Legislature(2007 - 2008)SENATE FINANCE 532
04/28/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 125 | TELECONFERENCED | |
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 28, 2007
9:00 a.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
9:00:53 AM.
PRESENT
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Joe Thomas
Senator Fred Dyson
Senator Kim Elton
Senator Donny Olson
Also Attending: SENATOR GARY STEVENS; DAVID VAN TUYL, Gas
Commercialization Team Lead, BP Exploration (Alaska) Inc.;
PATRICK COUGHLIN, Senior Attorney, BP Legal Department;
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 104-NATURAL GAS PIPELINE PROJECT
The Committee heard from a representative of BP. The bill was
held in Committee.
9:00:57 AM
CS FOR SENATE BILL NO. 104(JUD)
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments;
and providing for an effective date."
This was the tenth hearing for this bill in the Senate Finance
Committee.
9:04:47 AM
DAVID VAN TUYL, Gas Commercialization Team Lead, BP Exploration
(Alaska) Inc., introduced himself and began his presentation
which was accompanied by a handout titled "Alaska Natural Gas
Pipeline Project, Testimony on AGIA, Senate Finance Committee,
April 28, 2007" [copy on file].
9:05:54 AM
Page 2
An Opportunity…and a Challenge
· BP wants and needs a successful gas pipeline
[Line graph showing BP Net Production (mboe/d) and
projected production for the years 1975 through 2050 in the
categories of Light Oil, Viscous, Heavy, and Gas. Overlaid
is a line indicating Current decline with continued
investment.]
· Project remains commercially challenged
Mr. Van Tuyl testified as follows.
BP wants and needs a successful gas pipeline project. And
when I say successful, we want that pipeline to be built at
a low capital cost and operated cost efficiently. We
believe that is what is required to make the project happen
and make it successful. Low costs are good for BP and
they're good for the State because it results in lower
tariffs, higher netbacks and more revenues for both the
State and for BP. Also, a low cost project will help
provide incentive to explore for more gas to keep the
pipeline full into the future. That is also good for the
both the State and for BP. The best way to ensure there is
gas exploration in the future is to make sure we get a
pipeline built in the first place, and to get it built for
low cost. This is a hugely important project for BP, for
Alaska and for the nation as a whole. It represents the
largest, known, but undeveloped gas resource in the United
States, and in BP's world wide portfolio. The gas project
itself is important in its own right, but it also extends
the economic life of oil production on the North Slope for
decades into the future. Extending oil production is good
for the State, the nation and for BP. We share the
governor's and the legislature's desire to get a successful
gas pipeline project moving. But it's important to remember
that the project remains commercially challenged. It
requires massive capital investment. It requires even
larger financial commitments to get the necessary financing
in the capital markets to allow the project to advance. If
it was easy, it would be advancing today. But it's not
easy. It's incredibly challenging. The size of this project
alone makes it incredibly challenging and risky.
9:08:13 AM
Page 3
BP Disagrees with Administration's Economics
· Project is nor "wildly profitable"
o Can't separate upstream economics from midstream
commitments
o Economics must be based on the complete project
· Firm transportation commitments must be accounted for in
project economics
o Upstream pays for the midstream
o Without FT there is no project
· Long-term cash generation is highly important
o Cash flow well beyond 10 years remains vital
· Need common understanding of project
Mr. Van Tuyl continued his testimony as follows.
I want to leave you with a point that we do fundamentally
disagree with the way that the Alaska Gas pipeline project
economics have been characterized recently by the
Administration. We have concerns over a number of
statements made by the Administration on the project
economics, but I'm going to limit my comments here to three
key concerns. One relates to the underlying economic
methodology in the assumption that you can somehow decouple
the upstream from the midstream. We'll talk about that a
little bit. There's the nature of firm shipping
commitments, we heard a little bit about this from Fred
Rich the other day and I'm going to talk a bit more about
that. And the importance of not only near term but long
term cash flow in investment decision making.
We are concerned that the economic analysis presented by
the Administration to the legislature can be very
misleading. First, on the topic of economics. Without the
commitment of capital to the pipeline or the huge financial
obligation required for Firm Transportation (FT) for the
midstream facilities, there is no way to realize value from
the sale of gas. It won't happen. Thus, any analysis of the
project that excludes midstream capital and FT is
incomplete. Because these commitments are just that,
they're legally binding commitments, they need to be
accounted for when evaluating project economics. Those
commitments were ignored in the Administration's analysis
of the economics when they split out the upstream returns.
Because that method ignores the FT obligation, the
resulting assertion that the upstream economics are so
robust is patently incorrect. In fact, the upstream pays
for the midstream. It does this through firm transportation
commitments. And so those commitments cannot be ignored.
The second point I want to emphasize is to ensure we have a
common understanding of the nature of these firm
transportation commitments. FT is a binding commitment made
by a shipper to a pipeline company in an open season to
secure capacity on the pipeline for a specified duration of
time at a specified cost. Again, we heard Fred Rich talk
about this the other day. Now, there's a few important
facts to be clear on about FT. Again, as I said, FT is
binding legal obligation. It becomes binding once certain
conditions are met, and one of those conditions is the
pipeline coming into operation. We have heard the
Administration claim that the producers say that FT is
"exactly like debt". I'm not aware of any of us having said
that in testimony. Long term commercial commitments like FT
are often characterized as "debt-like", and therefore they
have to be reported to the SEC, and we do report these long
term commercial commitments to the SEC. But that's not the
core issue of how they're accounted for.
The core issue is whether those FT commitments require the
producers to absorb the substantial majority of the risk
associated with the project. FT is a financial obligation,
and it is certain that the lenders would have recourse to
the financial security provided by the producers' FT should
the pipeline company fail to meet its obligations. Because
of that, FT, again, can't be ignored if a project is to be
evaluated properly. Generic statements about treatment of
long term commercial commitments is dangerous. Commitments
of the magnitude required to underpin this project are
massive in both the dollar amount and the likely duration.
These commitments will create their own weather in the
financial markets just because of their size. They have to
be considered.
The third and final point I wanted to emphasize is
confidence in future cash flows is very important to
investment decision making. That is particularly true for a
commitment as large as the one that we're facing with the
Alaska gas pipeline project. The Administration suggested
that cash flows beyond 10 years are relatively unimportant
in financial decision making on this project. That's just
not true. Cash flows further out in time do have less
effect on net present value due to discounting, I mean that
is true. But cash impact years into the future will indeed
be real. And in evaluating the economics of projects, BP
looks at many different measures, including net present
value, internal rate of return, productivity index, the
things we heard the Administration talk about. Those are
some of the measures which are considered. But the ability
of a project to generate long-term cash flow is also an
important consideration to investors. It's important to
bear in mind that we expect the FT commitments we just
talked about will be in effect well beyond 10 years. So
those making those commitments want to make sure that
they'll be able to make good on them. Lenders will want to
know that, too. Getting this project right has enough
challenges of its own, let alone when we have such
fundamental disagreement with how the project is
characterized.
9:14:17 AM
Page 4
What is so important about FT?
· Firm Transportation commitments (FT) by the resource owners
are needed for a gas pipeline company to get financing
o "No customers, no credit, no pipeline" (TransCanada)
o "No producers, no pipeline" (Enbridge)
· FT is a binding financial obligation
o Not simply "committing gas to a pipeline"
· Requires multi-billion dollar commitments by resource
owners
o Assuming 4.5 bcfd, $3.50/mcf, 25 year term……$144
billion
· Long term commitments represent real risk
o Two risks:
ƒPrice risk (over time, market price will not
cover FT cost and produce an acceptable return on
the investment)
ƒSupply risk (will not have sufficient gas to use
the FT commitment over time)
o Risk is borne by those making the commitments
Mr. Van Tuyl explained this page as follows.
FT commitments are typically obligations to "ship or pay"
made by the resource owners or the "shippers", and they're
needed by the pipeline company to get financing. Just to
validate how important they really are, we've heard some
very simple and straightforward comments from pipeline
companies who have testified in the past few weeks, and
they're shown here on the slide. TransCanada said "No
customers, no credit, no pipeline". Enbridge put it perhaps
even more simply: "No producers, no pipeline". I don't
think those are "political" statements. They are simply
statements about the simple financial truths of a gas
pipeline project.
