM
REPRESENTATIVE GARA referenced basin control, pointing out
two competing projects:
· TransCanada line, and
· One proposed by the producers.
He asked if it was fair to assume that the pipeline would
provide a lower rate of return than the producers are
accustomed to. If they did decide to build a pipeline, it
would be so that they could control the basin.
MR. HOPPER acknowledged that could be one of the strategic
reasons.
11:28:18 AM
SENATOR HUGGINS questioned if producers commit to a two-year
time frame, could that change the presentation.
MR. HOPPER stated if the producers committed, it would
improve the certainty of other investors operating on the
slope, leaving unanswered the questions regarding the terms
of the expansion.
11:30:01 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, clarified
that the million barrels per day (mbpd) analysis and the
discussion on the presentation would be addressed during an
upcoming scheduled meeting.
11:30:44 AM
REPRESENTATIVE HAWKER summarized that the argument comes
down to what the alternative and regulatory process is
needed to protect Alaska's interest. There are two sides to
that question:
· One clarifies that the federal regulatory process is
sufficient to look out for all parties, and
· The other indicates that they are not able to
protect the State's interest.
11:32:34 AM
SENATOR LYDA GREEN inquired if there would be a time-certain
when a mandatory open-season was inappropriate.
MR. HOPPER acknowledged there would be times when that
system wouldn't work. He added that he was not aware of any
mandatory open-seasons existing in the lower 48 states.
SENATOR GREEN asked if there was a way-out of a mandatory
open-season every two years.
MR. SHEPLER explained that the Alaska Natural Gas
Transportation Act (ANGTA) enacted in 2004, refers to
mandatory open-seasons proceeding forward under that
authority, accompanied with responsibilities. There are a
number of conditions that FERC needs to satisfy and a number
of legal risks for anyone attempting to rely on that
statutory authority to obtain an expansion of the pipeline.
He added that the provision contained in AGIA that the
licensee will conduct an open-season every two years is that
it would be a voluntary and not mandated by the federal
statutes. Except for the federal statutes, which allows for
FERC to compel expansion of the Alaskan pipeline, the rules
do not authorize a pipeline company to accept any contracts
requiring them to expand once the contract is in affect.
Once the pipeline is built and is in service, the only
vehicle would be for them to wait for those contracts to
expire. For an oil pipeline, expansion is not a big issue.
He observed that the difference rests in the interpretation.
SENATOR GREEN stated that response did not clarify her
inquiry. She recommended providing members a "glossary" to
spell out the differences.
11:38:53 AM
SENATOR GREEN inquired if Ms. Rutherford had been referring
to the AGIA open-season.
DEPUTY COMMISSIONER RUTHERFORD explained that she had not
directed her comments specifically to an "open-season"; the
AGIA open-season provisions are a requirement of the
licensee soliciting new gas. If quick gas exists, the State
would respond by quick expansion. Previous discussion
revolved around the commercial terms regarding open-access
provisions such as 30% equity position and expansion with
rolled-in rates. Expansion was not addressed as an
individual element.
11:42:53 AM
REPRESENTATIVE KELLY referred to access issues with
relationship to the major producer's intent on such
developments.
SENATOR HUGGINS acknowledged that all legislators are
supportive of exploration and oil being placed into a
delivery system as soon as possible.
11:45:06 AM
AGIA - PRODUCER INCENTIVES TO EXPAND PIPELINE FOR THIRD-
PARTY SHIPPERS
(Copy on File)
DON SHEPLER, ATTORNEY, GREENBURG TRAURIG, related his
background and experience representing the industry. With
regard to expansion, he noted that the interests of
producers are not necessarily inline with those of the
State. He acknowledged the other motives. He provided a
handout: "AGIA - Producer Incentives to Expand Pipeline for
Third-Party Shippers"
MR. SHEPLER referenced Slide 2, a quote by the Attorney
General to U.S. Congress pursuant to the Alaska Gas
Transportation Act.
MR. SHEPLER identified Slide 3, the "Stranded Gas
Development Act (SDGA) History."
· Draft SGDA contract included the 10 Alaska Natural
Gas Pipeline Act (ANGPA) requirements for expansion
and added 20 more conditions;
· Explorers objected that they were better off with no
contract expansion terms; and
· Draft limited liability company (LLC) agreement
provided that pipeline board representatives owed
fiduciary duties not to the pipeline but to
producers that appointed them.
11:49:40 AM
SENATOR HUGGINS requested that Mr. Shepler provide a list of
the explorers referred to in Slide 2.
11:49:54 AM
MR. SHEPLER referred to Slide 4, the "AGIA History". He
noted that ConocoPhillips alternative proposal provided for
expansion at higher costs to the new shippers than AGIA
basically requires. The Denali proposal provides no
expansion commitments. He maintained that there are
incentives and motivations and that in a producer owned
pipeline, they would not be as motivated to expand their
capacity to make room for up-stream competitive explorers of
other pipelines.
11:52:08 AM
SENATOR BERT STEDMAN asked if there was enough information
available on the Denali project to be able to make a
reasonable comparison.
MR. SHEPLER explained that at this point, the Denali
proposal consists only of a twelve point power presentation
outline. That is all that is presently available.
DEPUTY COMMISSIONER RUTHERFORD commented that in her
conversation with Denali, she was not aware that they had
accepted the AGIA enhanced access provisions. However, she
did have a conversation regarding additional information to
the State for the proposal and the commercial structure; the
information was not available.
SENATOR STEDMAN asked if it was fair to assume that they
would be able to come forward with a reasonable amount of
information to make the comparison. He referenced Page 5,
Paragraph 4, addressing that.
MR. HOPPER questioned the type of comparisons the State
would like to make. One of the comparisons is in regard to
whether or not the applications made and submitted by
TransCanada were complete. He asked for more specificity
regarding those comparisons.
SENATOR STEDMAN commented that "reasonable" comparisons are
the operative word and that the report is over 300 pages
long.
11:56:14 AM
SENATOR KIM ELTON questioned how binding the two year
requirement for an open-season could become.
MR. SHEPLER responded the requirements of AGIA require that
they conduct the solicitations of interest and additionally
require that the pipeline expand in reasonable increments
and commercially safe terms.
