Legislature(2007 - 2008)SENATE FINANCE 532
07/23/2008 01:00 PM Senate SENATE SPECIAL COMMITTEE ON ENERGY
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | HB3001 | TELECONFERENCED | |
SB3001-APPROVING AGIA LICENSE
HB3001-APPROVING AGIA LICENSE
CHAIR HUGGINS brought SB 3001 before the committee. He asked Mr.
Walker to explain the makeup of the Port Authority to the
audience before Mr. Shipkoff resumed his presentation.
BILL WALKER, Project Director, Alaska Gasline Port Authority
(AGPA), Anchorage, AK, said the Port Authority is an entity
created in 1999 by three municipalities; the North Slope
Borough, Fairbanks North Star Borough, and the City of Valdez.
Their goal is to build an all-Alaska gas pipeline. Recently
Mitsubishi Corporation and Sempra LNG joined their effort, which
brought unique expertise to the project. He pointed out that
Sempra LNG has the only receiving terminal on the West Coast and
is affiliated with Sempra Energy, the largest single distributor
of natural gas in the United States. He described the AGPA
project as a 40-inch line from Prudhoe Bay to Delta Junction and
42-inches from Delta to Valdez, with approximately 18 off-take
points in the state.
CHAIR HUGGINS shared the sentiments of a citizen who called him
just before the meeting to express her support for an all-Alaska
gas pipeline.
1:14:30 PM
RADOSLAV SHIPKOFF, Director, Greengate LLC, Washington, D.C.,
said that before resuming his presentation [from the document
"Alaska Gasline Port Authority, Presentation to Alaska State
Senate, July 22, 2008, Juneau, Alaska]." he would like to
provide answers to several specific questions that were asked
yesterday. Senator Wagoner asked about re-gas capacity in North
America. Mr. Shipkoff displayed several slides of information
from the FERC [Federal Energy Regulatory Commission] website,
which shows existing projects, those under construction, and
projects approved but not yet under construction. The total of
the capacity of existing and under-construction projects was
21.8 bcf/day out of a total U.S. consumption of roughly 65
bcf/day. He pointed out that the number of approved terminals
that had not yet started construction added up to an additional
26.7 bcf/day. Proposed terminals, those that had not obtained
their regulatory approvals, represented another 18.1 bcf/day.
[http://www.ferc.gov/industries/gas/indus-act/pre-filing.asp.]
CHAIR HUGGINS asked for clarification of the projects listed as
"under Coast Guard jurisdiction."
MR. SHIPKOFF explained that if a project is far enough offshore,
a certificate is issued by the Coast Guard, not the FERC. He was
not sure, but thought the distance was 10 or 11 miles.
He also addressed the senator's question about imports of gas
into the U.S. The first slide showed monthly imports of pipeline
gas according to the EIA [Energy Information Administration] and
illustrated that Canadian imports dominate at approximately 9 to
12 bcf/day, with very small amounts coming in from Mexico. The
next slide showed monthly imports of LNG [liquid natural gas].
He separated imports from Trinidad because it is located very
close to the U.S.; so it makes sense for them to send their gas
here even if there are attractive prices in Europe or elsewhere.
CHAIR HUGGINS recognized Senator Fred Dyson's arrival.
1:19:37 PM
SENATOR WIELECHOWSKI asked Mr. Shipkoff on average, what price
and tariff the U.S. is paying to import LNG.
MR. SHIPKOFF answered that the FERC reports average basis prices
on the same website where he found monthly imports, but it is
not always updated. For the most part, he said, LNG imported
into the U.S. is imported under a sales and purchase contract
indexed to a pricing hub near the terminal where it comes in.
SENATOR WIELECHOWSKI observed that the market seems to be very
sporadic.
MR. SHIPKOFF explained that occurs when sellers are in a very
strong position and are able to negotiate diversion rights for
their cargos. In the U.S. a buyer of LNG has alternatives; if an
LNG shipment doesn't show up, the buyer can purchase pipeline
gas. Asian buyers are not usually excited about giving diversion
rights to their sellers because they have no alternative source
of gas, which is one reason they have to pay a premium. A seller
who has successfully negotiated diversion rights can send the
cargo wherever the highest price is. Typically, contracts have a
provision that the seller must compensate the buyer if the cost
of purchasing replacement gas exceeds the amount the buyer would
have paid under the contract. Any loss resulting from the
necessity for the buyer to obtain alternative supply is usually
negligible and is far outweighed by the incremental benefits to
the seller of diverting the cargo.
1:23:55 PM
SENATOR THOMAS asked if the price [of gas] can be positively
determined based on FERC reports of information provided by
sellers or transporters when they go to the regulatory agency to
establish the price. He assumed part of the formula would be
what they paid at the point of importation, plus transportation
costs from the import point to the distribution center.
MR. SHIPKOFF advised Senator Thomas that the FERC does not have
any approval authority over the price of importation.
SENATOR THOMAS asked if gas prices and transportation costs have
to be reported to the FERC.
MR. SHIPKOFF answered that once gas enters the U.S. system it
travels on FERC-regulated pipelines. What FERC reports is the
contractual price under which LNG is imported at the terminal;
it does not report costs downstream of that. He added that LNG
receiving terminals are not subject to FERC economic regulation;
they are subject to FERC approval and siting regulation.
SENATOR THOMAS said he is trying to get at the calculation of
cost to the customer and whether the sellers' rates have to be
approved somewhere along the line.
MR. SHIPKOFF acknowledged that Senator Thomas' observation was
correct in the sense that a seller of LNG who tries to access
the U.S. market faces a number of costs that must be subtracted
before reaching the ultimate netback. These include
regasification and transportation via pipeline to the nearest
liquid point or to wherever the consumer is located. If the
seller's contract is indexed to Henry Hub, regardless of where
the gas is being sold, it will typically have a provision that
subtracts a certain amount from the Henry Hub price; so it is
Henry Hub minus "x" or a percentage of Henry Hub. The
differential is intended to account for the fact that someone
has to pay the costs to get the gas to market. He commented that
sales contracts to Asia are structured differently. The buyer
takes possession at the offloading point, so gas is delivered x-
ship price and the seller does not pay the cost of
regasification and transportation.
1:28:59 PM
CHAIR HUGGINS recognized that Senator Donald Olson is attending
via teleconference.
SENATOR ELTON said he is still struggling with the chart [slide
2: U.S. Imports of LNG] and asked for Mr. Shipkoff's assistance.
He compared April 2008 to April 2007 and noted that April of
2008 showed roughly a quarter of the imports that the U.S. had
in 2007 and April 2006 showed about half. He asked if the spike
in 2007 occurred because other markets were softer and presented
an opportunity for sellers to get a better price.
MR. SHIPKOFF said Senator Elton was correct; the fluctuation can
be attributed to variations in the relative pricing between
different markets. Once LNG plants are up and running it is not
a good idea, from a technical standpoint, to interrupt
production; so if the LNG is not showing up in the U.S. it is
probably because sellers exercised their diversionary rights and
went somewhere else.
1:32:20 PM
SENATOR ELTON asked what the vulnerabilities might be of selling
Alaska gas into an LNG market with these kinds of radical
fluctuations.