FT is a binding financial obligation. Sometimes I've
sometimes heard FT described as "committing gas to a
pipeline". Kind of a short hand reference. And I've heard
that quote from industry as well as others, so I'm not
pointing fingers at anyone in particular here. But I wanted
to make it clear that FT is a financial obligation. It's a
commitment of dollars, not a commitment of gas. It's
typically a "ship or pay" obligation, and that means that a
shipper commits to pay the pipeline company for use of its
service whether or not it actually ships gas. It's also
important to note that a company doesn't have to have any
gas resources to enter into a firm transportation
commitment. Any company who meets the creditworthiness
standards set by the pipeline company is free to bid for
capacity in an open season. Gas pipelines are "open
access", and anyone is free to obtain capacity if they make
those requisite commitments.
The scale of the commitments is often oversimplified. It's
not "just" the capital cost of the project, if that weren't
enough on its own, being a twenty, thirty whatever billion
dollar commitment it might be. The commitment is for the
"demand charge" which is the cost of service the pipeline
will charge through time. Capital is one major component of
the demand charge. For illustration, I've shown on the
slide some broad assumptions to put the scale of these
commitments in perspective. If you assume you have a 4.5
billion cubic foot a day pipeline, that the charge is $3.50
per thousand cubic foot, and you have a 25 year term for
the commitment, and you do the sums it's a $144 billion for
the firm transportation commitments in total. That's a huge
sum, even for a company the size of BP.
Again, these long term commitments are just that. They're
commitments. Therefore, they represent real risk. That risk
can manifest itself in a couple of ways. There's price
risk. The price can drop in the future, the price of the
commodity in the market, such that the costs of these
commitments isn't covered. Does that relieve you of the
commitment? No, it doesn't. The commitment exists. The gas
supply on the upstream might be insufficient also to be
able use the capacity that's been committed over time.
That's another risk. The size of these commitments
magnifies that risk. And again, the risk is borne by those
that make those commitments.
9:18:09 AM
Page 5
Project Risk Resides with the Resource Owners
All risks are either borne directly by the resource owners
or passed to them via the market or the toll.
[Flow chart depicting the Price Risk of Natural Gas
Markets, market volatility; the Fiscal Risk of Government,
Change in fiscal terms; the Production Risk of Reserves,
Volume and deliverability risk; and the Toll Risk to the
Pipeline Company, including the Fiscal/Schedule Risk of
Governments/Regulators, Regulatory delay & fiscal terms;
the Cost Risk of Materials and Construction, Material,
labor, equipment costs; and the Finance Risk of Capital
Markets, repayment risk.]
Those bearing a risk are commercially motivated to manage
that risk
Mr. Van Tuyl spoke to the flow chart as follows.
What this slide attempts to show is that risk is ultimately
allocated in a major resource development project like the
Alaska Gas Pipeline Project, and how it all basically
starts with the resource owners. And I'll walk through this
one step at a time. First, we start with the resource
owners, and that's of course folks like the State of
Alaska, and it includes the lessees, like BP, Conoco-
Philips, Exxon Mobile, Chevron and others. Now there's
certain risks that are inherent with the resource itself.
There's things like price risk, which we just talked about.
We're in the business of selling a commodity like natural
gas. There's always the risk that the price of gas will
fall in the future, and it may even fall below the cost of
the tariff to deliver it to the marketplace. But that's a
risk we're in the business of managing. There's also
production risk. We need to be able to deliver the volume
of gas to the pipeline on a day-in and day-out basis, every
day, and then over time we need to make sure we can keep
the pipeline full over the life of the project. And again,
those risks are important consideration when considering
making these firm transportation commitments.
There's another risk for a lessee and that's fiscal risk.
There's the risk that the fiscal terms on the upstream
business might change over time. On major infrastructure
projects like the one we're talking about here, all around
the world, it's not uncommon for host governments to
address fiscal risk through a mutually agreed framework.
There's a whole host of risks that we commonly think of as
associated with the project itself. Those are thing like
regulatory risk, if the regulatory process changes it could
result in delays, and schedule impacts and what not.
There's cost risk associated with the materials required to
build the project, and labor costs and project management
and execution. Ant then there's finance risk. The ability
to go out to the capital market and d actually get
financing for your project. Again that was a topic of
discussion Fred Rich talked about at some length in that
finance workshop.
I guess what is critical to appreciate here is that all
these project-related risks that are taken by the pipeline
company and then are ultimately passed through via the toll
to the resource owners. The pipeline company receives a
regulated rate of return. It gets a reasonable return on
its investment that's commensurate with the risk that it
takes. In exchange for being rewarded with that regulated
rate of return, the regulators ensure that the pipeline
company does not take on certain risks. And instead those
are passed through to the resource owners. And that's how
the risk/reward balance is struck by the pipeline
regulators. So ultimately, virtually all risks are either
borne directly by the resource owners, or passed through to
the resource owners through the toll. To ensure a low cost
project, we think it's important that those that bear a
commercial risk are able to manage that risk. They are the
one's that are commercially motivated to ensure that that
risk gets managed downwards.
9:21:51 AM
Page 6
BP Messages on AGIA
· AGIA needs significant modification to result in a
successful project
· As drafted, BP will not be able to submit a bid under
AGIA
· As drafted, it is difficult to envision circumstances
that would allow BP to make a firm transportation
commitment to a licensed project under AGIA
· Why?...
o Negotiated rate production unavailable upon
expansion
o Subsidization of competitors is commercially
unreasonable
o Resource terms insufficient to justify FT
commitment
· BP intends to bid if AGIA is appropriately modified
Mr. Van Tuyl continued his testimony as follows.
I'd like to turn to some of our specific comments on AGIA.
I guess to put it clearly and succinctly, AGIA needs
substantial modification to result in a successful project.
And I'll go into some detail as to the modifications we see
as necessary. As we've said in previous testimony, we agree
with the Governor's intent on using AGIA to advance a
successful project. But the current version of AGIA won't
get us there. I'll explain why again in a moment.
I want to be very clear with BP's evaluation of AGIA as
it's currently drafted. Simply put, BP won't be able to
submit a bid that conforms to the requirements of AGIA.
It's not easy for me to say that. Because BP really does
want to be able to compete in the AGIA process. BP wants to
help deliver a successful Alaska gas pipeline project. We
think we can add significantly to the success of the
project. If AGIA is fixed, we intend to bid. We're happy to
have our bid openly evaluated along with others. But the
current terms of AGIA won't allow that to happen.
I also want to be very clear about the implications the
current version of AGIA holds for BP participating in an
open season. As currently drafted, it's difficult to
envision the circumstances that would allow BP to make a
firm transportation commitment to the licensed project
under AGIA in an open season. And that's true even if a BP
affiliate was the licensee. Why is that? That's because BP
believes the terms of AGIA put unreasonable commercial risk
on initial shippers. AGIA removes negotiated rate
protection. Those are protections from potential cost
overruns, from subsidization of expansion shippers, and the
ability to gain long term certainty of future rates. Now
there is language in the bill that now references the term
"negotiated rates" but it doesn't actually provide rate
protection for initial shippers. AGIA doesn't provide the
fiscal certainty also needed to justify the massive, long
term firm transportation commitments necessary for a
successful project.
I'm not trying to be dramatic, or issue any kind of a
"threat". I'm just trying to be very open, and transparent.
We owe that to you because there is so much at stake.
9:24:37 AM
Page 7
Key Concerns Preventing BP Bid Under AGIA
In the order they appear in SB-104
· .130(2)(B)/ .210 - "Detailed" description of design
requires substantial customer consultation,
engineering
o FERC Order 2005 requires "god faith estimate"
· .130(2)(C-D) - Can't "demonstrate" economic viability
o "nobody can say today whether this project is
economic or not" (Mid-American Energy); need
bottoms-up cost and revenue estimate
· .130(7) - Requires subsidization of competitors &
eliminates negotiated rate protections
o contrary to ANGPA & FERC rules
o imposes unreasonable commercial risk
· .130(13) - Commitment to reserve capacity for in-state
delivery points, regardless of open season outcome
o imposes unreasonable commercial risk
o not consistent with FERC Order 2005
[157.34(c)(8)]
· .150(a) - Release of proprietary information to
competitors after license award creates huge exposure
Mr. Van Tuyl detailed how the provisions listed on this page
would prevent BP from submitting a bid under the current version
of AGIA.