SENATOR ELTON stated that given that information, there are
various scenarios in which the State can be reasonably
confident that there could be an open-season occurring at
least every two years. He asked if the definition of
"reasonable" resides only with the pipeline companies.
MR. SHEPLER replied yes, pointing out that an independent
pipeline company could have every economic incentive to
expand.
SENATOR ELTON anticipated a scenario of a partnership equity
owner in the pipeline.
MR. SHEPLER confirmed that possible scenario; however, the
AGIA license requirements would continue regardless of the
ultimate ownership of the TransCanada-Alaska line.
SENATOR ELTON believed it comes back to the term
"reasonable".
12:00:53 PM
SENATOR WIELECHOWSKI referred to the concerns previously
voiced by the Attorney General regarding a producer owned
pipeline.
MR. SHEPLER agreed it could be an issue, which impacts their
ability to get the necessary licensing.
12:02:03 PM
SENATOR WIELECHOWSKI wondered if the licensing would be
denied as the producers attempt to move forward to qualify
for the FERC certification.
MR. SHEPLER did not think so; however, a producer-pipeline
that goes to the FERC for a certificate, will be subject to
a different set of competitive issues. That could prompt
the FERC to attach separate conditions on any certificate
for that project.
12:03:20 PM
SENATOR WIELECHOWSKI asked what would be FERC's role in the
process if TransCanada received the license, moved forward
towards certification and then attempted to get majority
ownership by the producer.
MR. SHEPLER did not expect that FERC would do that. The
AGIA license could survive a change in ownership. If the
company becomes a producer-owned project, the ownership at
that time could prompt other conditions.
12:04:50 PM
SENATOR HUGGINS asked Mr. Shepler to provide a copy of the
above referenced letter. He mentioned the qualifications on
the FERC certificate.
MR. SHEPLER stated that he would not be surprised if FERC
placed conditions on a certificate.
RECESSED: 12:05:37 PM
RECONVENED: 1:41:06 PM
ADMINISTRATION AND TRANSCANADA
[TECHNICAL DIFFICULTIES]
COMMISSIONER GALVIN explained that the afternoon session
would consist of presentations submitted by Ms. Buretta, Mr.
Johns and Ms. Otte. He introduced the speakers.
SHERI BURETTA, PRESIDENT, ALASKA NATIVE CLAIMS SETTLEMENT
ACT (ANCSA) REGIONAL ASSOCIATION AND CHAIRMAN, CHUGACH
ALASKA CORPORATION, PRINCE WILLIAM SOUND, expressed her
gratitude to be representing the ANCSA. Last year, ANCSA
passed legislation supporting the expedited development of
natural gas.
She pointed out the national need for oil, which create
pressure for her people. She noted that Prince William
Sound has stepped up, aware of their possible contribution
to that need. She emphasized that Native corporations are
"coming into their own" and have the ability to take control
of the resources and develop them for all Alaskans. She
indicated that the Native Corporations are supportive of the
Legislature and want to be a part of the process. She
interjected that high prices are an issue for rural areas.
1:48:43 PM
KEN JOHNS, PRESIDENT AND CEO, AHTNA INC., stated that the
pipeline moves through four villages in his area. Ahtna
Inc. is an experienced company and has a history with
pipelines. He thanked the Legislature and was encouraged by
the work done during recent years. He realized there is
statewide opportunity, however, noted the unanswered
questions remaining on the table. He understood that some
of the questions could not be answered until the project was
under way. He encouraged members to look closely at
TransCanada.
1:52:18 PM
REPRESENTATIVE NANCY DAHLSTROM addressed First Nation
issues, asking if Mr. Johns was confident to work with
TransCanada.
MR. JOHNS replied that his area has worked well with
pipeline producers over all these years, acknowledging that
they could have done better, now, there has been more time
and experience addressing the issues.
1:54:04 PM
MS. BURETTA commented that part of the land settlement act
provides private land to the Alaska Natives. She believed
that the process provides more opportunity in land
development. The First Nation groups in Canada are
different from those living in Alaska. She emphasized that
Alaska Natives have taken advantage of opportunities
provided by the federal government.
1:55:47 PM
SENATOR JOE THOMAS asked if their associations had discussed
issues such as the propane off-take in areas like the Yukon
River.
MS. BURETTA affirmed that they had and that the accesses to
the spurs were of greatest interest. Those regions are
"excited" about the opportunities.
1:57:13 PM
SENATOR THOMAS questioned if the Village areas intended to
bid on the work associated with the contracts.
MS. BURETTA explained that each of the Native corporations
are competitors, yet they work collectively. The
opportunities and training for rural Alaskans are enormous
in terms of contracts and jobs and that each organization is
discussing participation.
1:58:50 PM
REPRESENTATIVE BETH KERTTULA questioned if equity had been
discussed.
MR. JOHNS responded that those are internal Administration
talks; those considerations had been addressed during talks
with past members of the Murkowski Administration.
2:03:09 PM
SENATOR WAGONER inquired the type of certification granted
through FERC.
MR. SHEPLER indicated that it is not uncommon for FERC to
issue a conditional certificate, providing authorization to
do the project, fulfilling the other conditions set forth in
the certificate. He anticipated that a project with Alberta
would need to have arrangements in place, to get the gas to
the border and would be included as a condition.
SENATOR WAGONER understood that when a company receives a
certificate from FERC for the pipeline, they could then book
the reserves. He inquired if a company would be allowed to
do that if having only a "conditional" certificate.
MR. SHEPLER did not know.
2:06:22 PM
REPRESENTATIVE SAMUELS indicated his frustration with
testimony provided by Mr. Shepler. He referred to a
technical session held in Anchorage regarding FERC's 2005
public rulings. He maintained that FERC has more influence
over the expansion and building of the pipeline and Alaska's
future. During that technical session, the items that the
Legislature requested were included - each point was
included.
He maintained that the fundamental issue is that the FERC
has tremendous influence and that the State did receive
everything asked for. The protections were put in place in
2005; to hear that now, nothing has changed on those issues
but that those points are not now good enough.