MR. SHIPKOFF pointed out that they are not looking at an LNG
market; they are looking at imports of LNG into the U.S. market,
which is a very large, very deep market. He pointed out that the
peaks show a little over 3 bcf/day of imports out of over 65
bcf/day total U.S. consumption; so imports represent a very
small percentage of overall U.S. consumption and are not likely
to influence price. He added that the Asian markets do not show
the same kind of fluctuation because they do not have
alternatives. From Alaska's point of view, he said, this graph
shows the benefit of being a seller.
SENATOR ELTON said his understanding was that Alaskan LNG would
be subject to long-term contracts, which would not give us, as
sellers, the ability to switch to other markets.
MR. SHIPKOFF said diversionary rights are exercised under and
embedded into the long-term contracts. The contract provides
volume security and a base-line revenue security because it is a
seller's option to divert.
1:35:55 PM
MR. SHIPKOFF said the next slide [slide 3: Transportation Cost
Comparison (2019)], addresses Senator Wielechowski's question
from the day before. The left bar showed the transportation
costs of LNG and the right bar showed the transportation costs
of the 4.5 bcf/day pipeline project based on their model. He
pointed out that these figures are different from those shown in
AGPA's application because they recalculated the tariffs in this
analysis using the administration's assumptions for the
pipelines, conditioning plant, escalation of capital costs and
escalation of operating costs, in order to minimize
discrepancies between the assumptions. As a result, the total
cost was higher than the cost he indicated during his testimony
yesterday.
1:38:32 PM
CHAIR HUGGINS called a short at ease to fax copies of the slides
to Senator Olson.
1:43:26 PM
CHAIR HUGGINS called the meeting back to order.
1:43:51 PM
MR. SHIPKOFF resumed with the second of 2 slides [slide 4:
Netback Pricing at GCP Inlet (2019)] showing a comparison of
transportation costs and netbacks between the two projects,
assuming first gas in 2017. The 2.7 bcf/day LNG project showed a
projected price of $12.16 per mmBtu in Japan based on the EIA
reference case price assumptions. That price minus projected
transportation costs of $7.71 produced a netback at the gas
conditioning plant of $4.45. The corresponding AECO price in
Alberta, using the same set of assumptions, was projected to be
$8.26 minus $4.22 of transportation costs for a netback price of
$4.03.
CHAIR HUGGINS asked if this analysis is based on his assumptions
and data, not a comparison between his data and the
administration's data.
MR. SHIPKOFF said the analysis uses AGPA's financial model based
on EIA price forecasts and the capital cost estimates for all
the common components for which they had estimates from the
administration's analysis. So they used the administration's P50
capital cost estimates for the Valdez 2.7 pipeline, for the
conditioning plant, and for the 4.5 bcf pipeline case in Alaska
and in the Yukon and Alberta. They used the Port Authority's
estimate for the LNG plant capital cost and shipping costs,
which were not very different from the administration's.
1:47:22 PM
MR. SHIPKOFF shifted back to where he left off in his
presentation yesterday, on the slide which illustrates the
evolution of LNG pricing formulas in the East Asian market
[slide 21]. The key point, he said, is that sales prices are
directly related to the price of oil. He stressed that AGPA's
analysis does not assume the highly favorable selling prices
currently in place will continue; rather they anticipate that
the dynamic will shift back toward slightly more favorable buyer
terms. That means they will not be able to sell LNG at parity or
above parity with oil, which is what some projects are doing.
The administration put forward a set of three cases to evaluate
what Alaska LNG pricing might look like. He said that AGPA
adopted their base-case assumption for the purpose of this
analysis, which uses 0.1485 times the oil price plus 90 cents to
calculate the price in dollars per mmBtu. He pointed out that
typically price indexation formulas in Asia are indexed to a
basket of crudes called JCC or "Japan crude cocktail;" but for
simplicity they just called it "oil price." They did not use the
high case from the gas strategies report, which would have been
significantly more favorable for the LNG project. Neither did
they use the low case because they do not believe it is
realistic based on their analysis as well as discussions with
their partners and potential buyers.
MR. SHIPKOFF moved away from discussion of the Asian LNG market
to talk a little bit about North American gas pricing, which he
said will determine the netback on the pipeline side. Page 23 of
his presentation [slide 23, North American Prices: WTI and Henry
Hub] graphed historical monthly prices of WTI [West Texas
Intermediate] and Henry Hub. He explained that the scales on the
left side in dollars per barrel and the right side in dollars
per mmBtu are actually on a thermal equivalent basis; so one
could also look at the blue line representing oil in terms of
dollars per mmBtu. They generally move together, however recent
years have seen a bit of a disconnect as gas prices have not
kept pace with rising oil prices.
CHAIR HUGGINS commented that oil was at about $124.50 per barrel
and gas at $10.40 something, down from about $12.50.
MR. SHIPKOFF responded "Exactly," so the ratio would be about
$12.00.
1:51:01 PM
SENATOR THOMAS remarked that the gas seems to spike at almost
the same time every year, from about December through June. He
asked if that is just a winter spike based on weather
conditions.
MR. SHIPKOFF confirmed that North American gas prices are very
seasonal and typically spike in the winter time, especially on
the East Coast. Another way to look at the issue is by plotting
the oil-to-gas price ratio, which is exactly what Chair
Huggins' point addressed [slide 24: WTI and Henry Hub Price
Ratio]. Historically, it fluctuates pretty wildly. The average
over the previous five years was about 8; but it had been higher
in recent years.
He explained the reason the ratio is important in this context
is that a higher crude oil to Henry Hub price ratio means the
differential projected between Asian and North America prices
will increase [slide 25]. Higher oil prices directly affect
Asian LNG prices via the indexation formulas; so if that ratio
is higher, it means higher LNG prices and lower North American
gas prices.
The next slide [slide 26: DOE EIA Forecast Price Ratios (AEO
2008)] compared the five price cases published by the EIA in
their Annual Energy Outlook from June 2008. The ratios in the
high economic growth case and the low economic growth case are
almost identical to the reference case. In all 3 cases, the
ratio is about 10 and projected to stay that way through about
2030. The "high price case" shows a significant increase from
between 10 and 12 to about 14, while the low price case goes
back to the historical ratio of 8 and is projected to decline to
about 7 by 2030.
MR. SHIPKOFF advised that the higher oil-to-gas price ratios in
higher oil price environments occur, especially in the long-
term, because one of the principal uses of natural gas is power
generation. In the long-term, natural gas competes with other
fuels such as coal, which do not generally increase in price to
the same degree as oil.
The next slide showed the Wood Mackenzie forecast, which was
used by the administration in their analysis [slide 27:
Administration's forecast (Wood Mackenzie)]. AGPA did not have
access to the actual numbers in the forecast; however the
administration did publish a chart which was copied and included
in this presentation. The dotted line shows the oil-to-gas
ratio. On the right side of the axis it starts high to date and
is projected to go down to about 8 then increase to about 9; so
it is somewhere between 8 and 9 during the forecast period.
Slide 28: Price Ratio Forecast Comparison, the historical
average at about 8.1 for the past 10 years and summarized the
average through 2030 of all 5 EIA cases to be between 8 and 9.
The projected average of the implied ratios under the futures
market was 12.5.