While we have several concerns with AGIA as drafted, we've
tried to hone this list only to the most significant
concerns that we have that would prevent us from submitting
a conforming bid. I'm not planning to walk through each of
these in detail, but I'll explain a few of them to give you
a sense of our concern. They are arranged in the order they
appear in the bill, they're not in any sort of rank order.
For example, in section 130 paragraph 2 parts C and D, we
think it's impossible, the bill calls us to "demonstrate"
the economic viability of the project, and we think it's
impossible to "demonstrate" the economic viability of this
project within the AGIA timeframe. I mean we can make good
faith estimates based on assumptions, but we don't have a
detailed cost estimate. I mean, it took eighteen months and
$125 million to come up with the detailed cost estimate. It
was actually a preliminary estimate, that we did back in
the 2001, 2002 timeframe. In fact, Mid-American in their
testimony about a month ago acknowledged that conundrum,
saying that nobody can say for sure that the project's
economic.
Another one, the next one down, we've provided substantial
testimony in the past about section 130 part 7, paragraph 7
about AGIA as drafted requires subsidization of
competitors. If we intended to be an initial shipper, upon
expansion, this provision would require us to subsidize our
competitors. It actually eliminates protections of
negotiated rates. We think those provisions are in conflict
with FERC policy, as we've talked about under Order 2005,
and under the Alaska Natural Gas Pipeline Act, which talks
about it does talk about rolled-in rates and again, our
problem isn't with rolled-in rates. Our problem is with
subsidization. There's a couple of important objectives
that are highlighted in FERC Order 2005. One was providing
incentive for future expansion, but it also says there's
two of them. One of them is to provide rate predictability
for initial shippers. And this provision ignores that
important objective.
Another one on down the list is section 150. AGIA as
currently drafted would require the release of the
successful licensee's proprietary information. We would
hope to be able to make a very complete bid that included
quite a bit of data so that the State could analyze that.
Technical data, talk about new technologies that we've
worked on, our strategies plans, rate making strategies,
you name it. AGIA as drafted would require the State to
release all that information to our competitors upon being
awarded the license, which we think is commercially
unreasonable. There's some more concerns on the next page.
9:27:56 AM
Page 8
Key Concerns Preventing BP Bid Under AGIA
In the order they appear in SB-104
· .200(a) - Must accept FERC certificate despite
conditions
o could add significantly to project cost
· .200(b) - Must sanction project within one year of
FERC certification, regardless of cost
o failure to sanction results in loss of all data
to state (engineering, design, contracts,
permits, etc.)
· .230(a)(2)/.210 - In breach if substantial deviation
from plan set out in application
o Unless it increases NPV, is ordered by AOGCC or
isn't foreseeable
o FERC, BLM, municipal agencies, Canada, etc. could
require changes to project specs outside state
control
· .240(c) - Effectively no way to abandon an uneconomic
project; licensee subject to damages
· .310 - .320 - Fiscal terms insufficient; risk of no FT
customers
o "no customers, no credit, no pipeline"
(TransCanada)
Mr. Van Tuyl continued to address BP's concerns with AGIA as
follows.
Under 200a, this would require the licensee to accept a
FERC certificate despite potential conditions FERC might
impose, which is commonly done by FERC on issuing a
certificate. They'll issue a conditional certificate and
say "you need to address certain things." We don't know
what those conditions might be, we don't know what the
disposition of FERC might be at the time. Those conditions
could significantly add to the project cost, and if the
FERC knows that we have to accept that certificate, what
motivation will FERC have to, typically there's a
consultation period where you can work that out. If FERC
already knows that we have to accept that certificate, then
that certainly impacts the bargaining position.
The next item then, once the FERC certificate's issued the
project itself has to be sanctioned within one year,
regardless of what the cost is. Again, we don't know what
the cost of the project's going to be today. So, this would
require up to go forward with the project potentially one
that would lose money for the State and for the investors,
and we don't think that's commercially reasonable. And if
we didn't, then the breach would, that would be a breach.
Failure to sanction would result in turning all of our data
over to the State.
Another item that we've talked about quite a bit in
testimony is the last one on the page about the fiscal
terms. It is encouraging on one hand that AGIA does
recognize certain of the resource risks to the lessees,
things like RIV RIK switching, royalty valuation but the
terms as they're addressed in AGIA just are not sufficient
to justify those firm transportation commitments. We think
there's a real risk as a result that potentially no FT
commitments could be forthcoming, like I said. It's hard
for us to envision BP making FT commitments under this
current for of the bill.
9:30:08 AM
Page 9
How AGIA can help deliver a successful project
· Address areas of key concern listed on prior slides
· Allow applicants to respond to State's objectives
o Prescribing solutions up front will not result in
the best project
· Avoid exclusivity to ensure a pipeline gets built
o Even as amended, AGIA creates exclusivity
o Federal model encourages competition in the
marketplace
· Address fiscal terms to encourage FT commitments
needed for a successful project
o Allow resource owners to make offer in bid
· Allow due process of appeal, remove potential Order
2004 conflict, other clarifying edits
Mr. Van Tuyl testified as follows.
A number of modifications need to be made. Those ten areas
of concern that we just highlighted would need to be
addressed and fixed. And as we've discussed in every
testimony on AGIA we've offered, there are three other key
areas that we think also need to be fixed. First, we think
the State should provide its list of objectives that
prospective applicants must address. BP, and other
applicants, should be allowed to tell the State how we
would address the State's objectives. That's how the best
solutions are developed - through creative thought, not by
presupposed outcomes. Second, we think AGIA should remove
elements of exclusivity. Now, an amendment was made in a
prior committee to try and address that concern, but even
with the amendment language, AGIA still creates
exclusivity. And exclusivity prevents competition in the
marketplace. The federal model that we have under federal
law and FERC works well. It encourages open competition in
the marketplace. It works everywhere else in America, and
it will work for Alaska as well. Third, as I just spoke on
the other slide, fiscal terms have to get solved in a way
that will encourage firm transportation commitments from
shippers. We would like to have the opportunity to include
fiscal terms in a bid under AGIA that the State can
consider, and it can reject if it likes, but at least we'd
have an opportunity to make a bid. We'd like the
opportunity to submit a bid under AGIA. Finally, there are
other edits, less fundamental than the ones I just
mentioned that we think also should be addressed.
9:32:13 AM
Page 10
· BP's Vision for Alaska
· BP has a long history in Alaska…
· ….and we look forward to a 50-year future
· That future is only possible with a gas pipeline
· BP wants to bid under AGIA and hopes it will be
modified appropriately
[Line graph showing BP Net Production (mboe/d) and
projected production for the years 1975 through 2050 in the
categories of Light Oil, Viscous, Heavy, and Gas. Overlaid
is a line indicating Current decline with continued
investment.]
Mr. Van Tuyl provided the following testimony.
To close, I'd like to spend a moment to look into the
future and consider again the opportunities that we have
before us. BP has a long history in Alaska. We've been
actively involved in the exploration, development and
production of Alaska's North Slope energy for decades. We
see the opportunity for a bright future ahead. In fact, we
talked about our 50-year future. And it's not just a
slogan. If you look at this "green mountain chart", as I've
heard it referred to, it shows the possibility of the
future that BP sees for Alaska, this is just shown as BP's
net share of production through time. A couple of things we
can draw, of course, here we are in 2007. Those days of
high plateau production are behind us. We still have a
significant amount of production today, but that
production, too, will continue to decline with time. It's
kind of hard to see on the graph, but there's a dotted red
line that shows the current rate of decline at six percent,
but that has the historic level of investment built into
it. It requires a significant level of investment just to
achieve that level of production. We can make up for that
decline with new investment that would result in new
production from things like heavy oil resources, that's
shown in Viscous in yellow, the heavy oil in orange, huge
resource on the Slope untapped. And then of course there's
the known gas resource, which is shown in red. But none of
this is a given. It's a vision of what's possible. That
future is only made possible with a successful Alaska gas
pipeline project.