MR. SHEPLER pointed out that in the Lower 48, the more
sophisticated pipeline customers are moving more toward
negotiated rates. He stated that the State has a unique
opportunity to ensure that the FERC regulatory process is
made available for the project. In some aspects, however,
FERC cannot be relied upon. He cited capital structure
issues as an example.
REPRESENTATIVE SAMUELS reiterated that Alaska had received
every point that had been requested in 2005 with FERC.
2:12:50 PM
SENATOR HUGGINS inquired if Mr. Shepler had been a part of
the process referenced by Representative Samuels.
MR. SHEPLER replied he had not; he had been an advisor for
the Legislative Budget and Audit (LBA) Committee at that
time.
2:14:18 PM
SENATOR HUGGINS asked if he had had any influence in the
decisions at that time.
MR. SHEPLER explained that he had been the attorney for LBA
and that they filed a few comments with a focus on rule-
making for the open-season. He recalled they had focused on
the rule-making issues at the time and that the regulations
had not been helpful. He had argued to get the final
regulations changed.
2:15:36 PM
REPRESENTATIVE KERTTULA recalled that the work done with
FERC, three years prior, has provided the current capital
structure.
MR. SHEPLER agreed.
2:16:29 PM
REPRESENTATIVE MARK NEUMAN expressed concern regarding what
TransCanada-Alaska is requesting from the State. He pointed
out that they have requested Alaska to work with the U.S.
government to be a "bridge-shipper" and to reach an
agreement with the ANS producers. He worried about lawsuits
associated with that last request and how long they could
take to litigate. He hoped to see gas on-line by 2018.
MR. SHEPLER referenced previous comments made by
Commissioners Galvin & Irwin and representatives of
TransCanada. He pointed out that TransCanada has not met
the conditions of their application on any of the areas
mentioned; instead, they have clarified that the benefit of
the State's actions. That is not a condition. He
maintained that the previous presentation touched upon
litigation concerns.
2:19:43 PM
REPRESENTATIVE NEUMAN understood that TransCanada expected
the State to evaluate the financial and commercial
feasibility of dedicating significant State resources.
MR. SHEPLER responded that was an "expectation" question
rather than a "condition" on the application question.
REPRESENTATIVE NEUMAN emphasized that these are conditions
that TransCanada has requested from the State of Alaska. He
believed that under contract, TransCanada retains the right
to back out of the license.
MR. SHEPLER stated that Representative Neuman had
mischaracterized the material; he advised that the language
in the application does not establish conditions in the
legal sense that the State must fulfill.
REPRESENTATIVE NEUMAN commented that TransCanada retains the
right to back out of the contract.
MR. SHEPLER emphasized "no", they do not.
COMMISSIONER GALVIN interjected that the Administration has
clarified this concern many times and that legal advisors,
the Administration and TransCanada have all indicated the
exact same thing that there are no conditions placed on
TransCanada's commitment in the application. The statements
read by the representative were in regard to expectations of
the State to consider looking at using the State's influence
over the producers - those are only expectations and are not
conditions that would have the Board of TransCanada to back-
out of the deal without breeching the violation requirements
of AGIA. He stressed that the record is clear.
2:23:37 PM
REPRESENTATIVE NEUMAN noted his confusion.
COMMISSIONER GALVIN interjected that the confusion expressed
by Representative Neuman is a separate issue. Under AGIA,
there is no obligation for TransCanada-Alaska Company, LLC,
to build the pipeline. They are required to get the FERC
certification & if they have the financial backing, they
would then sanction those commitments. The statement
previously read is only a restatement of the AGIA
requirements.
2:25:35 PM
SENATOR LYDA GREEN referred to an earlier discussion in
relation to the power of FERC as the regulatory body
overseeing the project. She questioned if Alaska was an
exception to how projects are handled in the lower 48
states, because of the federal law passed, clarifying what
happens when gas is processed across states into another
state.
MR. SHEPLER agreed that the federal statute of 2004 allows
the FERC to compel the owners of a project to extend new
capital and expand the pipeline under restrictive
conditions. Alaska's pipeline is unique. The authority is
unprecedented and has not been tested in any court. There
exist five to six conditions to discourage exploration. The
problem is that through AGIA, the pipeline has made
commitments that it will do the type of expansion-
solicitation that will encourage producers to make their
drilling decisions.
2:30:39 PM
SENATOR GENE THERRIAULT referred to the FERC 2005 order,
addressing rolled-in rates. When FERC made the ruling, the
State had requested an absolute ruling for rolled-in rates,
instead, the State received rebuttal presumption.
MR. SHEPLER agreed.
SENATOR THERRIAULT added that the State had asked for a lot
that they had not received. The rebuttal presumption
basically means that it can be argued again at yet another
date.
MR. SHEPLER agreed.
SENATOR THERRIAULT continued, through AGIA and the State
partnering with a pipeline company, the State is requesting
that partner to side with Alaska in any future arguments.
MR. SHEPLER agreed.
SENATOR THERRIAULT referred to the "back-filling" occurring
with the AGIA proposal.
MR. SHEPLER acknowledged that was correct. The State can
anticipate the position of the incumbent shippers will take
on the rolled-in pricing. He agreed with how Mr. Palmer
characterized it that given the position of the pipeline,
making it a filing at the FERC, could become the tipping
point. It is a presumption, not a rule. There is no
guarantee of any outcome.
2:32:50 PM
SENATOR THERRIAULT pointed out that the FERC regulation
package was challenged by the producers. Most of the issues
were dropped, however, the challenge remained to mandate
capacity & design changes to the initial line. He stressed
that information is important. He mentioned the diameter of
the pipe proposed for use.
MR. SHEPLER agreed.
SENATOR THERRIAULT questioned where any litigation regarding
pipe could end up.
MR. SHEPLER responded that is a "murky" [area] resolution,
as it has not been challenged on that basis and then applied
in a particular factual situation. The regulation remains
in place.
SENATOR THERRIAULT revisited the 4.5 bcf line that expands
up to 7.2 and the exploration that could start with such an
expansion; however, pointed out that the State is not
assured of that. With an AGIA partner, the State would be
assured because the proposed pipe size is in a 48" line. He
assumed that FERC was attempting to accommodate low-cost
expansions.