MR. SHIPKOFF turned to slide 29 and said he was going to put
together the capital cost assumptions he talked about yesterday
and a range of different price assumptions discussed today to
show the relative netbacks of the 2 projects. He first reviewed
the assumptions that went into their calculations:
· Capital cost assumptions - The source of the assumption for
everything except the cost of the LNG facilities was taken
from the administration's P50 estimates.
[slide 30, Other Assumptions]
· Capitalization ratios used were the same as those proposed by
TransCanada and assumed by the administration.
· Return on equity was taken from the same sources.
· The spread between the cost of guaranteed and non-guaranteed
debt was 150 basis points and was taken from the Econ One
analysis.
He emphasized that the LNG would benefit from zero percent
guaranteed debt. They have assumed that the pipeline benefits
from 100 percent guaranteed debt, even though the financing plan
analysis presented by Goldman Sachs assumed that a substantial
part of the federal debt guarantee would not be used. Goldman
Sachs projected that only 30 percent of the debt on the pipeline
would actually be guaranteed, assuming no cost overruns occur.
So to the extent that a significant portion of pipeline debt is
not guaranteed, the netbacks would be lower than for it than the
LNG plant. This analysis assumes 100 percent of their debt is
guaranteed.
CHAIR HUGGINS asked if that is primarily due to higher tariffs.
MR. SHIPKOFF answered yes, reducing the portion of the guarantee
increases the average interest rate, which increases the cost of
capital, which increases the tariff.
1:58:29 PM
The LNG plant factor was 95 percent, which increased the unit
tariff because fewer Btu's were being transported on an annual
basis. The LNG sales price used the same formula as the base
case assumed by Gas Strategies. The shipping costs were a
function of the information provided to AGPA by their shipping
consultants, Mitsui OSK Lines; they obtained price quotes from
shipyards so these were actual non-committed cost estimates. The
shipping costs, plus time charter and voyage costs, boil off and
fuel consumption, come to a nominal cost in 2019 of about $1.10.
For the purposes of this analysis, they assumed a rich gas
scenario as presented in the RFA [request for applications].
They had lean in the rich gas case and the reason it was $11.33
instead of $11.16 here was because, for the LNG case you have to
strip out all the CO2 rather than leaving 1.5 percent, which is
what the RFA gas composition assumed. They also changed their
original escalation assumption to what the administration used:
4 percent per annum for Capex and 3 percent per annum for
operating expenses.
MR. SHIPKOFF introduced slides 31 through 36 showing different
scenarios under various assumptions and comparing the average
netback at the GCP [gas conditioning plant] inlet in real, 2008
terms. He said they took the nominal 25 year project life
netbacks, de-escalated them to 2008 terms, and averaged them
out. In each case graph, the red bar represents the netback
under the 2.7 bcf LNG project; the dark blue bar is the 4.5 bcf
pipeline; and the light blue bar is the 3.5 bcf pipeline. The
EIA reference case reflected an average netback advantage for
the LNG project of about 80 cents. In the EIA high price case,
this advantage increased substantially because there was a very
high oil-to-gas price ratio; therefore the differential between
the Asian LNG price and the lower 48 prices, or rather the
Alberta prices, increased substantially to almost $6.00. Under
the low price scenario, the pipeline was more attractive by
about $1.50.
2:01:37 PM
CHAIR HUGGINS asked Mr. Shipkoff if his reference case was
essentially an intermediate case between the high and low
scenarios.
MR. SHIPKOFF responded that, in some of their recent runs they
used this as their base case. The reference case is the
Department of Energy's EIA base case forecast.
SENATOR ELTON said, in terms of netback, he remembers the "road
show" presentations showed that over the life of a pipeline
taking gas to the North American markets, the state would earn
in the neighborhood of $66 billion and the comparable with LNG
was in the neighborhood of $30 billion. He asked if he was
correct in assuming that the main difference in the return to
the state was the volume of gas moved, that is, 4.5 bcf/day as
compared to 2.7 bcf/day.
MR. SHIPKOFF confirmed his assumption. He explained that if they
preserved these assumptions and generated these results in terms
of unit, per mmBtu netback, then showed the actual net present
value [NPV] of the total amount of cash flow sent upstream to
the producers and the state and shared it according to a fiscal
structure upstream, the fact that under the vast majority of
cases they show a higher unit netback would not be sufficient to
compensate for the LNG project showing lower total present value
because they were comparing a 2.7 bcf/day project with a 4.5
bcf/day project ... it is just a volume issue.
2:03:48 PM
CHAIR HUGGINS called a brief recess.
2:21:27 PM
CHAIR HUGGINS called the meeting back to order.
MR. SHIPKOFF described the first of the set of slides showing
the netback comparisons under a range of different scenarios.
This slide [slide 31] showed the results for the 3 different
price cases forecast by EIA.
The next [slide 32] assumed a flat constant 2008 USD $60/barrel
oil and 3 different oil-to-Henry Hub price ratios: 10/1, 9/1 and
8/1. At 10/1 the LNG project had about a $.50 advantage. It fell
a little below the 4.5 bcf pipeline at 9/1 but the difference
was negligible. At 8/1 however, it showed a significant
disadvantage of about $.80.
The next slide [slide 33] showed the same set of assumptions in
terms of 3 price ratios, but used an oil price of $80/barrel. At
10/1 LNG was more attractive than the 4.5 bcf pipeline. The 9/1
ratio produced a slight advantage of about $.40. But at 8/1 the
LNG was still less attractive by about $.65.
MR. SHIPKOFF moved to slide 34, which showed the assumptions
using $100/barrel oil. Under this scenario the LNG project had
an even greater advantage at the 10/1 and 9/1 ratios; and the
disadvantage was narrower at 8/1.
Slide 35 showed a different kind of sensitivity. They kept the
EIA reference case price assumption and all other factors
constant for all 3 cases, except that they increased the cost of
the LNG plants. The left set of bars showed their base case,
which was $8 billion un-escalated. In the middle that was
increased by 40 percent and on the right by 80 percent, which
was roughly the same as the administration's P50 estimate. This
graph showed that at base case + 80 percent they would break
even with the 4.5 bcf pipeline.
The final sensitivity case [slide 36] was included to give an
indication of what the sensitivity would be to variations in the
guaranteed portion of the pipeline debt. He reiterated that they
had assumed none of the LNG project debt would be federally
guaranteed because they are not eligible for the federal loan
guarantee. However, they anticipated that some fraction of the
pipeline debt might not be guaranteed because there would not be
a sponsor completion guarantee for the debt; therefore they were
reserving a substantial portion of the guarantee as a
contingency cost-overrun facility. He explored a range from 100
percent, which was the base case, at which they would benefit
from all of their debt being guaranteed, to 0 percent, meaning
none of their debt would be guaranteed, and the variation was
not very big. Their costs increased and their netback decreased
by about $.07 for each 50 percent of the debt.
MR. SHIPKOFF stated that what all of these cases are intended to
convey is not that they are absolutely certain that under all
cases they will have a higher netback than the pipeline, but
that under a wide range of different assumptions the results do
in fact show that the smaller 2.7 bcf project generates higher
unit netback results [slide 37]. As a point of comparison he
suggested that the legislators compare the similar assumptions
in this slide with what the Econ One analysis showed using their
model.