9:34:18 AM
Page 11
What A Successful Gasline Means
· Jobs for Alaskans
· Additional revenue for future generations
· Increased economic activity
· New businesses created
· Long term gas supply opportunity for Alaskans
· A more diversified economy for decades
[Map of Alaska, Canada, and the Continental United States,
with arrows indicating the path of the gasline traveling
2100 miles from the North Slope to the Alberta Hub, then
1500 miles to the Chicago Hub.]
Mr. Van Tuyl concluded his presentation as follows.
Again, it's not just any pipeline project that we need, we
need a successful gas pipeline project. It's a project of
tremendous scope and scale and that's what this picture in
the lower left-hand part of the graph reminds us of.
Because of that scope and scale, it presents tremendous
risk. But if it's done right, it also presents a wonderful
opportunity for the State, for the industry and the people
of Alaska. Because there is much at stake, we need to get
it right. The project creates opportunity for jobs for
Alaskans, and if we deliver that successful, low cost
project, the opportunity for revenues to the State and to
industry well into the future. In fact, we have an
opportunity here to create a whole new industry of gas
exploration with a successful, low cost project. Gas
exploration and expansion are only possible if the pipeline
gets built in the first place, and if it's built for a low
capital and operating cost. That will make it attractive
for bringing new volumes into the project, which benefits
the State, gas explorers, and initial shippers as well. A
successful gas pipeline project will provide the
opportunity to bring a long term gas supply source for use
by Alaskans right here at home. And finally, gas sales will
diversify Alaska's economy for decades into the future. As
I said, there's a lot at stake, so we need to get it right.
BP wants to get it right. That's why we've tried to be very
forthright and specific with our comments. We owe that to
you as you finish your deliberations on AGIA.
AT EASE 9:36:23 AM/9:45:19 AM
Co-Chair Stedman referred to the decrease in gas production
depicted on the "mountain chart" on page 2, and asked if that
graph was based only on known reserves.
Mr. Van Tuyl affirmed that the chart based all resource
projections on known reserves without consideration of
exploration potential.
Co-Chair Stedman referenced page 4, and asked if the $3.50
figure in the third bullet on that page was related to the
tariff rate.
9:48:08 AM
Mr. Van Tuyl responded that the tariff rate or the demand charge
could not be predicted. The $3.50 rate was provided to
illustrate the FT commitment. The three major producers in
Alaska conducted a cost study in 2001 through 2002 and arrived
at an estimated $20 billion total project cost, and a toll of
$2.39 per thousand cubic feet. Producers had not conducted
another cost estimate, but project costs had undeniably
increased. The rate of $3.50 was "half again as much" as the
rate estimated in the 2001 study.
9:49:32 AM
Co-Chair Stedman assumed that the rates reflected nominal
dollars and were not discounted to present value.
Mr. Van Tuyl understood that the $2.39 figure incorporated
nominal dollars, but would verify that. The $20 billion cost
estimate was calculated in constant dollars.
9:50:11 AM
Co-Chair Hoffman suggested that the same bullet point revealed
"great potential". Price fluctuations from $3.50 to $6.50
demonstrated the potential for large revenues to the State, the
pipeline owner, and the resource owners.
Mr. Van Tuyl admitted to the potential for profit in the gas
market, but stressed that the project was not without risk due
to unpredictable market fluctuations.
9:52:00 AM
Senator Huggins noted the reference Section ".200(a)" on page 8
of the presentation. BP testified that it objected to that
provision of Section 43.90.200(a), and Senator Huggins asked how
the provision could be "fixed" without putting the State at
risk.
Mr. Van Tuyl would work on solutions to the concern regarding
this subsection. The concern was the subsection's mandate that
the licensee accept the "unknown".
9:53:31 AM
Co-Chair Stedman asked for an explanation of the subsection.
Senator Huggins cited Section 43.90.200. Certification by
regulatory authority and project sanction on page 14, line 9 of
the bill.
Mr. Van Tuyl clarified that BP was concerned that this section
required the licensee to accept the FERC "conditioned
certificate" without knowledge of the conditions of the
certificate or other factors, such as total project cost.
9:54:53 AM
Senator Huggins anticipated two or three recommended solutions
to the issue. He next referenced Section 43.90.240(c) on page
18, and expressed his understanding that BP did not support the
use of arbitration in determining that a project was uneconomic.
Mr. Van Tuyl affirmed.
Senator Huggins requested BP provide "fixes" to this perceived
problem.
Mr. Van Tuyl described the concern associated with subsection
(c) as the requirement for use of an arbitration panel to
resolve differing opinions of whether the project was
economically viable. The panel could determine a project was
uneconomic only upon a finding of inadequate credit support and
after the licensee had demonstrated that the project was
uneconomic based on projected gas sales revenue and upstream
investment. He asserted that neither of the requirements under
this subsection were "provable".
9:58:19 AM
Co-Chair Stedman announced that a representative from the Palin
Administration would be asked to address these issues at a later
date. He reiterated the request that BP provide "reasonable
solutions" to the Committee to attend to the company's
identified trepidations.
Senator Huggins thanked BP and Mr. Van Tuyl for their
"specificity and candor".
9:59:41 AM
Co-Chair Stedman indicated items of concern that the
presentation had not specified, such as the five year extension
for "no credit".
10:00:08 AM
Mr. Van Tuyl clarified that the list represented a sample of key
concerns that would prevent a BP bid under AGIA. BP had other
issues with the bill, including the five year extension. He
pointed to page 9 for a listing of additional general concerns.
Co-Chair Stedman asked for more explanation of the items on page
8.
10:01:25 AM
Co-Chair Hoffman relayed "major concerns" of the previous
legislature regarding the "freeze" on oil and gas taxes
contained in the proposed contract negotiated between the
Murkowski Administration and BP, Exxon Mobile and Conoco
Philips. He asked BP's position on the rate structure contained
in AGIA, and the location in the bill that the issue was
delineated.
Mr. Van Tuyl expressed that the tax rate remained a key concern,
and was addressed on page 8 in the presentation in the bullet
labeled ".310/.320" generally as "fiscal terms insufficient". He
recalled the debate by the legislature and in the public, and
indicated BP's willingness to further explore the issue.
10:03:26 AM
Co-Chair Hoffman opined that the issue of FT commitments posed a
"major stumbling block" in the negotiations between the State
and producers. He asked if BP could prioritize its concerns with
the AGIA legislation.
Mr. Van Tuyl answered that each item must be addressed, and that
the list provided in the presentation was chronologically
arranged in accordance with the bill.
Co-Chair Stedman informed that the "fiscal terms" of the bill
referred to a ten-year period, but was contingent upon
participation in the first binding open season. He asked if that
provision was of concern to BP, or if it planned to participate
in the first open season.
10:04:52 AM
Mr. Van Tuyl did not expect BP would participate in the first
open season under the current proposal because of the fiscal
terms, the risk associated with the FT commitment, and the
removal of negotiated rate protection through the employment of
rolled-in rates. BP expected the FT commitments to extend 20 to
30 years, and would not likely commit to a long-term FT without
a corresponding guarantee on the tax rate for the life of the
FT.
Mr. Van Tuyl pointed out that AGIA addressed only the tax rate
without regard to other elements of State take. He expressed
approval that the proposed legislation indicated that "RIV/RIK
switching" would need further attention and amendment.
10:07:11 AM
Co-Chair Stedman asked the definition of "RIV/RIK switching".
Mr. Van Tuyl defined RIV/RIK as "royalty in value royalty in
kind". He informed that under the current proposal, the State
had the option to take its royalty in the form of gas or as a
monetary payment. This arrangement could cause problems of
capacity and supply for the pipeline owner if the State
"switched" between taking its royalty in value or royalty in
kind.
10:09:04 AM
Co-Chair Stedman understood from previous comments that the
issue had been resolved.
Mr. Van Tuyl disagreed. The bill recognized the issues created
by RIV/RIK switching, and stated that they would be addressed
via a regulation to be drafted before the first open season. The
proposed legislation contained language that prohibited the
forthcoming regulation from creating "unreasonable interference
with marketing" or "unreasonably disproportionate costs," which
Mr. Van Tuyl understood to mean that the regulation would be
permitted to "create these problems" as long as they were not
deemed "unreasonable".
