Legislature(2013 - 2014)HOUSE FINANCE 519
04/15/2014 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB385 | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 385 | TELECONFERENCED | |
| += | SB 138 | TELECONFERENCED | |
CS FOR SENATE BILL NO. 138(FIN) am
"An Act relating to the purposes, powers, and duties
of the Alaska Gasline Development Corporation;
relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated
funds; requiring state agencies and other entities to
expedite reviews and actions related to natural gas
pipelines and projects; relating to the authorities
and duties of the commissioner of natural resources
relating to a North Slope natural gas project, oil and
gas and gas only leases, and royalty gas and other gas
received by the state including gas received as
payment for the production tax on gas; relating to the
tax on oil and gas production, on oil production, and
on gas production; relating to the duties of the
commissioner of revenue relating to a North Slope
natural gas project and gas received as payment for
tax; relating to confidential information and public
record status of information provided to or in the
custody of the Department of Revenue (DNR) and DOR;
relating to apportionment factors of the Alaska Net
Income Tax Act; amending the definition of gross value
at the 'point of production' for gas for purposes of
the oil and gas production tax; clarifying that the
exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit
may not be taken against the gas production tax paid
in gas; relating to the oil or gas producer education
credit; requesting the governor to establish an
interim advisory board to advise the governor on
municipal involvement in a North Slope natural gas
project; relating to the development of a plan by the
Alaska Energy Authority for developing infrastructure
to deliver affordable energy to areas of the state
that will not have direct access to a North Slope
natural gas pipeline and a recommendation of a funding
source for energy infrastructure development;
establishing the Alaska affordable energy fund;
requiring the commissioner of revenue to develop a
plan and suggest legislation for municipalities,
regional corporations, and residents of the state to
acquire ownership interests in a North Slope natural
gas pipeline project; making conforming amendments;
and providing for an effective date."
2:50:58 PM
Co-Chair Austerman noted that the department was asked to
come before the committee to discuss the concept of
transitioning from a tax base to a profit base in taking
tax as gas. He wanted information on offtake points and
potential plans to meet future demands for anticipated
growth.
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, discussed the Black and Veatch
PowerPoint presentation: "State Participation in AKLNG
Project Presentation to House Finance Committee" (copy on
file). He commented that the slide was put together to help
talk about the change from tax in-value to royalty in-kind
and taking tax as gas.
2:52:47 PM
Mr. Pawlowski started with slide 2: "State Revenue From
Sale of Royalty and Tax Gas:" He indicated that the
illustration detailed the inferred tariffs for each section
of the project. He identified some of the acronyms on the
slide: PBU/PT referred to Prudhoe Bay/Point Thompson, GTP
referred to gas treatment plant, and LNG referred to the
liquefaction plant. The slide denoted the general value
chain. The way the traditional royalty and tax system
worked was that private companies built the infrastructure
and were entitled to recover, through deductions, the cost
of each one of the components which came in a tariff. In a
typical calculation the department would start with the
price of LNG in Asia and subtract the cost of shipping. For
example, it would start with an LNG price in Asia of $16,
subtract $1 for shipping, subtract $4 to go through the LNG
plant, subtract $2 to go through the pipeline, and subtract
$2 to go through the gas treatment plant. The state would
be left with roughly $7 per one thousand British thermal
units (MMBTU) point of production or wellhead value. In the
traditional royalty system, the state would take a
percentage of the wellhead value, which would equal the
royalties. A production tax would be taken after taking the
$7 and subtracting lease expenditures in the production tax
equation.
2:54:40 PM
Mr. Pawlowski discussed the red box on slide 2. He noted
that instead of taking the residual value, the state would
take a certain amount of value in energy. The department
did a rough calculation of the percentage of what was being
produced. He referenced the example of 350,000 MMBTU per
day for the royalty share and roughly 320,000 MMBTU per day
for the tax share. The state would have the gas at the
point of production going into the gas treatment plant. The
gas would then move through the system and would be sold in
Asia for the same price of $16. The state would have the
revenue of $16 of the sales of the LNG and would use the
revenue to pay the same costs, i.e., $1 in shipping, $4 in
the LNG plant, $2 in the pipeline tariff, and $2 in the gas
treatment plant tariff. The state would ultimately arrive
at the same value at the wellhead. The real difference was
that rather than relying on a third party to deduct the
costs in the filings with the state, the state would have
full control and full vision of the costs because it would
own the infrastructure. Slide 3 addressed the reason the
state started to focus on the need to invest in the
infrastructure and where in-kind offered value to the
state. He mentioned that the tariffs in the examples were
rounded to the nearest fifty cent.