He commented that the next and final slide [slide 38] went to
the point Senator Elton raised earlier, which was that the LNG
project generates smaller present value in terms of total
absolute cash flow, not in terms of per-unit price netback. He
said that is because it is a smaller project. Even though, under
many assumptions, under several scenarios, it shows a higher
mmBtu netback, the volume is not sufficient to compensate for
the nearly 60 percent higher volume on the 4.5 bcf pipeline.
MR. SHIPKOFF concluded by saying that AGPA does not necessarily
view the smaller volume and therefore smaller NPV [net present
value] associated with this project as a disadvantage. They
believe the lower volume requirement increases the likelihood of
success because it enhances their prospects of securing gas
supplies sufficient to implement the project. Furthermore, they
do not view the 2 options as mutually exclusive. Reports that
address the YTF [yet to find] reserves indicate that there is a
lot of gas on the North Slope, enough gas for both projects even
if the 4.5 bcf pipeline is expanded to 6 bcf or more. They
believe it makes the most economic sense to monetize those
molecules that can attract the highest price, the highest per
mmBtu value, in the way that maximizes their value; so if they
can monetize 2.7 bcf and attract a higher value on volumes going
to Asia, they think it makes sense to do that and still do the
4.5 bcf pipeline.
2:28:56 PM
MR. WALKER thanked the legislature again for this opportunity to
detail the reasons they believe theirs is the superior project
on the economics. He also shared the fact that they recently
received a letter, which was also sent to the Speaker of the
House and the President of the Senate, from the State of Hawaii,
expressing interest in LNG from Alaska. Mr. Mark Glick [Economic
Development Director] of the Office of Hawaiian Affairs
contacted them approximately a year earlier to express Hawaii's
interest in Alaskan LNG. Hawaii was importing large amounts of
coal from Australia. That letter marked the end of a 12 month
study by Hawaii to determine the feasibility of replacing their
coal-fired power generation with LNG. He pointed out that their
volume requirements were similar to Alaska's, from 3 to 5 bcf,
and represented another positive market opportunity. He believed
that the export license and Jones Act issues were covered in the
teammate agreement they had for the ships.
MR. WALKER added that about 10 days ago, he discovered Canada
had been faced with a similar dilemma regarding a $300 million
transcontinental pipeline in the 1950s. He located a book about
it entitled, "Pipeline: Trans Canada and the Great Debate / A
History of Business and Politics" [by William Kilbourn] and
found that the situation was pretty similar to Alaska's. Canada
wanted to move gas from the Alberta area to Toronto and had 2
proposals on the table. One would have looped through the Great
Lakes area, picked up market in the U.S., then looped back up
into Toronto. The other was referred to as the "all-Canadian
line" and Parliament became quite involved in the matter of
which route they should go with. The U.S. route would have been
about $50 million cheaper to build; but they were emphatic that
the all-Canadian route should be built first. It didn't have the
best economics, but there were communities in parts of Canada
that would not be serviced with the U.S. route. They also wanted
to retain control over the project. They were concerned that
when it crossed into the U.S. and back there would be a
different jurisdiction, a different set of laws. To make a long
story short, the government of Canada got involved in that
process and did a loan to make the financing work so they would
take the risk and it was a very successful project. TransCanada
ultimately did the project in conjunction with the competing
line; they basically became one. The analogy was too close not
to comment on and some people involved in AGPA's project felt
the only way it was going to get off of dead center was for the
state of Alaska to take an ownership position in it to the tune
of 100 percent on infrastructure, even if they divested it the
next day. There was a clear example of how that was done in the
past.
2:36:28 PM
SENATOR WAGONER interjected that actually took place in 1956.
MR. WALKER agreed.
CHAIR HUGGINS asked who built that pipeline.
MR. WALKER replied that it was built by TransCanada.
CHAIR HUGGINS commented that they can ask TransCanada about it
later.
MR. WALKER asserted that they did a great job and the parallels
couldn't be stronger.
2:37:07 PM
SENATOR WIELECHOWSKI said he has gotten a lot of emails and
phone calls about comments made by the CEO of TransCanada on
first developing Keystone, then developing the Keystone Project,
then building Mackenzie and then building Alaska. He asked Mr.
Walker for any comments he might have and how that fits into the
timelines that have been set forth under the AGIA process.
MR. WALKER said he received the same email and watched the
comments on his computer. He said he had been asked before why
he thought Mackenzie was going to go first, and it seemed the
chairman of TransCanada answered that pretty clearly yesterday.
The way he saw it, it would be the Keystone project, then the
Keystone expansion, then Mackenzie, and then Alaska. He thought
the timeframe was probably in line with what the application
said, about the end of the next decade, about 2018; but it would
certainly put us behind three other projects.
2:39:00 PM
SENATOR WAGONER said he wanted to go back to discussions they
had yesterday on capital cost assumptions. He said he had
received some additional information, including an article from
Tom Phalen, Vice President of upstream operations at Fluor
Corporation, who was responsible for directing Fluor's project
operations for LNG facilities on a global basis. Senator Wagoner
stressed that this reaches farther than Alaska's gas liquids or
the LNG project; they have to take it into consideration on
pipeline costs, gas to liquids, gas liquids, the whole works.
Basically what Mr. Phalen said was that all LNG project costs
had escalated since 2005 at the same 20 percent per year rate as
other upstream projects, creating a higher degree of economic
uncertainty for liquefaction projects. In addition to that, he
said doubling of the EPC project technical resource requirements
between 2005-2007 would create a 10 to 15 percent deficit of
people to staff the projects by 2010. Senator Wagoner said he'd
like the AGPA folks to respond to that, because they said these
were 2007 actual estimated costs and this is kind of scary for
not only this but the pipeline project.
MR. SHIPKOFF responded that they share his concerns. It is a
legitimate issue and a big issue for any project that is a major
capital-intensive project in planning. He said that over the
past couple of years, whether it's LNG projects, petrochemicals,
chemicals or pipelines, all projects have experienced
substantial cost overruns. They saw this in their own numbers;
they practically doubled from 2005 to 2007. So he could not say
with any certainty what was going to happen in 2012. He said he
is always reluctant to quote a tariff or to give the netback
price in dollars and cents because he is afraid it will convey a
false sense of precision, as if they know what the price is
going to be down to the last cent. They don't. He admitted that
there are very few things he can say with confidence about their
analysis or anybody else's; but he can say with a high degree of
confidence that all of these numbers that they are talking about
today are going to be wrong; its going to be something
different. Capital cost increases are a significant issue and
have been the result of a number of factors: materials costs
increases, steel and other materials; energy cost increases; the
EPC market has tightened substantially; the contractors
themselves are having a hard time finding qualified engineers
and then between the universe of contractors who qualify to do
these projects, all of them are booked because there have been
so many projects that have proceeded and attempted to go to
financing and have secured contracting services that there's a
huge backlog at all of the major firms. He hoped the backlog
would clear in the next few years, for their project's sake and
for the pipeline project's sake. He said one of the issues they
had to address with Bechtel when they were looking at the
pipeline component of the project was whether they were going to
find enough welders and engineers to do all the detail work that
was going to have to be done during the development process.
2:43:52 PM
CHAIR HUGGINS reminded members that according to the articles
they had seen on Mackenzie, it had gone from $4 billion to $16.2
billion in recent years; so Senator Wagoner was right about
escalation.