10:10:19 AM
Senator Dyson asked for a comparable situation to demonstrate an
instance when BP received the extent of fiscal certainty that
was requested under AGIA.
Mr. Van Tuyl responded that comparable situations were uncommon
due to the scope of the Alaska natural gasline project. However,
he referenced the Baku-Tbilisi-Ceyhan (BTC) pipeline in Western
Asia which was built under an agreement of fiscal stability for
60 years.
Senator Dyson assumed that all the sovereign countries involved
had agreed not to change any of the tax structures relating to
the BTC project.
10:12:06 AM
Mr. Van Tuyl replied that the tax agreement defined the tax on
petroleum, oil or gas, and on the facilities and transportation.
That tax was not subject to change.
Senator Dyson understood that the BTC pipeline crossed three
national boundaries. He asked for affirmation that all three
countries had agreed to the fiscal terms for a period of 60
years.
Mr. Van Tuyl answered, "I believe that is correct."
Senator Dyson asked if there existed a North American example of
the fiscal stability BP had requested under AGIA.
Mr. Van Tuyl was aware of no North American pipeline example, as
that infrastructure already existed. But he offered that oil and
gas leases provided defined terms for the length of the lease.
10:13:36 AM
Senator Dyson surmised that none of the major North American
projects had been built with the degree of fiscal stability BP
was currently requesting.
Mr. Van Tuyl commented that there was no like project for
comparison in North America.
10:13:57 AM
Senator Dyson acknowledged "constitutional public policy
challenges" in negotiating a guarantee to the pipeline builder
that it would recover the construction costs by freezing the tax
rate for a fixed amount of time. He shared that a colleague had
suggested the tax rate remain fixed until the pipeline builder
had recaptured its investment costs rather than fixing the tax
rate for a period of time, thus reducing the monetary risk to
the company and avoiding public policy litigation within the
State. He asked if BP would be willing to examine such a
possibility.
Mr. Van Tuyl replied that BP would welcome an opportunity to
discuss options to resolve the issue.
10:15:53 AM
Co-Chair Stedman informed that he had requested that the
Administration provide an estimate of the volume of gas
necessary to equal the construction costs of a gasline.
10:17:28 AM
Senator Thomas understood that the pipeline project could be
abandoned if the State and the licensee agreed that the project
was uneconomic. He asked for clarification that BP's concern
regarded an instance in which the State determined the project
to be economic and BP disagreed with that determination.
Mr. Van Tuyl affirmed. Section 43.90.240 (c) would be applicable
only in the event of a disagreement regarding the economic
viability of the pipeline.
Senator Thomas asked what factors would cause a licensee to
determine that the pipeline was uneconomic after expending the
necessary resources to obtain the license.
10:18:43 AM
Mr. Van Tuyl responded that many factors could result in a
project becoming uneconomic. For example, the project cost could
become so high as to make transporting gas to market uneconomic
for shippers, and the pipeline company would be unable to obtain
FT commitments.
10:19:33 AM
Senator Thomas informed that the Committee heard an extensive
presentation from Sullivan & Cromwell LLP addressing this issue,
and assumed that those details had been researched. He inquired
whether, if BP found the terms of AGIA to be unacceptable, the
company would pursue a FERC application outside of AGIA.
Mr. Van Tuyl replied that BP's "desire" was to work with the
host government, as was its standard practice.
10:20:12 AM
Co-Chair Stedman invited questions regarding the provisions of
Section 43.90.230(a)(2) and Section 43.90.210.
Mr. Van Tuyl shared that BP's concern was that the provisions
presumed likelihood for a of breach of contract due to
"substantial departure" from specifications set out in the
application, as the licensee had only three opportunities to
make changes to the plan under Section 43.90.210. Other events
could occur which would compel a change in the initial plan not
allowed under the proposed legislation, such as an order from
FERC, the Bureau of Land Management (BLM), or a municipality.
10:22:40 AM
Senator Dyson asked the meaning of "loss of all data to state",
which was included on page 8 of the presentation as a
ramification of Section 43.90.200(b).
Mr. Van Tuyl assumed that BP would be determined to have credit
support, resulting in a one-year "window" to sanction the
pipeline project. If for any reason BP deemed the project
uneconomical and failed to sanction the contract, it would be in
breach of the agreement. Under the provisions of Section
43.90.230, a breach would be remedied by requiring the licensee
to release to the State all data related to the pipeline
project.
Senator Dyson discerned that BP would not "lose" the data it
collected as the company would be allowed to retain copies which
may be valuable for future projects.
Mr. Van Tuyl assumed that the records would also include
proprietary data that BP could use in competing projects
elsewhere. Revealing that valuable data would be of benefit to
competitors.
10:25:19 AM
Senator Dyson reminded that the State could have paid up to $500
million of the costs to gather that data. He hypothesized a
situation in which the State would assure that the relinquished
data would be kept confidential. He asked if that would be
acceptable to BP.
Mr. Van Tuyl clarified that the "real concern" was the
requirement that the licensee sanction the project within one
year, as necessary information regarding project costs was not
available.
Senator Dyson summarized that the loss of data was a concern,
but the primary issue was the sanction requirement.
Mr. Van Tuyl affirmed. He also informed that BP would not seek
State investment if it decided to participate in the application
process and was selected as the licensee. Thus, the data would
solely represent BP's investment.
10:27:31 AM
Senator Huggins perceived an "inoperability" in the provisions
of Section 43.90.240(c) and Section 43.90.200(b) that would
impede BP's willingness to participate in the application
process. The latter Section allowed no avenue to abandon an
uneconomic project, and the former required the acceptance of
the FERC certificate and sanction of the project regardless of
fiscal considerations.
Mr. Van Tuyl expressed that BP would prefer the flexibility to
manage the project as it would any other project, by taking into
consideration all relevant factors.
10:28:26 AM
Senator Huggins asked regarding administrative appeal rights
under section 43.90.200.
Mr. Van Tuyl responded that the FERC process for certification
allowed for review of a conditional certificate with FERC to
determine the best way to proceed. He deferred to Mr. Coughlin
for further explanation.
10:29:38 AM
PATRICK COUGHLIN, Senior Attorney, BP Legal Department,
explained that under the normal FERC process, a certificate was
often issued with several conditions. Those conditions
instigated a "give-and-take" negotiation process. The applicant
had the formal right to appeal the FERC decision through the
administrative process, and if the applicant lost the initial
appeal it could appeal the agency determination to the
Washington, DC circuit court. AGIA would remove the right to
appeal the FERC decision, thus weakening the applicant's
negotiation leverage. This position would effectively force the
applicant to accept the FERC determination.
10:31:24 AM
Co-Chair Stedman asked for additional information regarding FERC
certificates issued to BP, and whether forfeiture of appeal
rights was standard.
10:31:41 AM
Co-Chair Hoffman discerned that Section 43.90.200(b) required
the project to go forward regardless of cost, which he found
unreasonable. The economic viability of the project should be
considered in the determination to proceed with a pipeline.
10:32:25 AM
Mr. Van Tuyl agreed that the provision would "tie the hands of
the investor" and was unreasonable. He could not offer a
specific language solution at this time, but would return to the
Committee with recommendations.
10:33:13 AM
Co-Chair Stedman asked regarding Section 43.90.200(a).
Mr. Van Tuyl informed that the subsection was related to
subsection (b), in that subsection (a) required the licensee to
accept the FERC certificate and (b) mandated the licensee to
advance the project regardless of cost.
10:34:32 AM
Senator Dyson reminded of the congressional act that stated that
the Alaska natural gas pipeline was a necessary pipeline in the
nation's best interest. The declaration that the pipeline was in
the national interest included the "veiled threat" that the
federal government would take over the construction process in
the event that the State failed to secure a gasline. He asked if
that fact would alter the current negotiations.
Mr. Van Tuyl shared both the federal and State governments'
desire to complete a natural gas pipeline. He advised that the
conditioned FERC certificate could, in the most extreme case,
render the project completely uneconomical. It could also result
in a major increase in the tariff. BP could devise a method to
reduce the toll increases, but would need the ability to
negotiate with FERC to achieve those results.
10:36:49 AM
Co-Chair Stedman returned to page 7 of the handout, and the
bullet point labeled ".150(a)", for explanation.