2:56:22 PM
Mr. Pawlowski detailed slide 3: "State Revenue From Sale of
Royalty and Tax Gas, 25 percent State/TransCanada Ownership
of AKLNG Project With Capital Structure Change for LNG
Plant." He explained that in the second example the
department changed the financing of the LNG plant. In the
first example the LNG plant was financed at a 70 percent
debt, 30 percent equity with a 12 percent return on equity.
In the second example the LNG was financed at 100 percent
equity with a 15 percent return on the equity for the LNG
plant. The royalty study, published by DNR, listed several
large integrative projects around the world that were
financed at 100 percent equity. The LNG plant under FERC
section 3 would not be subject to economic regulation. If
an investor chose to take profit as 100 percent equity in
the LNG plant, the tariff would change in the LNG plant
from $4 to $8 and the state value would reduce from $7 to
$3.
Mr. Pawlowski communicated that in the past the state was
able, either through disputes in front of FERC or in the
state's tax statutes, to fight over the value in the
deductibility of returns on tariffs in the midstream. The
way LNG projects were structured the state did not see the
same opportunity in what was roughly 50 percent of the
project, the LNG plant. The decision to co-invest to take
the gas and have transparency of what those costs are,
would put the state in a similar place as it would be in-
value but with greater transparency and greater protection
for the state. It would also depend on on achieving the
same value in the market through the marketing agreements.
Through the value chain the state's co-investment would
protect the state. With the change in the royalty, as the
price went up, costs would stay the same in the midstream
leading to the same value to the state going up, whether in
an in-value or in-kind arrangement. He referred back to
slide 2 suggesting that if the price in Asia went from $16
to $18 and the costs did not change, the value per MMBTU
would increase from $7 to $9. If the price in Asia went
down from $16 to $14 it would decrease from $7 to $5 - not
changing the value in the midstream. Consultants have given
presentations to the House Finance Committee that showed
the value of in-kind, particularly in co-investment at low
price environments. He appreciated a lot of the work that
some of the state's consultants had done to illustrate how
in-kind actually provided more revenue to the state at
lower prices than in-value did along with co-investment.
Co-Chair Austerman expressed concerns about knowing how to
proceed with conversations with the general public. He
stated that the two-year time frame would allow the
legislature to make a commitment. His objective was to
allow the public to have a voice.
3:01:52 PM
Mr. Pawlowski stated that DNR would manage the sale of the
energy value. There would be a daily value of energy for
royalty and for gas. The commissioner of DNR would manage
the revenues of the sale of gas, of which a portion would
be deposited into the Permanent Fund. The enabling
legislation set up the relationship between DNR and DOR
where the DNR commissioner would take the $320 MMBTU per
day times the value as tax revenue. The tax revenue would
then be directed to the general fund by the commissioner of
DNR. The tax share would become public information in order
for people to see the value the state received from taxed
gas. He made one final point that there were other taxes
that the state would receive from the project apart from
the ones that have been discussed. The additional taxes
included the corporate income tax of 9.4 percent statutory
rate and the property tax, a very substantial piece of the
$45 billion to $65 billion the state would be investing. He
summarized that the state would receive corporate income
tax, property tax, and taxed gas in royalty from the
advancement of the Alaska Liquefied Natural Gas (AKLNG)
project.
Vice-Chair Neuman discussed the value to the state of $7
per MMBTU. He noted that the value did not account for the
costs for the lease expenditures for standard allowable
deductions. He referred to the Point Thomson unit and used
a $5 billion investment as an example. He asked if $1.75
billion was the correct lease amount that would have to be
paid.
3:04:44 PM
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
replied that the deductions were realized in the year that
the expenditure was made. It would depend on how much of
the $5 billion was spent over which years.
Vice-Chair Neuman clarified that the Point Thomson example
had been used because the related lease expenditure was a
cost the state was currently incurring. He reiterated that
the lease expenditures and standard allowable deductions
were not taken from the value as seen in the example
provided (in the Black and Veatch presentation). He opined
that the number in front of the committee was a gross
value. He wanted to see a netback value for the state.