SENATOR WAGONER asked Mr. Walker if AGPA had current contracts
or if they were working on contracts with their other partners,
such as Mitsubishi or Sempra.
MR. WALKER answered that they currently had an MOU with
Mitsubishi and Sempra that provided for further definitive
agreements by the end of August. He confided that a factor in
their timing was that they felt this process would have
concluded by the end of August so they could decide where to go
from there.
2:45:13 PM
SENATOR ELTON opined that they need a buyer but they also need a
seller at the other end of the pipe, and asked if they had
started a process with potential sellers.
MR. WALKER confirmed that is a necessary piece of the process
and the process had started; but said he could not be any more
specific about it than to say other meetings were scheduled.
SENATOR ELTON said he recognized that Mr. Walker could not tell
them the status of those [meetings] but asked if he was correct
in assuming they wouldn't be before the committee if they didn't
think they'd ultimately be successful.
MR. WALKER assured Senator Elton he was not trying to be evasive
but said there had been a first round of meetings and subsequent
meetings were being scheduled. If there hadn't been any
interest, he didn't think there would be a second round of
meetings. They were pleased with the interest and wouldn't be
there today if they didn't feel optimistic that their partners
had the ability to buy.
2:47:01 PM
CHAIR HUGGINS said, in the interest of time, they would have to
alter the schedule a little before bringing the administration
forward. He said he would like to ask Mr. Palmer to come forward
to address an issue about the in-country Canada line.
2:47:43 PM
TONY PALMER, Vice President of TransCanada Alaska Company LLC,
Calgary, Alberta, Canada, said he came in part way through Mr.
Walker's discussion but did hear the bulk of it.
CHAIR HUGGINS asked if Mr. Walker would do a quick synopsis for
Mr. Palmer.
MR. WALKER stated that his understanding of what he read about
what happened in the mid-fifties was that there was a desire to
move gas from Alberta to Toronto in Eastern Canada and a dilemma
about which route to follow, the all-Canada route or one that
looped through the U.S. and back up. The desire was clearly to
follow the all-Canadian route, which he believed was proposed by
TransCanada; so the government stepped in to make that possible.
TransCanada paid the loan off early and did a wonderful job and,
from what he could tell it was a wildly successful project.
2:49:29 PM
MR. PALMER said he had read the same book many years ago and
recalled that. In fact, he said, over the course of his
testimony in front of one of the many committees he's testified
to over the last several years, he spoke to that exact point.
That is, in order for that project to proceed there was a
significant debate in the Canadian parliament and the Canadian
government did take a very active role in the decision regarding
how the project would go forward. In fact, they took a financial
position in it.
CHAIR HUGGINS asked if he could refresh the committee about the
debate, as they had not read the book and he was the only
Canadian the room.
MR. PALMER said it was a prolonged debate in the mid-fifties
about how or if a gas pipeline should be constructed to serve
Canadian needs. Western Canadian suppliers had significant
natural gas surplus available and there was a large market,
mostly in Ontario and Quebec, Eastern Canada. The debate was
over whether a pipeline could be put in place, how that would go
about and whether it would go north or south of the Great Lakes.
He commented that, if they knew that terrain they would
understand that from a pipeline construction standpoint, it's
much easier to go south of the Great Lakes rather than going
through the granite of Northern Ontario. That's one major
factor. And the second major factor was and is that there are
more customers south of the Great Lakes than there are north of
the Great Lakes. So those were the considerations of the
commercial aspects. On the other hand, there were some
nationalistic aspects and public policy matters that the
government of Canada had to consider. That was the nature of the
debate He thought Mr. Walker had correctly characterized that
there were two potential projects put forward with different
proponents; and they ultimately came together and put together a
project that was approved by the government of Canada and
supported financially by the government of Canada in certain
ways.
CHAIR HUGGINS asked if it was like the loan guarantees they saw
with this [project] and what the history of support by Canada
for pipelines was.
MR. PALMER said he was going from memory of a book that he read
several years ago; but as he recalled, the government of Canada
had to take an ownership position in the section in Ontario,
particularly Northern Ontario, where there were very few
customers. They also provided a loan guarantee or a loan for the
section across the prairies in Western Canada. As Mr. Walker
described, the project was very successful and, as he recalled,
TransCanada purchased the Ontario section from the government
and was able to pay off the loan over the course of years in a
normal fashion. He did not recall how many years it took for
TransCanada to pay off the loan for the Prairie Section.
CHAIR HUGGINS said his assumption was that the politics of his
position and Canada's position and probably the U.S. position
have evolved over time. He asked if that was accurate and if he
would bring the committee up to speed.
MR. PALMER agreed that the politics had evolved over time.
Governments in Canada had been involved many times over the
course of the last 50 years in deciding how projects should
proceed in many different fields. The government of Alberta for
example, was involved in establishing a pipeline company that
was the predecessor of Nova Corporation, TransCanada's Alberta
system. They decided they did not wish to own the pipeline and
in effect gave the TransCanada predecessor, which at that time
was called The Alberta Gas Trunk Line, a franchise to provide
the service as a private company to customers across Alberta. He
added that they had seen how successful that predecessor company
was over time in some of the presentations he had provided. It
was a privately financed company, privately owned, which
received a franchise from the government of Alberta.
2:54:38 PM
CHAIR HUGGINS called a brief recess. He said when they returned
he would ask for 2 representatives from the administration and 2
from the Port Authority to talk project economics and to
contrast the analyses.
3:03:27 PM
CHAIR HUGGINS called the meeting back to order.
He explained that what he would like to do is to have a
discussion about the Port Authority's perspective and the
administration's perspective. To kick that off, he wanted to
look at the rationale behind their different approaches to the
analysis. The administration apparently did a "top down"
analysis while the Port Authority's analysis was "bottom up." In
addition, he said, Mr. Shipkoff stated that AGPA shared their
model with the administration, but that was not reciprocated.
3:04:50 PM
PATRICK GALVIN, Commissioner, Department of Revenue, Juneau, AK,
responded that the first question with regard to the nature of
the analysis goes to the current exercise. They were trying to
answer the question, with regard to the TransCanada Alaska
application, did it sufficiently maximize benefits to Alaskans?
In order to do that, they had to do a full comparison of that
decision and the issuance of an AGIA license with the opportunity
to pursue an LNG project. But they did not have a singular LNG
project to use as for their comparison; they were comparing
against a potential LNG project. Two had come in the door and
there were others that could potentially go forward as they
progressed with other interested parties; so they had to look at
it from the vantage point of LNG as a project option and
determine a comparison of values both in terms of economic values
and in terms of likelihood of success. From that vantage point it
became a discussion with the technical team in terms of the best
way to accomplish that. He deferred to Mr. Sparger regarding the
nature of the actual analysis and the way they built the cost
estimates in particular. He thought Mr. Smith from Black and
Veatch could talk about the financial modeling, but felt that was
one remove from some of the issues being discussed here that went
to the cost estimates and the difference between what they were
using in their financial models versus the numbers the Port
Authority presented as their expectations about their costs. He
suggested that it seemed most appropriate to start by having Mr.
Sparger talk about the cost modeling.