Mr. Van Tuyl likened the release of proprietary information to a
"winners curse", as the winning bidder would be required to
provide all information relating to the project to its
competitors after the license was awarded. This may cause a
bidder to omit certain technological or other advantages in the
application process.
10:38:10 AM
Co-Chair Hoffman opined that the requirement seemed reasonable.
He asked if BP had discussed that concern with the
Administration.
Mr. Van Tuyl recalled that the language was added during the
legislative process, although had not been discussed with the
Administration.
10:38:55 AM
Senator Thomas was unclear of how the licensee would be put at
risk by the release of proprietary information after the license
was awarded.
Mr. Van Tuyl exampled "trenching" technology BP had developed
and would include in a confidential application. That
technology, however, was proprietary knowledge that would
benefit BP's competitors worldwide if it was made public.
10:40:09 AM
Co-Chair Stedman next characterized Section 43.90.130 as the
Administration's "must haves".
Mr. Van Tuyl set forth that paragraph (13) referenced FERC Order
2005 [157.34(c)(8)]. The FERC requirement was two-fold, first
requiring that the licensee offer service to in-State delivery
points, and secondly to offer distance-sensitive rates to those
delivery points. BP did not object to the FERC requirements, but
was wary of the implication in testimony by the Administration
that the language in AGIA actually reserved capacity, which
would exceed the FERC requirements and impose "unreasonable
commercial risk".
10:42:04 AM
Co-Chair Stedman asked for confirmation that BP would not object
to the requirement for distance-sensitive rates.
Mr. Van Tuyl affirmed.
10:42:19 AM
Co-Chair Hoffman allowed that the Administration may have
claimed that capacity would be reserved for in-State
distribution, but asked if that was specified in the language of
the bill.
Mr. Van Tuyl was concerned with the potential interpretation of
the language.
10:43:03 AM
Senator Thomas asked if the concern was with the provisions of
Section 43.90.130(6)(B).
Mr. Van Tuyl explained that the issue was with the language that
referenced "firm service", and BP was concerned that the mandate
could be interpreted to go beyond the FERC requirement.
10:43:59 AM
Senator Huggins communicated that Mr. Van Tuyl was referencing
language relating to the State's "royalty in value, royalty in
kind" take contained in the House of Representatives' version of
the bill. He read the language into the record as follows.
…eliminating the ability of the State to take its royalty
in kind for gas in the quantity and volume committed to a
firm transportation capacity acquired during the first
binding open season.
Senator Huggins shared that the provision went on to state that
in this case, the pipeline licensee would then be required to
provide for the "in kind" requirements within the state. He
asked if Mr. Van Tuyl was familiar with that language.
Mr. Van Tuyl recalled that an amendment to insert this provision
was offered in the House Resources Committee.
Senator Huggins asked Mr. Van Tuyl's position on the amendment.
Mr. Van Tuyl would review the language and provide the Committee
with a response at a later date.
Senator Huggins commented that it was "interesting language"
that could address the RIV/RIK issue.
10:45:29 AM
Senator Thomas asked if Section 43.90.130(1)(B) on page 3 of the
bill would speak to the concern.
10:46:14 AM
Mr. Van Tuyl understood that the provision in paragraph (1)(B)
addressed a different issue than the in-state delivery points
required by the FERC order. Paragraph (1)(B) did, however,
represent another concern, as BP was unsure that it would have
the required information prior to the application deadline.
10:47:02 AM
Senator Dyson surmised that FERC demonstrated a preference to
rolled-in rates over negotiated rate increases in order to
stimulate future exploration. Presentations to the Committee by
various parties had indicated that pipeline expansions would not
cause rates to increase over initial shipping tolls until
"looping" was required, and then could increase no more than 15
percent over the original rate. He asked for Mr. Van Tuyl's
position.
Mr. Van Tuyl explained that BP had "no problem" with rolled-in
rates, as that was required by FERC for this project. FERC
articulated its limited support of rolled-in rates, which
extended to just before the point of creating a subsidy to
expansion shippers by the original shipper. The language of
Section 43.90.130(7) would not address the subsidization issue,
and was contrary to FERC rules. That subsection would treat
affiliates and non-affiliates differently, and create a subsidy
for expansion shippers by eliminating negotiated rate
protections. This was of "major concern" to BP.
10:50:46 AM
Senator Dyson judged that the intent of Congress, as reflected
by the position of FERC, was to avoid the establishment of a
"monopoly" pipeline. Due to the exorbitant costs of pipeline
construction in Alaska, it was unreasonable to expect a
competing pipeline to be built, as was a common occurrence
elsewhere in the country. Therefore, the FERC regulations for
the Alaska natural gas pipeline were created in an attempt to
treat the gasline as a "common carrier", accessible for a fair
price to new shippers. He asked why the State should manage the
gasline differently, and whether the assurance that rates to the
initial shipper would not increase more than 15 percent over
initial rates was "any help".
10:51:53 AM
Mr. Van Tuyl responded that BP viewed the situation differently.
He understood that FERC had the regulatory authority to
promulgate different rules for the Alaska natural gas pipeline,
as the circumstances in Alaska were unique. BP supported the
FERC regulations. The company's concern was that the State was
instituting additional regulations and rules on the construction
of the pipeline. He favored FERC jurisdiction over regulation by
the State of Alaska. He foresaw the 15 percent limit on the rate
increase as unpredictable and opined that it potentially
represented an amount much greater than 15 percent.
10:53:57 AM
Senator Dyson asked if prior reference to AGIA's "exclusivity"
was indicative of an assumption that only one natural gas
pipeline would be built in the state.
Mr. Van Tuyl disagreed. The concern was that only one entity
would be able to advance the pipeline project, as AGIA provided
for the award of one license.
Senator Dyson commented that federal loan guarantees were
available for more than one project, and assumed that the
question was whether the State project coordinator could serve
on multiple projects.
Mr. Van Tuyl allowed that this was a "fundamental difference"
between AGIA and federal law.
10:56:28 AM
Senator Thomas recalled that the Canadian policy employed
rolled-in rates.
Mr. Van Tuyl affirmed.
Senator Thomas calculated that the discussion of rolled-in
versus incremental rates applied to approximately 22 percent of
a 36,000 mile pipeline.
Mr. Van Tuyl set forth that the rate would apply to the Alaska
section of the pipeline and any portion built in the continental
United States.
10:57:20 AM
Co-Chair Stedman asked for more information regarding the
Canadian rate structure and rates of return.
Mr. Van Tuyl was "not a FERC or an NEB expert" but understood
that the Canadian NEB (National Energy Board) had adopted the
use of rolled in rates for pipeline expansions.
10:58:18 AM
Mr. Van Tuyl stressed that the demonstration of a project's
economic viability required under Section 43.90.130(2)(C-D) was
"impossible".
Co-Chair Stedman asked Mr. Van Tuyl to speak to this provision
in reference to mega-projects, and whether it would impede or
enhance such a project.
Mr. Van Tuyl responded that as a project matured, it would
provide a "better sense" of the technical and commercial
viability. An investor might not initially understand the
market, but would make a determination of reasonable probability
of success, and expend the resources to mature the project and
gain more specificity regarding the variables. The project would
advance in steps, or pass through "gates" of maturity.
11:01:34 AM
Co-Chair Stedman asked if a consortium of companies that planned
to develop a mega project would typically employ an outside
consultant to conduct the analysis, or if that process was
unique to BP.
Mr. Van Tuyl replied that other companies had similar "gated
processes". One firm that provided consultation and analysis was
IPA, or Independent Project Analysis. That company emphasized a
disciplined, gated approach, especially for mega projects.
11:02:39 AM
Co-Chair Hoffman recalled learning about gated evaluation
criteria for mega projects in a legislative seminar the previous
summer.
Co-Chair Stedman was "trying to put these pieces together." He
asked if the commitments required under AGIA would circumvent
standard industry practice or compliment it.
Mr. Van Tuyl answered that the provisions of Section
43.90.130(2)(C) and (D) were inconsistent with the gated
process. An applicant would be unable to demonstrate the
economic viability of the project because the project had not
yet progressed to the "gate" at which viability could be
determined.
11:04:10 AM
Senator Huggins asked the amount of time that would be required
to produce a "bottoms up" cost analysis.