3:06:07 PM
Mr. Pawlowski offered to supply Representative Newman with
additional information from work done by Black and Veatch
to answer his question. He indicated that the intent was to
illustrate the value chain. He conveyed that in the larger
project there were other costs associated upstream that
were deducted as well as additional oil production that
counted as an additional value. He mentioned that when the
department ran the equations, the internal rate of return
for the state investment metric exceeded 20 percent. He
noted that there were additional tens of thousands of
barrels of oil that came with the build out of Point
Thomson as well as the gas production that came with it. He
stated that some work by Black and Veatch was done and
could be circulated to committee members. The consultation
information was not provided by DNR.
Co-Chair Austerman asked if there was a price per MMBTU
associated with Point Thomson to the gas treatment plant
(GTP) that the state would pay. Mr. Pawlowski responded
that it was rolled into the GTP tariff. He reported a small
cost for the pipe moving the gas from Point Thomson to the
GTP just as there was a cost already incorporated into the
tariff for the pipe moving from Prudhoe Bay to the GTP in
the Prudhoe Bay unit geographically. He restated that the
numbers used in the presentation were rounded.
3:08:06 PM
Representative Gara requested that the department return
with the answers. He mentioned the corporate tax of 9
percent. He clarified that it was not 9 percent of the oil
industry's profits in Alaska, it was 9 percent of their
world-wide profits which has been 5 percent in some years.
Mr. Pawlowski pointed out that the March 10, 2014
presentation to the Senate Finance Committee contained the
answers to Representative Gara's inquiries. Mr. Pawlowski
confirmed that the department modeled a lower number than
9.4 percent, which was a statutory number.
3:09:16 PM
Representative Gara specified a change made in the House
Resources Committee that included the qualifier "best
interest finding" when considering royalty in-kind or
royalty in-value. He suggested that, based on everything
presented by DOR, it was in the state's best interest to
receive its royalty in-kind. He asked for the department's
position.
Commissioner Balash replied that the assumptions used in
the state's materials supposed that the state was getting
the same price as the producers. Either the state made a
satisfactory arrangement with the producers to dispose of
the state's gas on the same terms or they would receive in-
value. He noted that, for purposes of doing the analysis,
the department relied on a reasonable set of assumptions.
The state's agreement with the other parties, the Heads of
Agreement, stipulated that the state reached satisfactory
resolution on the sale or disposition of the state's gas in
order to take payment in-kind. However, he mentioned the
challenge of satisfying the state. He emphasized that the
purpose of publishing the royalty study in November 2013
was to let all parties (the public, the companies, and the
legislature) know that there were real risks associated
with the state opting for royalties in-kind. The parties in
the best position to help mitigate risks for the state were
the other producers. He felt the notion that the state
would have to bargain hard was misplaced. He opined that,
in essence, the parties had already agreed. He indicated
the difficult task would be fashioning the necessary
agreements with each company individually and also keeping
everything fair relative to the federal and international
anti-trust statutes. The state would need to protect itself
and the interest of Alaskans while protecting the
information of competitors from other competitors at the
same time.
3:12:27 PM
Representative Gara stated that Ms. Poduval of Black and
Veatch testified about a concern he had raised that the
state would be paying for full capacity without receiving
full capacity. Her response was that more than 90 percent
of capacity was usually filled. He asked if the state would
owe TransCanada for any unused capacity with in-kind value.
Commissioner Balash replied that the state would assume
some risks regardless of the in-kind acceptance. He
continued that underutilized capacity, the state's or the
producers', would impact revenues. The revenues generated
would be based on the throughput. If the project was not at
100 percent every day, the underutilized capacity would
still have to be paid for upfront. It would be reflected in
the deductions through the value chain and impacting the
total revenue, whether in-kind or in-value.
3:15:02 PM
Mr. Pawlowski offered to reach out to Ms. Poduval.
Representative Gara was interested to know if DNR's model
was satisfied whether it reflected 100 percent capacity or
less. Mr. Pawlowski responded that he would follow up with
Ms. Poduval and get back to Representative Gara.
Co-Chair Stoltze appreciated the detailed questions asked
by committee members in spite of the limited time schedule.
He added that the amendments were due by 4:00pm the
following day. He wanted to make sure committee members had
the opportunity to ask questions and make suggestions. He
hoped that the vetting process would help committee
members.