MR. SHEPLER agreed that it is not available through FERC but
would be through AGIA.
2:36:01 PM
REPRESENTATIVE SAMUELS asserted that there are no assurances
for an explorer. The bottom line is that the project is up
to the FERC to decide. The assumption is that the State
"won" by getting the rolled-in tariff.
COMMISSIONER GALVIN commented that it is easy to speculate
what an explorer would be more comfortable with, however,
relaying on only FERC rather than the AGIA requirements,
does provide greater confidence in getting the desired
access. Secondly, regarding the "major victory" from FERC
should actually be sobering in terms of the historic
expectation of the actual type of positions taken. The bar
was set modestly. He pointed out that 90% of the discussion
at the meeting had been with regard to what was passed last
year; it does not add anything new with the TransCanada (TC)
application.
REPRESENTATIVE SAMUELS concluded that the explorers will
appreciate the terms of AGIA until it drives their tariff up
by one cent and then they will come forward fighting the
FERC.
2:39:00 PM
REPRESENTATIVE GARA directed comments to AGIA. He stated
that Alaska is sovereign and is not willing to accept just
what the federal government delivers. The State passed AGIA
with that in mind, which he questioned was legal. As a
sovereign, Alaska has an interest in rolled-in rates and by
statute, FERC can only go so far. He pointed out that
Alaska has pushed further. Alaska wants in-state delivery
of gas; FERC does not recognize that, hence, the standard
was established in AGIA. Alaska wants to keep the tariff
rate and toll rate down to encourage production with a 70/30
debt equity ratio. AGIA includes Alaska hire and is not
governed by the FERC. He predicted that there were
complications from adopting greater protections under AGIA
than the FERC will allow.
MR. SHEPLER explained that he was advocating that point.
The State is "best served" by taking care of its own
interests.
AT EASE: 2:41:39 PM
RECONVENED: 2:43:23 PM
THE CHALLENGES IN BUILDING AN ALASKAN LNG CHAIN
(Copy on File).
COMMISSIONER GALVIN explained the structure of the next
presentation: "The Challenges in Building an Alaskan LNG
Chain" with Robert Fenton.
2:45:55 PM
ROBERT FENTON, MANAGING GAS & STRATEGIES CONSULTANT,
outlined his experience over the past four years, in
management, business development and strategy formulation in
the gas models, particularly with LNG. He distributed the
handout to members. [Copy on File].
MR. FENTON referenced Slide 3, LNG as an alternative to a
pipeline:
· Not just a choice between LNG and a pipeline but
between:
· LNG to the illiquid, long-term contracted and in
China's case developing, gas markets of Asia, and
· Pipeline to the deep, liquid, short term-contracted
market of USA.
MR. FENTON referenced Slide 4, which defines placing an LNG
chain together as complex; it varies by market and is
challenging in Asia. He noted that gas in not oil; the U.S.
gas market is different from others and that the LNG market
is challenging-especially into the Asian Pacific markets.
MR. FENTON pointed out Slide 5 highlighting the commercial
contracts critical for viability of the LNG chain to ensure
financing and construction.
· All elements of the chain need to be connected with
legal agreements to ensure that the LNG produced
will be sold over the life of the project,
supporting investment risk.
· It makes LNG development complex and liable to
delays and occasional failures.
Slide 6 demonstrates the producer's view of risk & rewards.
He pointed out that the pipeline (to USA) is simpler by
comparison:
· Single commitment to pipeline capacity of LNG
requires pipeline, liquefaction, ships, and
degasification;
· LNG requires higher level of reserves assurance;
· Assured market off-take;
· Transparent pricing;
· Single gas quality and blending; and
· Producers can act independently and integrate with
the rest of their North American gas sales.
MR. FENTON addressed Slide 7, discussing today's prices as a
basis for commitment to LNG for the long-term:
· Oil today is around $135/bbl;
· New long-term LNG contracts into Asia priced close
to oil parity;
· Implies a significant premium of $9/MMBtu over USA
prices;
· The premium will more than compensate for the higher
cost of an LNG scheme; and
· The divergence of Pac-Rim LNG and USA gas prices is
unlikely to sustain in the long-term fundamental
price projections and Pac-Rim LNG price drivers.
2:51:37 PM
MR. FENTON highlighted the chart on Slide 8 indicating that
the Asian contract prices normally sit above Henry Hub (HH);
however, in some periods they don't. The slide provides the
history of the Japanese LNG costs. The projects tend to be
large & costly with many companies involved. All elements
of the chain need to be connected with legal agreements to
insure that the LNG produced & sold over the life of the
project are a justified investment.
The Asian market has gas quality higher heat content than
that found in the U.S. market. The difference of that
places a constraint on the ability to supply different
markets of the LNG and is associated with additional costs.
He addressed the alignment of the producers and the
complexity of selling the Alaskan gas in the Asian market.
MR. FENTON addressed Slide 9, indicating the rapid market
changes leading to a scattering of prices and renegotiation.
2001-2004:
· Over ten suppliers and potential producers were
offering supply;
· Buyers achieved lower prices & a reduction in the
oil price linkage;
· Price ceilings at around $25/Bbl oil prices in some
contracts; and
· The result was a much lower LNG price and high oil
prices in the new contracts.
2005:
· Return to "sellers market" has strengthened position
of producers;
· Qatar has pushed the LNG price to crude oil parity
at $100/Bbl oil in its most recent deals;
· Wide-scatter of prices opened up by the sudden rise
in oil price; and that
· Virtually all legacy contracts are being
renegotiated.
MR. FENTON pointed out that Slide 10 indicates the Asian
premium is limited by a growing flexible supply:
· In 2007,the U.S. supplied 16 mtpa;
· 50 mtpa of new supply for US, United Kingdom (UK) is
under construction;
· Which could potentially be diverted to Asia; and
· Some Asian premiums will remain driven by security
concerns.