Mr. Van Tuyl informed that the 2001/2002 cost estimate required
18 months and $125,000. That analysis required extensive field
work and research, but was mandated to effectively "mature" a
project.
Senator Huggins shared his concern that the legislature was
operating on "blind faith" that the AGIA process would work. He
was unsure that the current version of the bill was compatible
with the expectations of the industry.
11:06:52 AM
Senator Thomas pointed out that the request for a design
description and other basic application criteria was simply a
method for the State to evaluate the different applicants'
propositions. He understood that "proving" the economic merits
of the project could be challenging, but was only one aspect of
advancing the project. An applicant would be required to provide
a project plan to the State before the State could find it
reasonable to grant a license to any party. The application
requirements were simply the beginning point of this process.
11:08:40 AM
Mr. Van Tuyl replied that BP would like to be a part of that
application process, but would not be able to submit a bid under
the current requirements.
11:09:24 AM
Senator Elton read the second bulleted point on page 6 as "BP
will not submit a bid under AGIA". He asked if BP would submit
an application for the AGIA license if the ten points addressed
in this presentation were amended to be acceptable to BP.
Mr. Van Tuyl stressed that it would be the "intent" of BP to
submit a bid if all concerns were addressed, including the three
broad concerns listed on page 9.
11:10:22 AM
Senator Elton identified a difficulty in addressing the bulleted
points to conform to BP's requests without a commitment from BP
that the broad points would not be later cited as further reason
to withhold a bid under AGIA.
Mr. Van Tuyl reported that the two bulleted pages were the
explanation of why BP would not bid under AGIA. If those points
were addressed, BP would reexamine the application process.
11:12:41 AM
Senator Elton advised that the assurances of FT commitments that
BP stated would be required to allow the company to submit an
application under AGIA were not included during the prior
negotiations under the Stranded Gas Development Act (SGDA)
either. He could identify no additional certainty for the
construction of a pipeline under AGIA than under the previously
negotiated SGDA.
Mr. Van Tuyl shared the same concern. That concern motivated BP
to divulge what it identified as weaknesses in AGIA.
Senator Elton asked if BP was more comfortable with the SGDA
application process than with that of AGIA.
Mr. Van Tuyl reminded that the SGDA application process was
never completed.
11:14:36 AM
Co-Chair Hoffman pointed out that the stipulated 36 month time
frame for the first open season in Section 43.90.130(3)(A) had
not been mentioned. He asked if that the timeframe was
reasonable and if the length of time could possibly be
diminished.
Mr. Van Tuyl reiterated that BP had many concerns with AGIA that
were not included on the list of "key concerns". The "time
certain" components of AGIA were troublesome to BP. In the
2001/2002 cost study BP had declared its intent to hold the
first open season within approximately two years. Thus, 36
months was a reasonable timeframe. He reiterated that date-
specific commitments were a bad practice in advancing large
projects.
11:16:49 AM
Co-Chair Hoffman assumed that aspects of Section 43.90.170 on
page 11 of the bill would also need to be addressed.
Mr. Van Tuyl affirmed.
11:17:23 AM
Senator Dyson expounded on the importance of accelerating
Alaskan gas production and asked if BP could provide a timeline
of optimal gas "offtake" from Prudhoe Bay.
Mr. Van Tuyl was unsure.
Senator Dyson asked if he would able to tell the Committee if he
did know.
Mr. Van Tuyl was not sure that he would be permitted to share
that information if he had it.
Senator Dyson cautioned that while the State was motivated by
financial concerns to construct a natural gas pipeline as soon
as possible, the producers were motivated by the dynamics of
reservoir economics, and the two driving forces could be on
different schedules.
11:19:23 AM
Mr. Van Tuyl stated that the concern regarding Section
.130(2)(B) and Section 43.90.210 was that although the sections
were patterned after the FERC regulation, they were markedly
different from the FERC directives. Due to the fact that the
applicant may not have the best information available at the
time of application, the FERC regulations require a "good faith
estimate" to describe the process, and allow for subsequent
modifications. AGIA, however, required a detailed description,
and would then prohibit deviation from that proposal as more
complete information became available.
11:20:59 AM
Senator Dyson understood that BP participated with Conoco-
Philips in the Rockies Express pipeline. That pipeline
construction contract included a protection against cost-
overruns. He asked how that protection operated.
Mr. Van Tuyl had "limited knowledge" of the project. BP was a
participant and had committed to capacity on the pipeline. That
project was comprised of three levels of negotiated rates to
shippers.
Senator Dyson clarified that he was interested in the mechanism
for managing construction cost overruns.
11:22:39 AM
Co-Chair Stedman asked Mr. Van Tuyl to provide that information
to the Committee.
Mr. Van Tuyl agreed.
11:23:10 AM
Senator Thomas read Section 43.90.210. Amendment of or
modification to the project plan., into the record as follows.
Subject to the approval of the commissioners, a licensee
may amend or modify its project plan if the amendments or
modifications improve the net present value of the project
to the state, are necessary because of an order issued by
the Alaska Oil and Gas Conservation Commission, or are
necessary as a result of changed circumstances outside the
licensee's control and are not reasonably foreseeable
before the license was issued.
Senator Thomas judged that section to be reasonably
accommodating, and asked BP's apprehension to the provision.
11:24:22 AM
Mr. Van Tuyl argued that the AGIA provision was "fundamentally
different" from the FERC regulation, which recognized that the
best information was not always available, and that market
demands are a reasonably foreseeable event that might result in
a project change. AGIA would not permit such deviation from the
original design.
11:25:13 AM
Senator Huggins asked the location of that stipulation in
Section 43.90.130(2)(B).
Mr. Van Tuyl informed that Section 43.90.130(2)(B) required the
provision of a detailed description of the project, including
design capacity and receipt delivery points. He continued that
BP would not know those specific details until the conclusion of
the first open season.
Senator Huggins countered that assumptions must be made when
compiling application data. He asked if Mr. Van Tuyl found this
expectation unreasonable.
Mr. Van Tuyl characterized it as "absolutely reasonable", and
told that FERC Order 2005 required a good faith estimate akin to
Senator Huggins' comment.
11:26:56 AM
Senator Dyson observed that BP had not stated a need to control
the construction of the pipeline, as other oil producing
companies had. He understood that producers had been financial
participants in pipelines, but that none of the major producers
in the state had played a management role.
Mr. Van Tuyl assured that BP would like to build the Alaska
natural gas pipeline. BP would contribute unique skills, such as
experience in building mega-projects around the world, financial
resources, and the "commercial motivation" to deliver a pipeline
at the lowest possible cost. BP had experience in building and
owning a pipeline in the Gulf of Mexico. Other North American
examples may be available upon research.
11:30:25 AM
Senator Dyson asked the "dollar size" of the Gulf of Mexico
project.
Mr. Van Tuyl did not have that information.
Senator Dyson judged that the Gulf of Mexico project did not
compare to the proposed Alaska gasline project.
Mr. Van Tuyl agreed.
Senator Dyson perceived as common practice producers hiring an
experienced pipeline company to build and manage a pipeline
project.
Mr. Van Tuyl contended that it was more typical for the
producing companies to participate in a pipeline project that
would open a new basin, due to the risk associated with such
endeavors. He characterized the Alaska gasline as a "basin
opening" project.
11:31:55 AM
Senator Olson asked if BP was a participant in the Alliance
Pipeline project.
Mr. Van Tuyl did not know.
11:32:26 AM
Senator Elton asked if BP would participate in building the
pipeline if Exxon Mobil refused to take part in the project.
Mr. Van Tuyl was unsure of Exxon Mobil's position, but assumed
that a successful project would require participation by the
producers as well as the host government.
11:33:25 AM
Senator Elton relayed that Rex Tillerson, CEO of Exxon Mobil,
had announced that the Alaska natural gas pipeline could not be
completed without "fiscal durability".
Mr. Van Tuyl agreed that appropriate fiscal terms must be
negotiated to encourage FT commitments and a successful open
season. The current version of AGIA did not provide
"appropriate" fiscal terms.
Senator Elton surmised that this concern should appear on the
list of key issues provided in BP's presentation and handout.