Representative Gara asked if 4:00 pm was the deadline for
submitting amendments or debating them in committee.
Co-Chair Stoltze replied that 4:00 pm the following day was
the deadline for submitting amendments to his office.
3:17:17 PM
Representative Gara suggested that if the state was
shipping gas at 95 percent capacity, the cost would be much
greater taking royalty in-kind versus royalty in-value. He
surmised that not only would the state receive less than
full capacity, it would owe TransCanada shipping charges,
which were never owed when taking royalty in-value. In the
instance of taking royalty in-value, the lower the amount
of gas shipped, the higher a company's tariff would be and
the less taxes the state would receive. In other words, the
cost of paying for empty shipping charges would be higher
to the state than if the state only filled it 95 percent
and took its royalty in-value. He asked whether they were
the same amount of money.
Commissioner Balash explained that throughput utilization
was one of the associated risks of the project, whether the
state received its royalty in-value or in-kind. He
clarified Representative Gara's concern about the state
either receiving less gas than it planned or choosing to
drop off gas in-state, thus, not taking it to the
liquefaction plant or to market. He affirmed that in such
cases there were greater risks to the state. He asserted
that the state would need to mitigate such risks by making
sure the state received the amount of gas it needed to fill
its capacity outlining terms in the offtake and balancing
agreements. He indicated he was unwilling to take out
capacity on any infrastructure without knowing that the
state would receive gas to put into the capacity. The
lending institutions that would be setting up the financing
for the project would not let the state engage without
sufficient security to ensure that gas would flow through
the infrastructure.
Commissioner Balash brought up his second point. If the
state's demand suddenly and drastically increased, the
state would be faced with deciding whether to divert its
gas and underutilizing the pipeline and liquefaction plant.
He added that the scenario was unlikely.
3:20:21 PM
Commissioner Balash continued that in the terms of the MOU
with TransCanada, the state had assumed 100 percent
utilization of the capacity in order to establish rates and
tariffs. However, the state knew it would not be at full
capacity all of the time. Maintenance turnarounds and
unforeseeable circumstances would influence utilization. In
the event that TransCanada was able to find customers
willing to take interruptible service, they would be able
to move more gas per day resulting in revenue credits for
the state. The department planned for mitigation in all of
the state's agreements. He claimed that there would be
additional steps to mitigate against risks to protect the
state's interest.
Representative Wilson asked about current royalty in-kind
contracts. Commissioner Balash replied that there were
currently two contracts; the first with Flint Hills
Resources which would expire by the end of the year, and
the second with Tesoro.
Representative Wilson asked if there were any royalty in-
value contracts at present. Commissioner Balash answered
that the state had settlement agreements with all three of
the major North Slope producers to value the state's oil
produced under the DL1 lease form.
Representative Wilson asked about rectifying the difference
between the prices at which the producers sell their gas
versus the prices at which the state sells its in-kind gas
in the same Asian market.
3:24:03 PM
Mr. Pawlowski replied that the state would receive
royalties in tax gas as gas was produced prior to going to
market. The gas would be sold at the same price, in the
same day, and in the same way. It was not a calculation
that came back and then created a volume of gas. Rather, 13
to 14 percent of the gas produced would belong to the state
through royalty. Another 13 percent of the gas produced
would be the state's tax share. In other words, the state's
share was 25 percent of what came out of the unit.
Representative Wilson asked if the tax would be paid in gas
at 13 percent no matter what the value. She also asked if
the transparency that Mr. Pawlowski referred to was the
price of the day at the wellhead.
Mr. Pawlowski responded that the state would receive 13
percent in gas for its tax share, the same way the state
received royalty in-kind. Once the state took delivery of
its gas it would be sold at a price determined in a
contract. In terms of transparency, the state would be
deducting or paying the state or an agent like TransCanada.
In the in-value situation the producer elected how, where,
and when the state's gas was sold, which was the
misalignment discussed in the royalty study. He continued
that (in the example on slide 3) the producer had the
incentive because its tax would earn money in the
liquefaction plant and drop the dollar amount that taxes
and royalties were based off of from $7 to $3. The state
would be getting 25 percent of $3 rather than 25 percent of
$7.
Representative asked if it was good for the state. Mr.