MR. FENTON summarized the key messages of Slide 11:
· LNG project carries significantly greater costs and
risks of delay or failure than the pipeline project
including sale negotiations complex, quantity and
quality constraints; additionally, producer
alignment is difficult to retain;
· The current level of Asian price premium is unlikely
to sustain;
· Producer's have substantial competing LNG interest
in the Pacific Region; and
· Producer's perception of the risk is likely to drive
the preference for the pipeline.
3:09:00 PM
SENATOR BERT STEDMAN directed his comments to the statement
regarding risk exposure and how that would affect the
State's credit. AGIA requires an applicant to go through
the process. He questioned if that process would also work
under an LNG contract.
MR. FENTON responded that all major producers have lead LNG
contracts and are experienced in taking gas and placing it
in inter-state pipelines; however, those producers are aware
that putting an LNG project together is more complex. They
would want to participate in the plans. No liquefaction
plant has been built by a third party. He reiterated that
the companies would want to participate and be assured that
the plant would be theirs to use over the life of the
contract. He directed discussion regarding how to operate
an open-access in a liquefaction plant and who would have
jurisdiction over that. The producers would need to
participate in and controlling the liquefaction plant in
order to have the assurance that an experienced operator was
building it & running it.
COMMISSIONER GALVIN emphasized the point that no one will
build without having financial backing, parallel to the AGIA
track. It would provide getting the gas commitments, to
lead the completion of the project.
SENATOR STEDMAN inquired if the State had "created
something" that would place LNG at a disadvantage.
COMMISSIONER GALVIN replied no, but instead, has created an
equal opportunity.
3:13:45 PM
REPRESENTATIVE SAMUELS referenced Slide 7, asking if there
was a difference in the Asian market between the individual
countries of Korea, Japan and then the others.
MR. FENTON responded that they analyzed the demand and
pricing in the largest markets: Japan, Korea, Taiwan, China
and India.
REPRESENTATIVE SAMUELS asked if each had acted
independently.
MR. FENTON explained that they do act independently,
however, they take their lead and pricing mostly from Japan.
REPRESENTATIVE SAMUELS referenced a $9 dollar premium,
questioning if it is assumed that if the price declines, it
would be because of the price of oil dropped. He wanted to
know at what point it is projected that the premium
disappears.
MR. FENTON responded that he could not predict what
depresses the price of Asian LNG by altering the
relationship of the LNG price to oil. It would need to be a
change to the construction of the formula that would likely
drive down the price of LNG. [Slide 9].
3:17:18 PM
SENATOR THERRIAULT understood that the LNG market in Asia
requires certain British Thermal Unit (BTU) contents.
MR. FENTON noted that all that gas is a high BTU content
LNG.
SENATOR THERRIAULT recalled that there are markets in Asia
that use a lower BTU content for industrial use and power
generation. He inquired the capacity in the Asian market
for the use of a lower BTU.
MR. FENTON elaborated that at present time, all Asian
markets are using the high BTU gas. If they buy low BTU
gas, they add propane to increase the heat, making a higher
BTU. One of the biggest questions now, is in relationship
to what will happen in China, which is potentially a very
large market. It is not clear how China will standardize.
He added that if the State begins to produce LNG, they would
be locked into one subset of the market.
3:20:10 PM
REPRESENTATIVE PAUL SEATON referenced Slide 7 and asked the
comparison between the $9 million British thermal unit
(mmBtu) to the gas pipeline natural gas liquids.
MR. FENTON responded that those numbers address only the
volume of gas sold. For LNG purposes, the value retains
most of the natural gas liquids in. For the pipeline gas
sold into the U.S., those would be stripped out and sold
separately. In an economic comparison between the LNG and
the pipeline, two separate revenue streams are created.
REPRESENTATIVE SEATON wanted to determine if the premium
price value could capture the total value in either Canada
or the U.S. He asked what the $9/mmBtu would actually
include.
MR. FENTON stated that the natural gas liquid (NGL) value
would have to be added back into the pipeline gas option.
He was certain that at the $9 dollar value, there would be
economics favoring the LNG project.
3:23:10 PM
REPRESENTATIVE RAMRAS asked if the U.S. was currently
importing 6 billion cubic feet (BCF) per day of natural gas
and if it was anticipated that by the year 2010, the number
would increase to 20 BCF per day.
MR. FENTON thought that sounded correct and that gas imports
would be increased.
REPRESENTATIVE RAMRAS questioned if all Arctic gas
investments globally are "in trouble", while the equatorial
projects are thriving and robust.
MR. FENTON agreed, noting the challenges in both places.
3:25:38 PM
REPRESENTATIVE RAMRAS requested further elaboration on the
global Arctic gas projects.
MR. FENTON asked if the representative was speaking about
oil and gas Arctic projects or LNG projects. He suggested
it would be difficult to narrow that scope. He referenced
specific projects.
REPRESENTATIVE RAMRAS asked if the Salkin project had come
in on budget and on time.
MR. FENTON replied they had been out of budget by a factor
of nearly 100%, from a $10 billion dollar project to now
over a $22 billion dollar project. That project was two to
three years late.
3:27:55 PM
SENATOR WAGONER referenced the comments made by
Representative Ramras regarding the increase from 6 to 20
BCF by the U.S. over the next few years. He asked how the
U.S. Department of Commerce would react to Alaska selling
gas reserves into a foreign market.
MR. FENTON said he had not discussed that with the U.S.
Congressional delegation but agreed it is an important
discussion to have. He deferred to his colleagues for
additional comments regarding the concern.
COMMISSIONER GALVIN reminded members that there had been
reactions to the reports during the application process. He
noted that Senator Murkowski had indicated concern with the
LNG countries organizing into a gas group - Organization for
Petroleum Exporting Countries (OPEC). He acknowledged that
these are statewide concerns. That is one of the reasons
that the State has determined that an LNG Y-line off the
over-line pipeline would be one of the best opportunities
for LNG in Alaska.
3:30:31 PM
SENATOR WIELECHOWSKI referenced Slide 3, the choice between
the LNG and a pipeline. He asked about the issue regarding
producers making a long-term (20-30 year) commitment.
Comparing the worldwide large investments in LNG, raises
fundamental questions, including the fundamentals existing
in Asia with coal usage and carbon output. He challenged
the manner in which Mr. Fenton presented the scenario.