3:07:01 PM
COMMISSIONER GALVIN continued that as far as "top-down" versus
"bottom-up," they didn't have a particular project they were
trying to analyze or build; they were trying to create a range
of possibilities given the types of projects that exist. He felt
that was the most appropriate way to try to capture the range of
possibilities related to LNG, as opposed to comparing one
particular project to another particular project.
3:07:54 PM
BILL SPARGER, Energy Project Consultants, Colorado Springs, CO,
was performing technical consulting for the state of Alaska
administration.
CHAIR HUGGINS asked Mr. Sparger if his organization did the
analysis.
MR. SPARGER replied that he headed up a technical team and
various members of the team and subcontractors did various parts
of the analysis.
CHAIR HUGGINS asked when they began the analysis.
MR. SPARGER answered that they started January 6, 2008.
MR. SPARGER stated that, from the LNG side, they were given a
series of options roughly configured like the Port Authority
application, the TransCanada Y-line, and the Little Susitna
application. They had a 2.7 bcf pipeline, 48/42 inch
configuration; the Y-line; and the Little Susitna, which was 48
inch all the way to Valdez. Taking those one at a time, the
pipeline was bottom-up. It was bottom up for TransCanada and
they simply prorated their estimates for the pipeline portion.
It was bottom up because the pipeline itself had been worked on
for a long time and was relatively simple compared to the GTP
[gas treatment plant] or an LNG plant and TransCanada had
provided a lot of information that they used to develop their
own estimates.
3:10:27 PM
MR. SPARGER said the GTP is common to any project. No applicant
provided any extensive details about the GTP; they, through some
of their experts and engineering firms, built a stand-alone GTP
range. Their analysis did not arrive at a cost estimate per se.
They arrived at a best-case/worst-case range of both cost and
schedule. They were not trying to prepare a proposal to submit
to someone as the Port Authority, TransCanada and others were,
but to provide the commercial team who would take that capital
cost information and run it through their MPV model with many
other economic assumptions. That was their task; it was not to
provide an estimate. So, looking at worldwide facilities and
factoring those for current dollars, then factoring for Alaska,
both the GTP and the LNG ranges were fed into a Monte Carlo
simulation model that effectively picks these things randomly at
thousands of iterations and comes up with a probability curve.
3:13:09 PM
MR. SPARGER explained that a probability curve is nothing more
than the probability that the percentage will fall on that
curve. In other words, a cost with a P50 or probability 50 means
there is a 50/50 chance that will be the cost; a P90 means there
is a 90 percent chance that costs will be exceeded. That is
important because P50 is not an estimate; it is simply the mid-
point in the probability curve. The reason it's not an estimate
is that for most projects, this one in particular but most
projects, the worst-case range is much higher. In other words,
it is further from what you might think than the best-case range
is, because there is less chance the costing schedule will
improve than there is that it will get worse. So in the way they
perform the ranging, by sheer definition, P50 is always going to
be higher than a point estimate. In fact, he asserted, they did
an estimate on TransCanada and their estimate was more like P15.
It's important to remember that when you try to compare a point
estimate like the Port Authority's, like TransCanada's, like
Little Susitna's, to P50, you already have a built-in
differential because P50 is not an estimate.
3:15:22 PM
MR. SPARGER said, going back to LNG, the LNG costs were put
together top-down. There are few LNG projects of this size built
in the world at any given time. Their LNG experts, using public
and proprietary databases that they had access to, looked at a
series of projects across the world with ready-for-service dates
since 2003, mostly from 2006-2009. Unfortunately, there weren't
any projects in the arctic except one in Norway called Snovit,
which was a horrible example. The cost of Snovit was probably
double; it would be way beyond P90 or P95 on the curve. But we
did look at it because it was in the arctic and decided it was
not representative so it was not included in the analysis.
Likewise, we threw out the bottom. So there are a whole lot of
projects lumped in the P20-P30 range, which means lower cost;
and then about an equal number up in the very high range, P80-
P90, and none in the middle range. He admitted they don't know
why; but what it indicates is that projects are coming in on an
adjusted basis. Projects are coming in at the $1000 dollar a ton
range [of LNG] and at the $350-$400 range on the lower end with
some falling in between.
3:17:53 PM
Going back to what the administration was trying to do, trying
to see how good or bad it could be, Mr. Sparger said they
couldn't limit the range to the lower end because they can
almost guarantee it would go up from there, not down. So
regarding the little arrows depicting the projects, those
project costs were not directly used to generate the probability
curve, only to generate the range that went into the Monte Carlo
analysis.
3:18:42 PM
MR. SPARGER said he was a little confused. They heard yesterday
about the Bechtel top-down cost estimates and he wanted to
respond to the methodology that was used for their estimate. He
read out of the Port Authority's application:
The execution phase cost estimates were prepared under
a variety of estimating techniques to build up an
indicative cost. As there is little design definition
available at this stage, the costs were arrived at by
comparing costs from a variety of similar projects and
making adjustments to reflect the differences of
location, scoping, timing, and technical parameters.
He submitted that was exactly what the administration did; t
hey were not looking for a point number. The Port Authority's
point number falls on this curve, in that lower end group. But
the range of projects on a worldwide basis and trying to adjust
for location, scope, timing, etc., told him that the lower end
group was not appropriate for the state to use in analyzing the
MPV.
3:20:17 PM
COMMISSIONER GALVIN said, from the administration's perspective,
what they wanted was to ensure they had a comparable analysis on
the TransCanada Alaska license project to what they were
comparing on the LNG side. They had a similar differential
between what TransCanada said they expect their costs to be and
what they came in at as far as their range and the midpoint they
used for all of their financials. Similarly on the LNG, they had
a range they ran LNG projects against and the Port Authority
falls on the low end of that. The issue for the administration
was a combination of both economic risk and where the project
could fall on the cost side. Separate and apart from the
economic analysis was the likelihood of success. He didn't want
to give the impression that one drove the other or that one
dominated the decision; they separately participated in what
resulted in their conclusion.
The final point he wanted to make was that throughout the
hearing process, one of their challenges had been how to convey
to a large group of people the breadth of the analysis that was
done in the context of hearings focused on a particular topic.
Most of the focus had been on issues associated with the
TransCanada Alaska project because that was the license project
on the table. He did not believe enough time was devoted to
discussion of LNG.
3:22:40 PM
COMMISSIONER GALVIN said the large amount of material that went
into the LNG analysis was not done on a cursory basis or last
minute. All of the materials the administration provided
presented different aspects of that analysis, including reports
dealing with the technical engineering cost estimates; the
financial estimates with price analyses; and the financial
analysis performed by Goldman Sachs running the same numbers
through the evaluation they used for the TC Alaska project, all
of which were summarized in chapter 4 of their finding.
3:24:08 PM
COMMISSIONER GALVIN summarized that they found LNG projects are
economic and viable. In comparison to a Canadian overland
however, they found that they're not likely to be as economic or
to result in as much money coming back to the state as they
would expect from the Canadian project. They also found the
state's long-term interests would be best served by having both
and that it is in the state's interest to insure that they
maximize the opportunity for an LNG component to the
distribution of Alaska's natural gas. The administration was
pleased about going forward with the licensed project,
recognizing that ultimately the markets will drive the
conclusion as to whether an LNG or an overland project gets the
first gas off the north slope in the initial open season.