Pawlowski avowed that it was bad for the state. He stated
that the transparency was important in order for the state
to have control of what was being deducted. All the parties
would earn what they earned based on their share of the
project.
3:26:859 PM
Representative Wilson concluded that the companies wanted
assurance that the state would not consistently alter the
tax regime. If the state wanted the project to move forward
the tax regime would have to be based on a percentage in
order to guarantee a level of certainty for the other three
parties. Mr. Pawlowski concurred that certainty was
imperative for the other parties. He added that it was also
about placing the state in a position to control the
state's destiny and to protect the state's interest. He
furthered that whether the state partnered with TransCanada
was a separate question.
Representative Wilson expressed her concerns that the state
would be giving up revenue because the terms were defined
in percentages rather than dollar amounts. In the past,
fall and spring revenues were distinct dollar values. Her
main concern was that the project would bring affordable
energy to her district. She expressed her doubts.
Co-Chair Austerman discussed the offtake points and the
amount of gas that would be available for in-state use. He
wanted to know how the state would determine current and
future demand, which he suspected would play a role in
determining pipe size specifications.
3:29:52 PM
Mr. Pawlowski referenced Page 3, Recital I of the HOA. The
HOA described the progression of thought that the parties
of the HOA went through in laying out the project. He noted
that the governor and the administration recognized a
synergy between the instate project under Alaska Gasline
Development Corporation (AGDC) and the larger AKLNG
project. The work that AGDC was doing, moving towards an
open season in FY 14 into the first quarter of FY 15, was
looking for gas in the field and the demand for gas from
Alaskans along the right-of-way. Sub I recognized that the
administration would work with AGDC. In turn, AGDC would
participate in and cooperate with the AKLNG project.
Mr. Pawlowski continued with page 12 of the HOA, Article
6.5. He noted that AGDC was tasked with the small in-state
line and getting gas to Alaskans, a core mission. In the
current legislation some of AGDC's missions were defined.
In the near-term, the project would include five offtake
points between the North Slope and Nikiski. The offtake
locations would be determined in consultation with AGDC who
would assist in addressing in-state gas demand. He noted
that DNR would assess the work of AGDC.
3:33:02 PM
Co-Chair Austerman asked for clarification about the role
of AGDC. He asked if AGDC would do the work to determine
the state's potential use of in-state gas. Mr. Pawlowski
responded that AGDC was currently doing the work as part of
advancing the smaller project. By building cooperation
between the large and small projects information was being
shared back and forth. The state would transfer AGDC's work
to the larger project should it progress.
Co-Chair Austerman asked about the price value of offtake
gas prior to LNG. He assumed that the price value would be
appraised at less than gas processed at the LNG facility.
Mr. Pawlowski agreed with Co-Chair Austerman's assumption.
He elaborated that the terms of the MOU with TransCanada
stated the gas entering the LNG plant going north was less
expensive because the transportation costs were less. He
reported that there was a mileage sensitive tariff and that
the tariff of transporting gas from the North Slope to
Fairbanks would be lower than the tariff imposed on
transporting gas to Southcentral Alaska. He noted that the
gas going north was worth less. The tariff to get to
Fairbanks would be lower than to Southcentral.
Co-Chair Austerman supposed that if the state sold its 25
percent of gas in-state it should be priced at the same end
value as in the Asian market.
3:36:01 PM
Commissioner Balash responded that there was a point at
which the state would be indifferent to whether it sold its
gas in-state or in Asia. He remarked that it was an
interesting economic analysis because the state had to also
consider the costs associated with the risks of the
liquefaction plant and the counter party risks with the
state's buyers. He referred to slide 3 and the $3 netback,
the value of the gas at the slope after deducting all
costs. He suggested that the first two $2 figures for the
GTP and pipeline tariffs plus the $3 netback price equaled
$7/MMBTU. Arguably, a sale of the gas of $7 MMBTU in-state
would bring just as much revenue to Alaska as would a sale
of LNG overseas. Exactly whose gas would satisfy in-state
demand was undetermined at present.
3:37:38 PM
Mr. Pawlowski stated:
This goes to a term in the MOU that Commissioner
Designee Balash talked about yesterday is you can look
at the gas in Fairbanks as a coming from the North
Slope then coming south. Or looking at the backhaul
provision in the MOU, look at a Cook Inlet price going
north for free. and so that was put into the MOU to
provide that sort of benefit to the Interior and being
able to look at which is the better price compared to
what is going on in the Cook Inlet Region.