MR. FENTON explained that there are many buyers and sellers
in the U.S. market. Most gas is contracted for short-term.
He pointed out from the producer's point of view, the risk
concerns that the gas would not be taken. He believed that
the producers need to make a long-term commitment to selling
gas. The producers want to assure themselves of an outlet
for the gas reserves.
Regarding the liquidity of the Asian LNG market, it is not a
competitive market. They are either monopoly markets or a
defacto regional monopoly with a number of suppliers
competing. Contracting with that buyer, the country would
become dependent upon them to absorb that gas in that
market. He acknowledged that there are many investments in
LNG marketplace. He asserted that the Chinese market is
"energy hungry" and warned the world should be cautious in
that market.
3:35:52 PM
SENATOR FRENCH suggested that Mr. Fenton's presentation
"dashes the hopes" of Alaskans who want to see an all
Alaskan pipeline with an LNG export facility in Valdez. He
asked how the proposed Y-Line could overcome the same
political obstacles faced as a stand alone project. He
questioned how the balance could shift with an overland
route to Alberta.
MR. FENTON explained that initially they were looking at the
baseline project; if the State wants to go for the LNG, the
Y-Line would be the correct way to address that.
Additionally, the question regarding federal export is one
of degree.
COMMISSIONER GALVIN recognized the dynamic as the findings
being portrayed as a "death" to moving LNG out of Alaska.
He said it was the important to understand what the findings
were about. He applauded the presentation of Mr. Fenton
regarding the comparison to an overland route, carrying a
better likelihood for success. He stressed that it is only
a comparison. It was never intended by the Administration
for it to be considered an end to LNG. It could be true
that there is someone that would want to use the findings
and portray those as an indication that LNG will not work;
however, that is not the conclusion of the findings.
Analyzing the LNG project, has determined that it is
economic. The question remains in comparison to an overland
route and then which route could bring more value to the
State of Alaska as a first entrance. The overland route
clearly provides more value. A separate issue is whether
LNG is viably economic. He believed that it will be
economic.
3:41:54 PM
REPRESENTATIVE GARA recalled that in January, the
TransCanada proposal had been accepted but the LNG concept
was not endorsed. He worried about the risks associated
with a Canadian project getting the necessary permitting.
He questioned if the Legislative Body was receiving an
objective discussion of the dangers and shortcomings of LNG.
Representative Gara asked what was necessary for that to
happen.
MR. FENTON stated that if Alaska was faced with only an LNG
project, the work already accomplished was not aimed at
reaching a particular conclusion. He did not want to give
the impression that an LNG project would be impossible to
do. In the development of the North Slope project, there is
an enormous amount of gas, with over 30 million tons a year.
The State of Alaska will be able to develop LNG, however,
there will need to be a balance between the pipeline and the
LNG.
COMMISSIONER GALVIN hoped that the subject of LNG had been
properly addressed. He recognized the findings portrayed as
detrimental for getting LNG out of Alaska. He stated that
it is important to understand what the findings are about.
He applauded the presentation given by Mr. Fenton regarding
LNG as a stand-alone project. The presentation indicates
that it is in comparison to an overland route, which has a
better value and likelihood of success. It was not the
Administration's intent for the finding to be in contrast to
LNG. He clarified that the TransCanada proposes a route to
an LNG project, which might not otherwise exist after
identifying all the other factors. It is a comparison issue
and is not the conclusion of those findings. The State will
make a profit. The question remains the comparison to an
overland route, which would provide more value to the State.
He emphasized that the overland route would clearly provide
more value and would be economic for the State of Alaska.
He addressed an export license as a stand-alone project and
that having an overland project could first provides a head
start. The State's conclusion is that LNG is important to
pursue and that the overland route would be the best place
to begin.
3:49:57 PM
REPRESENTATIVE GARA asked how complete an application would
need to be under AGIA. He inquired if they would need the
export license, the ships and the receiving facility.
COMMISSIONER GALVIN addressed the time frame. That was not
an included hurtle in the AGIA application process; the
application process included providing a full project that
had all the commitments required under the law and that
information available by the deadline. There have been a
number of changes for an LNG project, which do not exist for
any overland project. It is important to give weight to
that concept. The differences between the two projects are
still inter-dependent of one another and the hurdle to show
the reserves and being able to sell it as separate from one
another. Whereas, with an overland project, reserves would
have to be demonstrated to reach the market. The market
itself has a different dynamic than the Asian market because
of the long-term contracts and the liquidity, which affects
moving the project forward. It remains a comparison issue.
3:53:46 PM
SENATOR HUGGINS referenced Slide 11 and asked about the
significant greater costs. He inquired if the analysis
includes the incremental costs between the Valdez tide-water
minus the maritime shipping.
MR. FENTON could not determine that amount.
COMMISSIONER GALVIN pointed out that there will be a
forthcoming presentation addressing all the cost issues.
SENATOR HUGGINS noted that Alaska has the longest existing
LNG plant in the world. He requested an overview of the
history and success of those projects.
MR. FENTON stated that they had not studied that project
specifically. The determination was made in regard to the
industry rather than the Kenai project; the project was
developed at the inception of the industry and was one of
the first LNG projects in the world; it operated many years
serving the Japanese market.
SENATOR HUGGINS mentioned the complications in the Asian
market. He requested an overview of that market and how
long the State had been involved.
MR. FENTON was not clear on the request.
SENATOR HUGGINS addressed the State's involvement with the
Port Authority. He directed comments to BG-Group (BG)
involvement internationally in LNG gas. Other than
regulatory concerns, they had hoped to bid under AGIA. He
asked if there had been discussions with that group.
MR. FENTON responded that they had not addressed the
specific project with that group but rather dealt with all
companies. At the moment, BG does not have any sales in
that market. BG has recently taken on the responsibility of
selling LNG to Singapore & a new pre-gas terminal in Chili.
Other than that, BG has no other participation in the Asian
LNG market.
COMMISSIONER GALVIN was not aware of BG providing any
conflicting information on gas strategies.