3:25:30 PM
SENATOR WIELECHOWSKI commented that there was a several dollar
difference between the tariff AGPA calculated and the tariff the
administration calculated for the LNG line. He asked if hearing
AGPA's analysis changed Commissioner Galvin's opinion in any way
as to what the proper tariff should be.
COMMISSIONER GALVIN said he would let Mr. Sparger and Mr. Smith
address that question.
3:26:05 PM
MR. SPARGER said, from a technical standpoint, which means cost
and schedule, they did not hear anything that would change their
opinion or their report. He thought they had properly evaluated
and analyzed it. Basically, even though the LNG plant itself is
somewhat different from a capital cost estimate standpoint, when
it is added to the total of the pipeline and the LNG facilities,
that difference narrows because their pipeline cost was lower
than the Port Authority's pipeline cost. The other thing he
pointed out was, when he added the 2 numbers on page 15 of the
Port Authority's presentation, he came up about $2 billion shy
of the numbers for those same facilities in the application that
was received in mid-December and he didn't know why. If AGPA's
application numbers were correct, then the total capital cost
between the Port Authority estimate and the administration's
P50, (once again it is not an estimate, but he said he would use
AGPA's terminology) is within 10 percent. At this stage in a
project, if two independent estimates can come within 10, 15, 20
percent of each other, that's good.
3:27:46 PM
SENATOR WIELECHOWSKI said there were a couple of things he
thought he heard from the Port Authority that the administration
hadn't considered in their analysis. First was the fact that
AGPA said it [the natural gas] was at much higher pressure and
that would lower the costs. Second, there's a cold weather
impact that needs to be included in the calculations, and
obviously it's colder in Valdez than in Qatar. Third, the
administration, he believed, had calculated it at a 4.5 bcf LNG
facility; and they had calculated at a 2.7. He asked if Mr.
Sparger could address those things and whether they had any sort
of impact on the tariff.
3:28:46 PM
MR. SPARGER started with the last issue first. The
administration provided capital costs and schedules for a number
of scenarios, one of which was exactly what the Port Authority
proposed, the exact pipe configuration and 2.7 bcf. They also
did a 4.5. They actually expanded the liquefaction, the GTP and
the pipe, putting more compression on it to come up with a 4.5
bcf case with their pipeline configuration. So, he said, it was
incorrect to say they did not look at or model the 2.7 from an
MPV standpoint, because that was done.
SENATOR WIELECHOWSKI said he could have been mistaken, since he
was trying to recall what he thought he heard.
MR. SPARGER said yes, Valdez is colder and to produce LNG or to
get the natural gas to LNG you must lower the temperature, so
that does help somewhat. The process requires getting the
pressure up and in this case it's already up at a certain level.
He said they assumed they would have to hold it up above about
1300 psi for to keep the hydrocarbons in the gas stream. That's
the same thing that was assumed on the TransCanada overland
route and that's why they used a 2500 psi pipeline in both
cases; if the pressure drops too low the liquids start falling
out. Obviously, it takes compression somewhere to get that and
in this case, it's built into the pipeline.
3:30:47 PM
MR. SPARGER continued that they recognize there'll be some
savings, and he thought that is why their costs were on lower
end of the range. He thought the range had already taken that
into consideration.
3:31:10 PM
COMMISSIONER GALVIN said the initial question went to the
tariffs and they only dealt with the cost side. He asked if
Senator Wielechowski wanted to expand the conversation to
include what Mr. Smith would add.
SENATOR WIELECHOWSKI rejoined he is just trying to get at what's
the correct tariff here, because there's a pretty big
discrepancy. He deferred to the chair but said he wouldn't mind
if more people wanted to jump in; he wouldn't mind hearing from
the Port Authority if they disagreed; he just wanted to get to
the bottom of it.
CHAIR HUGGINS agreed. He said he had a copy of the text of the
slides from their meeting on January 30, 2008. One of the slide
components said "commitment to evaluate LNG project options as
part of the AGIA evaluation process." He reminded Commissioner
Galvin that he expressed his concern at that time, that after
months of the process they were just committing to look at LNG.
His question remained, what were they thinking prior to January
th
30? Why weren't they committed to evaluating LNG, because it's
a methodology of getting gas to market? Commissioner Galvin's
answer, according to the text, was that they committed to that
th
"today" on January 30 and a letter went out to the Port
Authority and Governor Hickel saying they were committed to
that. Chair Huggin's concern was why were they not already
committed to it since it was a methodology of marketing Alaska's
gas; and he remained concerned because the project most Alaskans
were behind mentally wasn't going to be considered.
3:33:32 PM
COMMISSIONER GALVIN asserted that the issue was when the public
statement of commitment was made, which is the nature of both
the letter and the testimony. The sequence of events was that
they received applications in November and two of them had LNG
as the primary component. Those were reviewed over the course of
the next month and it wasn't until the first week of January
that they made the determination with regard to completeness
that the LNG projects were not complete and would not be subject
to a direct comparison within the constrict of AGIA. He pointed
out that Mr. Sparger had just said in response to the question
about when they started this process, the evaluation of LNG as a
general comparison to the TC Alaska project began immediately
after that decision; however, it wasn't until the end of January
that they had a hearing down here. In the interim, they received
inquiries from both the Port Authority and Governor Hickel
asking how they were going to proceed with regard to the
evaluation of the TC Alaska project if they didn't have an LNG
comparison; and they made the public statement that yes, they
would do it. They had already made the decision internally,
which started the process Mr. Sparger described. He didn't think
a lack of focus on LNG was an issue at any point during that
period of time. He insisted that they'd talked about the
distinction and the inherent competition between overland and
LNG since the beginning of the AGIA process and that never
changed. It transitioned over that first week in January from a
direct competition between two proposed projects to a comparison
of one proposed project and a suite of options associated with
LNG.
3:35:27 PM
CHAIR HUGGINS said he was reading the text and it said "the
th
commitment was made today." That was on the 30 of January. It
always concerned him because of the support the Port Authority's
concept enjoyed in Alaska, that they didn't get a commitment to
look at LNG until two months after the application process.
3:35:54 PM
COMMISSIONER GALVIN reiterated that the responsibility to
evaluate LNG was on the administration from the beginning. They
acted on it and began the process of doing the evaluation. At
the hearing and in the letter they made a public commitment to
assure the public that it was being included in the analysis,
because they knew the analysis wasn't going to be out for a
th
couple of months. It's just that January 30 was the opportunity
to make that public statement.
3:36:57 PM
CHAIR HUGGINS said as he recalled, the Port Authority gave the
administration their modeling process and requested that they
reciprocate; but the administration chose not to do so. He asked
if that was true.
COMMISSIONER GALVIN replied that he would not characterize what
the Port Authority may or may not have provided to them
because....
CHAIR HUGGINS interjected that he would let the Port Authority
speak to it and called on Mr. Shipkoff to repeat his statement.
MR. SHIPKOFF responded that, on the procedural matters with
respect to what the Port Authority provided or did not provide,
he would have to defer to Mr. Walker.
3:37:49 PM
MR. WALKER said yes, they did provide their financial model as
part of their application, so the administration had full access
to it.