3:38:23 PM
Co-Chair Austerman asked about the anticipated length of
contract for gas sold in the Asian market.
Mr. Pawlowski reported that the initial contracts would be
20 years or more in duration. The contracts would have to
reflect a long-term commitment that allowed the state and
the other parties to obtain financing and to make a final
investment decision in the project. Also, there would be
other interim agreements that would provide other
opportunities in additional capacity. However, the state
would need to look for the long term agreement to be able
to make a final investment decision with any confidence.
Co-Chair Austerman pointed out that the state should make
sure to determine the in-state demand correctly up front to
avoid selling off any of the state's supply. Otherwise, it
could experience some in-state problems as well.
Commissioner Balash believed it was important to have a
midstream partner like TransCanada who knew how to make
money moving additional gas. He felt the state agencies
lacked the needed expertise to expand the pipeline to meet
the in-state demands. The incentive to make an extra buck
moving an extra metric of gas is something that would be in
TransCanada's interest and ultimately serve the people of
Alaska very well.
3:40:32 PM
Vice-Chair Neuman discussed reducing the state's risk. He
noted that he looked at the LNG facility and shipping gas
to the market in Asia. He concluded that depending on
foreign-flagged vessels for shipping could be a huge risk
for the State of Alaska. His concerns regarding shipping
began after reading an article in the Alaska Journal of
Commerce or Business Monthly Magazine that discussed the
topic. Apparently, there were currently 375 LNG tankers
world-wide. In 2008, there were 300 LNG tankers. In
comparison there were 5,700 oil tankers. At a cost of $150
million to $200 million each, the most expensive tanker
built was about $300 million. He wondered if the state had
looked into purchasing 1 or 2 tankers to ensure flow and
reduce the state's risk. Since there were no other LNG
vessels the state could potentially make a share in the
profits. He further suggested that, with an LNG vessel, the
state could ship to other places in America. He wanted to
know how to reduce risk and get the best value for the
state. He wondered about the opportunity to purchase
tankers to allow for a share in the profits.
3:42:12 PM
Commissioner Balash replied that the department had not
looked at his question specifically. What the department
had considered was the relationship of ownership of the
vessels to the nature of the sales contract. There were two
significant categories of contracts; those that sold
product free-onboard and those that sold decimation ex-
vessel. The first category meant that title was changing
hands at the outlet of the LNG plant. The other was
changing title at the dockside destination in Asia. The way
in which the department examined the question, the shipping
costs would be approximately $1. However, the sales price
was a dollar higher or lower, depending on whether the
state owned or chartered the vessel or whether the buyer
owned or chartered the vessel.
Vice-Chair Neuman suggested placing a provision concerning
reducing risk in the HOA. He noted that the biggest risk he
anticipated would be an interruption in flow.
Representative Wilson asked why the state was building an
LNG plant on the North Slope when it knew it could get gas
in Cook Inlet and would build an LNG plant in the same
location. She inquired why the state was building two LNG
plants.
Mr. Pawlowski replied that he was the designee for DOR on
the AIDEA board. He indicated he spent a lot of time on his
favorite immediate LNG project compared to the other big
LNG project that would take longer. It really had to do
with the timing. The small LNG plant slated to be built on
the North Slope for the Interior energy project was a near-
term project that would provide the ability to build out
the infrastructure to take advantage of the larger LNG
project. The large LNG project was not slated to come
online prior to the early 2020s because of the scale of
permitting and the amount of work that needed to be done.
The Interior energy project had a very near-term start-up.
He elaborated that loans were already being authorized for
build-out in the region at present.
3:45:15 PM
Representative Wilson recalled a smaller LNG plant that was
currently not at capacity and taking gas from Cook Inlet.
She wondered if it would be smarter for the state to
reshape the plant currently in Cook Inlet as a temporary
solution rather than investing in another LNG plant on the
North Slope.