SENATOR HUGGINS understood that they had contemplated
th
submitting a bid. He recalled that on January 30, the
Administration had committed to examine the LNG course of
action.
4:00:33 PM
REPRESENTATIVE FAIRCLOUGH communicated that the
Administration has put forth a pipeline as an alternative,
which does not preclude a Y-line or LNG. She asked the
consequence to the State of Alaska's liability if they were
successful in the pipeline process application and then
moved to a Y-line or LNG plant concept proposal.
COMMISSIONER GALVIN clarified that a spur line (Y-line) off
the main line would not be in conflict with the TransCanada
proposal.
REPRESENTATIVE FAIRCLOUGH responded that the Y-line is not
the question, but rather if the State is considering
exporting and then creating a Y-line for State gas, how does
the Y-Line extract more and does that benefit the State.
COMMISSIONER GALVIN did not understand the question. He
asked if she was referencing the 500 million cubic feet
(mmcf) per day as a separate project.
REPRESENTATIVE FAIRCLOUGH reiterated that if the State draws
more than.5 bcf and if that was not moving through the
Canadian portion of the line, there could be consequences
with increased tariffs and/or additional liabilities by
drawing more.
COMMISSIONER GALVIN responded that the 500 mmcf issues go
away upon the initial run of the gas line; it is only in
place until the initial commencement of operations. The
issue is in regards to taking more gas out of the stream,
which ends up going into Canada, does the State then loose
value in royalty gas where market value is lower. One of
the concerns is that the State, as the owner of the
resource, is provided opportunities to select which market
is served. Moving forward, the issue of higher-up value
will play a role on the royalty-side associated with that
choice.
The State does not have the ability to dictate where the gas
goes; yet royalty gas is different. It becomes an issue of
evaluation and the complications can be eliminated for those
who make the initial offer on the AGIA line. He noted that
Representative Fairclough had identified a question down-
the-road regarding the Y-line project and what interest the
State has guaranteeing that project makes the maximum return
to the State. Those concerns will be addressed later in the
process.
The findings address the interest that the State has in
providing an access to both markets. The relationship
between the two markets will ebb and flow over the years and
having access to both markets will provide the State's
leaseholders to be able to maximize the opportunities in
moving between those markets. He did not see that as an
issue as to what the State needs to control in the initial
selection but rather the economics in an overland project.
4:07:31 PM
REPRESENTATIVE FAIRCLOUGH explained that the reason that she
had asked the question was because the State is telling
Alaskans that we are not precluding options at this point,
yet if the State does not understand the economics of draw-
down or liability over the bcf per day, it becomes
complicated.
4:07:59 PM
REPRESENTATIVE PEGGY WILSON argued that the State should not
address the possibility of gas moving into China since it
does not meet with U.S. Government support.
MR. FENTON replied that he was not an expert on U.S.
politics. He deferred the question to the Commissioner.
COMMISSIONER GALVIN answered that the query was relevant to
the issues at hand. He recognized that there would be a
negative reaction to China or any place in the Asian market.
The concern about getting an export license is real and
continues to be subject to interpretation.
REPRESENTATIVE WILSON recalled that a gas pipeline through
Canada involves FERC. She asked if they would also be
involved with an LNG line.
COMMISSIONER GALVIN agreed that with a pipeline that feeds
an export line, the direct jurisdictional authority of FERC
would not cover the pipeline at that time; the U.S.
Department of Energy would be responsible for regulating the
export license. FERC is an area of uncertainty because LNG
ends up being a commodity that could serve either the U.S.
or foreign markets. FERC has been somewhat non-committal on
their view of that issue. It was fair to say that if FERC
was not set up in that manner, the Regulatory Commission of
Alaska (RCA) would likely step-in to regulate it in a manner
similar to FERC. At the federal level, there would need to
be an export license from the U.S. Department of Energy,
including much federal permitting along the way.
REPRESENTATIVE WILSON commented that has not yet been
addressed. She thought the process could be difficult if
Alaska was not certain that the gas would move to the lower
48 states. She recommended the subject be discussed.
4:13:38 PM
SENATOR HUGGINS reminded members that for many years, the
State has been exporting gas to Japan and that the State has
endorsed renewing that certificate. He urged flexibility in
the discussion.
4:14:05 PM
REPRESENTATIVE KERTTULA asked if the State had analyzed any
of the reasons why the producers have not yet been providing
LNG from Alaska.
COMMISSIONER GALVIN pointed out that query would be
addressed during the economic analysis.
REPRESENTATIVE MIKE KELLY believed that the State's choice
was either yes or no. He said there is no third option and
that the producers probably are not in favor of the LNG
choice. He noted that there is nothing indicated under the
TransCanada proposal including an LNG Y-line.
COMMISSIONER GALVIN affirmed that was true.
4:16:36 PM
COMMISSIONER GALVIN indicated that the topic of discussion
for the 6/10/08 meeting would be Chapter 3 of the findings
and the back-up material received from Black & Veatch. The
presenters will summarize the high points in the
presentation materials.
BLACK & VEATCH PRESENTATION
4:19:21 PM
SCOTT SMITH, BLACK & VEATCH, provided a historical overview
of Black & Veatch, a company which handles engineering,
construction and consulting worldwide. The primary focus of
the presentation remains the energy & water sectors. He
pointed out he leads the market analysis sector of the
company and focuses on providing commercial and economic
analysis to the energy industry.
Presentation to the State of Alaska Legislature -
Liquid Natural Gas (LNG) Analysis and Results
(Copy on File).
4:21:06 PM
MR. SMITH outlined Slide 2, the key conclusions:
· LNG projects have higher capital costs and therefore
greater risk than a pipeline project;
· Similar to an overland project, price remains the
primary risk to a LNG project;
· LNG projects have positive Net Present Values (NPV)
with base and high LNG price assumptions;
· The 4.5 billion cubic feet per day (Bcf/d) proposal
base case project produces a higher NPV than a 4.5
Bcf/d LNG project; and
· A sustained high oil to gas price relationship is
required for an LNG project to be favorable when
compared to an overland route.