11:34:43 AM
Mr. Van Tuyl clarified that fiscal terms would need to be
defined to ensure FT commitments and a successful open season,
and that concern was highlighted on pages 6 and 9. He suggested
that the State allow the producers to propose fiscal terms for
the State to review, and either accept or reject.
11:36:04 AM
Co-Chair Stedman reminded that the tax on gas was set at 22.5
percent under the Petroleum Profits Tax (PPT). The failed
contract negotiated by the Murkowski Administration had proposed
a different tax. "Progressivity" was applied to oil profits but
not gas profits, as the gas was to be taken in kind. He
understood Mr. Van Tuyl's comments to indicate a desire to
revisit the issue of gas taxes and the period of tax certainty
prior to the first open season.
Mr. Van Tuyl stated that BP would like to have that conversation
"as soon as possible", as a resolution of those issues would
provide for more informed decisions about the future. The
duration of the tax guarantee was important, as BP expected the
FT commitments to be much longer than the ten years currently
proposed. Other elements of government take also needed to be
addressed to provide fiscal certainty.
11:38:18 AM
Senator Elton asked if Mr. Van Tuyl was avoiding referencing
"oil" in his comments on fiscal certainty.
Mr. Van Tuyl assumed that fiscal certainty would include oil,
but would be willing to engage in negotiations.
Senator Elton asked if BP would require a fiscal certainty
guarantee to be reached before participating in the application
process.
Mr. Van Tuyl suggested that if fiscal certainty was not
determined prior to the commencement of the application process
the resource owners be allowed to include a tax structure
proposal in their applications under AGIA.
11:39:29 AM
Co-Chair Stedman asked regarding the 70:30 debt to equity ratio.
The State would support a lower equity position to reduce the
tariff and enhance the value to the State. He asked BP's
position on the 70:30 ratio.
Mr. Van Tuyl revealed that BP agreed with the State objective to
achieve a low tariff, as well as a low construction cost for the
project. The concern was that AGIA would prescribe the rate-
making structure, which may deter lenders, thus affecting the
financing of the project.
Mr. Van Tuyl continued that the rate-making requirements
differed from the capital structure that a pipeline builder
would arrange with its lender. A lender may require for a
project to be comprised of greater than 30 percent equity, yet
the toll imposed on shippers would be equal to a maximum of 30
percent equity. BP was unsure that that tax structure would
allow the pipeline company to generate sufficient revenue to
meet the lenders' long-term requirements.
11:42:00 AM
Co-Chair Stedman identified three components of the debt to
equity issue: the State requirement under AGIA, the lender
requirement, and the FERC tariff. He asked if FERC could set the
rate regardless of the debt to equity ratio.
11:42:37 AM
Mr. Van Tuyl responded that the rate set by FERC may not reflect
the structure agreed upon in the financial markets. BP preferred
to allow the applicant to respond to the identified State need
rather than setting inflexible requirements. The State would
always have the option to reject an application that was
insufficient at meeting the State's needs, and the applicants
would have more latitude in crafting a proposal that would be
acceptable to the potential financers.
11:43:45 AM
Co-Chair Hoffman noted that the $500 million matching
contribution provided for in Section 43.90.130(18) on page 9 had
received significant attention. He asked BP's position on this
provision.
11:44:21 AM
Mr. Van Tuyl replied that BP had not suggested the inclusion of
the $500 million match, and did not intend to pursue those
dollars.
11:44:35 AM
Co-Chair Stedman asked why BP would not accept the $500 million
incentive.
11:44:52 AM
Mr. Van Tuyl answered that while the BP shareholders would
likely approve of the incentive, it was not a requirement for BP
to advance the project. The "establishment of resource terms
with certainty" was the single largest enabling event to the
construction of a natural gas pipeline.
11:45:42 AM
Co-Chair Hoffman summarized that BP had not asked for the $500
million, but would accept it.
11:45:44 AM
Mr. Van Tuyl declared the intent of BP was to not require State
money to further the project.
11:46:03 AM
Senator Dyson understood the assumption of Congress and FERC was
that only one pipeline would be built. The possibility of a
producer-owned pipeline had raised antitrust issues. He asked
the State's possible exposure to antitrust actions.
11:47:26 AM
Mr. Van Tuyl deferred to Mr. Coughlin.
11:47:36 AM
Mr. Coughlin informed that BP's analysis of the issue revealed
no antitrust concerns, due to the fact that the competition
would exist in the downstream markets serviced by the pipeline.
Additionally, FERC would regulate the monopoly of the pipeline
by granting a license to an applicant. While this could in other
cases create an antitrust issue, the concern was abated by the
governmental agency involvement. FERC insured against antitrust
claims by regulating both the downstream and upstream aspects of
the pipeline functions to protect against a monopoly of
services.
11:49:22 AM
Senator Dyson inferred that FERC was more concerned with the
upstream access issues than with downstream competition. He
asked for a "synopsis" of antitrust concerns that had emerged in
other North American pipelines, particularly pertaining to
upstream access issues.
11:49:55 AM
Mr. Coughlin was not aware of any antitrust actions relating to
upstream activity. The regulation of pipelines had changed
dramatically since 1984 when federal law was amended to allow
producers to own pipelines.
11:51:00 AM
Senator Dyson assumed that FERC's "predisposition" for rolled-in
rates was an indication that FERC endeavored to address access
for new explorers, and prevent pipeline owners from
discriminating against new explorers in an attempt to control
production in the basin.
11:51:43 AM
Mr. Coughlin responded that FERC Order 2005 attempted to balance
two contradictory goals. The first goal was to get a pipeline
built. To finance the construction, rate certainty must be
offered to initial shippers. The second goal was to ensure that
new explorers would have access to the pipeline, especially
because it would likely be the only pipeline in the basin. FERC
Order 2005 was an attempt to balance the two goals. The balance
was reached by including a rolled-in rate provision and by
providing the initial shippers the guarantee that expansions to
accommodate new discoveries of gas would not result in initial
shippers "subsidizing" expansion shippers.
11:54:25 AM
Co-Chair Stedman asked regarding the viability of loan
guarantees.
11:54:36 AM
Mr. Van Tuyl stated that BP was interested in loan guarantees,
as they would reduce the cost of the pipeline. There existed
uncertainty as to the rules of access to the loan guarantees,
which had not yet been established by the federal Department of
Energy. Loan guarantees would be dependent upon other factors
such as completion guarantees and negotiated FT commitments,
stipulations he considered "entirely reasonable".
11:55:55 AM
Co-Chair Hoffman shared that the loan guarantees were
established when pipeline cost was estimated to be $20 billion.
Current estimates for completion were approximately $30 billion.
He asked if the previous rates were still considered adequate.
Mr. Van Tuyl informed that the provisions of the loan guarantee
program recognized the project cost escalations.
11:56:47 AM
Senator Thomas spoke of a presentation by the Alaska Oil and Gas
Conservation Commission (AOGCC) that detailed the reported known
reserves in the State. This presentation indicated that while BP
had expended money to confirm reserves in other parts of the
world, it had not done so in Alaska for several years. He asked
what measures BP had taken to confirm reserves in this state.
11:58:10 AM
Mr. Van Tuyl answered that Alaska was a mature oil field. The
majority of exploration and discovery was done in prior years.
Basins typically declined in a pattern known as a "creaming
curve", in which large reserves were identified first, and
subsequent discoveries become smaller and smaller over time. The
"green mountain" graph on pages 2 and 10 of the handout
illustrated this trend, as well as the potential for
"significant future adds" to those reserves, such as heavy oil.
This opportunity would not be displayed as a known reserve at
this point. BP was also examining the possibility of opening new
fields, but reminded that Alaska was a mature basin and the
prospect for new adds was not significant.
11:59:37 AM
Senator Thomas clarified that his inquiry was to the measure BP
had taken to confirm the volume of gas in the Prudhoe Bay area.
12:00:07 PM
Mr. Van Tuyl acknowledged 35 trillion cubic feet of known gas in
that area, as well as additional volume in Endicott, North Star
and other fields. United States Geologic Survey (USGS) estimates
suggested that other large reserves may exist in the State. BP
was not currently exploring for new volumes of gas, but
construction of a gas pipeline would lead to further
exploration.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 12:01:55 PM
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