Mr. Pawlowski replied that the direction to advance the
Interior energy project belonged to the legislature. He
expressed his confidence in the work in progress,
especially since MWH [Global] was recently selected as the
preferred party. The opportunity to use the facility long-
term was there. He stressed to the committee to think about
what level of state resource would get stranded in the
smaller project if the larger project moved forward. The
opportunity to bring gas to Fairbanks was not limited to
supplying residents but also to possibly supplying Golden
Valley Electric Cooperative, that had expressed interest in
the LNG trucking project. The project was moving rapidly
forward; however, a final approval of the project has not
been issued. He opined that the small project should
continue to advance in order to keep the larger project
advancing as well. He highlighted the importance of getting
gas to the Interior as soon as possible and helping to lay
the ground work for the demand for the AKLNG project.
Representative Wilson agreed that she and Mr. Pawlowski had
the same goal in mind. She just wanted to make sure the
state was not passing up a more expeditious and more
affordable opportunity to bring gas to the Fairbanks area.
3:47:50 PM
Representative Guttenberg discussed the state's
relationship with TransCanada. He relayed that TransCanada
would have a 25 percent interest in the project. The state
wanted the ability to expand to whatever capacity possible
at the beginning without filling the line up with
compression. He suggested that the other three investors
may want to minimize the cost up front developing a
different design strategy that had the line at capacity
with compression. He asked how the state would direct the
remaining 75 percent interest in the line when the state
was in conflict with the other investors.
3:49:53 PM
Commissioner Balash talked about the unique challenges of
the project. He indicated that because of the size of the
project and the length of the financing terms all of the
gas at Point Thomson and Prudhoe Bay would need to be
developed. He surmised that every party at the table had a
veto. The likelihood that the project would succeed or move
forward without every party's interests being satisfied was
slim. He pointed out that the state needed to be very
thoughtful about the agreements coming together for review
and approval. Inside the equity arrangements and governance
structure the final design would be very important. The
expansion principles that were found in appendix A of the
HOA laid out the circumstances under which an expansion
could not move forward. One of the circumstances listed was
when one of the other parties could be harmed. He explained
that once the pre-FEED phase was completed a final design
would be taken to FERC to file for National Environmental
Policy Act (NEPA) purposes. The state would need to be
satisfied with the design providing a sufficient increment
of capacity available through compression. The state would
seek certifications from the other parties making sure the
design was expandable to meet the state's need. He
mentioned having discussions about building the pipe
slightly larger. Forty-two inches was estimated as the
correct number. However, the state had not agreed to it, at
present.
Commissioner Balash suggested there were scenarios where it
would make sense to pre-pay for a larger pipe. He reported
that the department had looked at the difference in cost
between a 48-inch pipe and a 42-inch pipe. The pipe would
cost more but the compression and associated facilities
would cost less; the difference of about $600 million. Much
like Representative Neuman's idea of putting another vessel
in the water, the idea that the state pre-pay for
additional pipe capacity upfront was something DNR
investigated. He also pointed out that, in Appendix A, when
there was a reallocation of capital among the parties, if
the state pre-paid money for an expansion and did not end
up wanting it the state would have the opportunity to get
some of its capital back. Such a provision was already
incorporated into Appendix A in the expansion principles.
3:54:26 PM
Representative Guttenberg inquired about the state's
liability to use the increased capacity if it contributed
$600 million for a larger pipe.
Mr. Pawlowski indicated that the state would recover the
extra costs in the tariffs. With the reallocation of
capital, should a party use the capacity, the state's rates
would go down essentially reimbursing the state for its
initial outlay.
Representative Guttenberg clarified that he was not asking
about when the pipe reached capacity for expansion. He was
referring to the larger pipe when the gas initially started
to flow. He wondered if the state would have to compensate
TransCanada for unused gas.
Mr. Pawlowski replied that the extra incremental cost would
be rolled into the capital costs that then would be spread
across the tariff. Less gas would be moved through a larger
pipe. The extra cost would be borne by the state because
the state would be buying the opportunity for the
expansion.
Representative Guttenberg expressed his approval of the
idea.
Co-Chair Austerman commented that additional hearings on
the bill. He mentioned that government take had not been
discussed.
3:56:58 PM
Representative Thompson discussed the expansion of
capacity. He mentioned the provision in the HOA which
provided for at least 5 Offtake points. He asked if there
had been any provisions for an in-take point if a large
amount of gas was found.
Commissioner Balash replied that of the five offtake
points, at least two of them would potentially be in-take
points as well. He believed one of the points would be at
Nenana.
Vice-Chair Neuman asked if there were any further questions
regarding slide 3.