4:25:03 PM
MR. SMITH referenced Slide 3, which outlines the expected
LNG tariffs for the LNG project configurations being
considered. The cash flow is determined by the price less
the volume. Highlighted are four different cases, assuming
the same terms as the TransCanada proposal. Comparing the
tariff to the LNG tariff results in differences related to:
· higher capital costs
· higher fuel loss
· higher operations and maintenance
· higher property taxes
· delayed start date
· higher debt
· LNG shipping
4:28:01 PM
MR. SMITH referenced Slide 4, applying the gas strategies to
the Asian price formula expectations. He stated that price
differentials are the key element to understand whether an
LNG project economics are favorable (relative to an overland
project). The chart illustrates a high LNG case, a base LNG
case, a low LNG case and the wood Mackenzie Henry hub
projection for the years 2008 through 2044.
4:30:31 PM
DEEPA PODUVAL, CONSULTANT, BLACK & VEATCH, provided an
overview of Slide 5, the estimated cash flow for the 2.7
Bcf/d LNG case with positive net cash flow of $103 billion
dollars to the State.
MS. PODUVAL explained the cash flow percentages. She noted
that the State's share of gross grows through time and is
driven by price assumptions. The State's share grows due to
the progressivity and production tax structure. She pointed
out that the percentages of the total share of the cash flow
accrue for the State as well as the producers. Over the
evaluation period, the State only receives 33% of the total
cash flow from the project and the producers receive 21%.
The net cash flow from the project is $1.3 billion dollars.
4:32:49 PM
MS. PODUVAL referenced Slide 6, the estimated cash flow for
the 4.5 Bcf/d LNG case and the positive net cash flow of
$170 billion dollars to the State of Alaska. She stated
that the State has an increasing share and the slide
indicates that amount is 34%, with the producers receiving
20%. The Point Thompson production field will affect those
amounts. The analysis was designed to capture the cash
flow. There are several factors that cause oil and gas
production to be interdependent including the shared
facilities & tax benefits. All the analysis provided at the
meeting represents the impact of the gas line.
4:34:50 PM
REPRESENTATIVE LINDSEY HOLMES asked for further explanation
on the LNG-take that will be available to the State.
MS. PODUVAL explained that the LNG represents the project
developer and is essentially, whomever is building the
pipeline.
4:35:28 PM
SENATOR FRENCH noted that the State is accustomed to seeing
a developer receive a 12-14% rate of return. He asked why a
much higher scenario had been indicated for the LNG.
MS. PODUVAL responded that the return on equity would
continue to be 14%; the 26% is the percentage of the total
cash flow. Because the capital costs are higher, the equity
is earned over a higher rate and so receives more cash flow
from the project.
4:36:10 PM
SENATOR WIELECHOWSKI asked why the 2021 start date had been
chosen. He understood that typically, an LNG line-run is
about seven years or less. He thought that amount of time
will have a tremendous impact on the net present cash flow.
MS. PODUVAL clarified that the projected start date was
actually 2022, which was driven by input from the technical
team. One year delay comes from the fact that it would be
outside the AGIA process and without having the process in
place to approve and get an LNG project started, there is
already a one year delay. An additional year delay is
attributed to the construction time frame. She deferred to
the technical team for further clarification.
MR. SMITH stipulated that the start date would be delayed
until the award of the AGIA project.
SENATOR WIELECHOWSKI reiterated that backing everything up
seven years provides a "huge impact" to the net present
value (NPV).
MR. SMITH agreed, pointing out that one of the reasons for
the higher tariff was the fact that one of the project
delays means that the project will experience higher capital
costs due to escalation. Delays could mean anywhere between
20 and 30 cents in tariff costs on a per year bases,
depending on the capital assumptions behind it.
COMMISSIONER GALVIN added that the technical team, scheduled
to testify at the 7/10/08 meeting, could further clarify
those questions. He noted that if the State can assume a
seven year start date and assume lower costs, then clearly,
the project would appear more economic than indicated on the
charts. The technical team was asked to use the same
schedule and costs used to analyze the TransCanada project
and use that to make assumptions for an LNG project. The
primary drivers are the cost assumptions associated with the
liquid faction terminal. The second part will be the gas
treatment plant.
4:41:27 PM
REPRESENTATIVE GATTO referenced the LNG project; he stated
that 26% seems out of reach. He questioned if it was high
because the liquidification plant costs quite a bit and
offers a different rate of return.
MS. PODUVAL responded that they have the same 14% return on
equity with higher base costs.
REPRESENTATIVE GATTO asked how that would change the
percent.
MR. SMITH clarified that the percentage noted on the pie
charts are not returns but rather percentages of the total
cash collected. The returns would be much lower at a 14% -
15% range because it is assumed that it is already
regulated. The pie chart focuses on the total pot of dollars
rather than how much each party is getting.
4:42:45 PM
MS. PODUVAL referenced Slide 7, the Y-Line - aggregate
project cash flow and a positive net cash flow of $353
billion dollars to the State of Alaska. The dip areas are
times when capital is being spent. The chart also indicates
the share available to the stakeholders; the State carries
43% of the shares with the producers owning 23%.
4:43:54 PM
MS. PODUVAL discussed Slide 8, estimated State net present
value which is substantially positive for all LNG project
configurations being considered. That amount ranges from
$29 billion dollars to $85 billion dollars. The base line
and NPV to the State just for the overland project is about
$66 billion dollars.
4:44:48 PM
REPRESENTATIVE SAMUELS referred to Slide 7, questioning the
numbers indicated for TransCanada. He asked if those
amounts only include where the borders start.
MS. PODUVAL affirmed.
4:45:20 PM
REPRESENTATIVE GARA asked about the range of NPV's.
MS. PODUVAL explained that they represent nominal cash flows
and that they are being added back to the State without
discounting them back to present day.
4:47:14 PM
SENATOR HUGGINS recalled that TransCanada had indicated that
the Canadian government anticipates making $8 billion
dollars from the pipeline over time.
MR. SMITH explained that Black & Veatch did not assume
TransCanada's assumption's or prices. Instead, they relied
upon the technical team expert's opinion regarding capital
costs. Black & Veatch carries a higher capital base assumed
in that analysis.
HB 3001 and SB 3001 were held in Committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|