3:57:52 PM
Mr. Pawlowski reminded members about the analysis regarding
the state's expenditure with slide 4: "SOA Investment for a
25 Percent Ownership with TransCanada is Expected to be
$1.3-$4B Lower than for a 20 Percent Ownership Going
Alone." He explained that the slide depicted three
different cost curves corresponding to the state's level of
investment options for FY 18 through FY 23. Twenty percent
state ownership would require an investment of
approximately $11 billion. If the state chose not to
exercise its equity option with a 25 percent TransCanada
ownership the state's investment requirement would drop to
approximately $7 billion.
Mr. Pawlowski referred to slide 5: "SOA Revenues for a 25
percent ownership with TransCanada are Expected to be $0.4-
$0.5 billion per year higher than for a 20 Percent
Ownership Going Alone." He explained that the slide was a
comparison of potential revenues depending on the state's
level of ownership. The slide showed how much more revenue
the state would receive with a 25 percent ownership in
partnership with TransCanada compared to a 20 percent
stand-alone ownership. The state's revenues would go from
$3.6 billion per year to $4.1 billion or about a $400
billion benefit to the state as an owner with TransCanada
versus going it alone at 20 percent. He remarked that there
was a balancing of upfront investment versus long-term
return.
Representative Wilson asked about the option to proceed
without a partner and about a preferred time frame.
4:00:56 PM
Commissioner Balash replied that ending Alaska Gasline
Inducement Act (AGIA) was not difficult. However, DNR's
main concern was maintaining project momentum with all of
the partners the state had worked with over the previous
three years. He noted partnerships were planning on
TransCanada's involvement. Summer fieldwork was scheduled,
as was the remaining pre-FEED activity for the project. The
activities would be populated with TransCanada employees
with certain skill sets and expertise. If TransCanada were
suddenly not involved, there would be a scramble to fill
the void left behind. His prediction was that the other
three investors would debate over what company would fill
the void, possibly causing delays in the project.
4:02:47 PM
Representative Wilson asked if there was a list of items
that should be included in order to remain in alignment
with the HOA when considering amendments. Mr. Pawlowski
encouraged members to review sections 60 and beyond;
directions for financing information, a range of options,
and expansion policies.
Representative Wilson commented on avoiding another DNR.
Vice-Chair Neuman asked if the 13 percent production tax
rate was locked in.
Commissioner Balash replied in the negative. He stated that
SB 138 set a production tax, but the bill did not allow the
administration to execute long-term agreements. The bill
gave the administration the authority to negotiate and
execute agreements of less than two years in duration. Any
agreement longer than two years had to be approved by the
legislature prior to execution.
Vice-Chair Neuman clarified that, as an example, the state
legislature could add an additional 2 percent in-value
production tax after the passage of the bill.
Mr. Pawlowski stated that the power to set taxes belonged
to the legislature. The administration was confident in the
tax rates established in the bill. He was not implying that
the administration supported any changes to the rates.
Vice-Chair Neuman clarified that his question aimed at
dispelling the fears of other members about being locked
into a percentage with the bill. He was glad to know the
agreements would be brought before the legislature again
for final approval.
4:07:34 PM
Representative Edgmon referred to the difference between
express and implied agreements. He mentioned that as the
project continued to move forward legislators would
potentially feel additional pressure to maintain project
momentum. He stressed that he was not making any
accusations. He emphasized that with the different
permutations he wanted to better understand to what extent
the state was making implied agreements because the
decisions were being made at present that would likely add
to the pressure of keeping the project going.
Mr. Pawlowski appreciated Representative Edgmon's comments.
He remarked that it was essential to the project that the
administration and the legislature work together and were
engaged as the agreements were crafted. He opined that the
bigger decisions should not be rushed.
Representative Edgmon asked the administration's team about
Co-Chair Austerman's point regarding the offtake lines. He
wanted to see an informal analysis of what the debt service
would potentially be for an offtake point. He wanted to
know, of the 20 percent royalty amount of up $180 million
per year, how many offtake points could be serviced. He
requested greater detail than high-level concepts.
Vice-Chair Neuman discussed the schedule for the evening
meeting.
CSSB 138(FIN) am was HEARD and HELD in committee for
further consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 138 H FIN Black & Veatch 04.15.14.pdf |
HFIN 4/15/2014 1:30:00 PM |
SB 138 |