COMMISSIONER GALVIN said that in a discussion subsequent to the
release of the finding, the Port Authority asked them to release
the Black & Veatch financial model. They talked to the technical
folks, particularly those at DNR [Department of Natural
Resources], the Division of Oil and Gas, about what was embedded
in that model and confirmed that there was a substantial amount
of proprietary, confidential information about production and so
forth embedded in it; so they responded to the Port Authority
that they were going to have to take the time to find a way to
strip that info out in order to provide the non-confidential
portion of the model. He admitted that unfortunately, because
it's an integrated financial model, it's fairly time-intensive
to do that and it will be a joint effort between the Division of
Oil and Gas and the Black and Veatch folks, so they had not had
the time to do it; but they intended to get to it as soon as
possible.
3:39:25 PM
CHAIR HUGGINS said, with all due respect, the legislature is in
the process of making a decision and having a vote and to the
extent that one of the parties has some concerns about their
viability, he would hope the administration would respond. "They
are here, a voice at the table and they're asking...
information-wise, they had an expectation... As an Alaskan, not
as a senator sitting at this end of the table, it sounds
practical to me."
COMMISSIONER GALVIN agreed that it did sound practical.
Unfortunately it was not. He said they simply can't get it done
in the timeframe provided by this decision-making process;
however they had made their folks available for discussions
about what went into the decision making, how the financial
models were structured and the nature of any distinctions
between the methodologies. He did not believe there was anything
they'd withheld in that regard.
3:40:40 PM
MR. WALKER clarified that, of course they'd like to have
received it long ago, but if they can receive it at some point,
somewhat late is better than never. He admitted it does make the
st
process somewhat awkward. On May 31 the gasline team was kind
enough to come to Fairbanks and meet with the Port Authority
board, which is when he initially requested the model. At that
time they explained some of the sensitivities in that; but he
also asked for the assumptions and what the inputs were, which
would certainly not be confidential, and those were not made
available. Sometimes the assumptions provide a good indication
of what went into the model; what comes out is based in a large
part on what goes into it.
3:41:39 PM
COMMISSIONER GALVIN said a lot of times there are communication
difficulties in terms of understanding the request. All the
assumptions that went into the model are in the reports. He said
when they get down to a discussion of what the Port Authority
really wants, it is beyond the nature of simply assumptions,
which are part of the public record, and into the mechanics of
the model and the difficulty of extracting that as a separate
component.
3:42:24 PM
MR. SHIPKOFF added that he does not see a tremendous amount of
benefit in reviewing the administration's model at this point.
It would be nice to see it and be able to enhance his
understanding of their methodology; but as Mr. Walker said, what
goes into the model is more important than the model itself. He
conceded that in some scenarios their model generated results
that indicated the LNG project is less attractive than the
pipeline. If the capital cost of the LNG plant is high and the
price ratios are not favorable, it shows the same thing. He said
his biggest concern about the comparative analysis was that they
came up with an LNG plant cost estimate of $8 billion and, he
insisted, they had not changed the numbers from those on the
application. But the administration's P50 estimate which, as Mr.
Sparger explained is not an estimate, it's a P50 result that has
a 50 percent chance of being higher or lower than the actual, is
substantially higher than the Port Authority's number. On the
other hand, the estimates for the pipeline were, in the Port
Authority's estimate, greater than their P50 estimates for the
pipeline. He felt there was some disconnect there, something on
the technical side, something in the methodologies perhaps. He
admitted he is not an engineer, and is not ready or qualified to
engage Mr. Sparger on any of the details behind the estimates.
That would be much better done by Bechtel, who actually worked
on the development of the Port Authority's cost estimates. He
wanted to understand what caused that wide divergence between
the costs for the two categories, acknowledging that they may
very well be wrong and, if so, they would like to have that
discussion. As Mr. Walker indicated, the Port Authority offered
to make Bechtel's engineers available to make sure everyone was
on the same page. He thought that the difference between an $11
billion and $13 billion building on the pipeline was notable but
not fatal; however, the difference between $8 billion and $14
billion for the LNG plant seemed to indicate a big disconnect.
3:45:16 PM
MR. SPARGER asked Chair Huggins if he could comment on that. He
said the approach used when building a project estimate is
different than it is when looking at the potential range of
outcomes as they did in their analysis. The Port Authority said
they disagreed with the administration's P50 analysis and its
economic results; but he opined that TransCanada was probably
equally frustrated with their P50 on the pipeline overland
route. For the sake of comparison, he said, recognize that
TransCanada's cost estimates and economic analysis resulted in a
$2.73 tariff estimate, while their analysis on TransCanada's
project resulted in a tariff rate of $4.70. That $4.70 tariff
was what they compared to the LNG analysis. It would not be a
fair comparison to take our ranged analysis on the TC Alaska
project and compare it to the Port Authority's project-based
estimates. He summarized that they focused on using the experts
they had available to them to give them the range of possible
outcomes on an overland project and the range of possible
outcomes on an LNG project and compare them using similar
methodologies.
He felt that focusing in on the distinction was appropriate, but
wanted to make sure they came back to the outcome of this
result, which is a licensed project that will go to an open
season in which the opportunity for an LNG project to proceed
exists and the market will decide.
3:47:45 PM
SENATOR STEDMAN asked the commissioner if he was hearing him
correctly to say that they have little to no interest in
releasing the data inputs.
COMMISSIONER GALVIN repeated that the data inputs area all in
the public record.
SENATOR STEDMAN suggested they back up a little because he was
probably using the wrong terminology. The issue of the inputs
into the model was the discussion here; the Port Authority
wanted to know what was put in that model. He asked if that was
correct or if he was still off base.
COMMISSIONER GALVIN answered that they were using similar
terminology and maybe talking about different things.
3:49:07 PM
MR. SHIPKOFF said he thought he had a pretty decent
understanding of what went into the model because it was
described in their finding. His concern was that the people who
generated the numbers did not appear to be on the same page
because the numbers are very different. He stressed that he did
not generate the $8 billion estimate for the LNG plant, Bechtel
did that with a team of 30 engineers who had been working on
this project for 10 years. He felt they needed to discuss the
apparent disconnect between that number and the administration's
number. He did not feel it was useful for the Port Authority to
say they are confident their number is correct because he didn't
know if it was correct. But it was very different from the
number the administration used in their comparative analysis to
calculate tariffs for the LNG plant. He said he still did not
understand why there was such a big disconnect and he didn't
think the right people on their side were engaged to deal with
it.
3:50:27 PM
SENATOR STEDMAN asked the chairman and the commissioner how to
rectify this. He admitted that he was interested to know.
3:50:39 PM
CHAIR HUGGINS interjected that if this was being brought up by
the 2 people from California, it would be a different thing in
his mind; but this [LNG] concept is widely supported by Alaskans
and he wants to make sure they are given clear information about
why the Port Authority is not going forward, potentially. The
Port Authority has some questions that deserve an answer.
COMMISSIONER GALVIN said it is also important for the public to
understand when they talk about the Bechtel information, that
Bechtel studied this issue and provided a tremendous amount of
engineering work in generating their numbers; but he didn't
believe they submitted that level of detail in the application.
They received a certain amount of detail in the results of that
work, so it was not a matter of all the information on one side
being provided and the administration ignoring it. The
administration took the information that the Port Authority
provided and what they received from the Little Susitna project
and engaged the expertise of folks who had been involved in LNG
projects around the world to provide their assessment of the
potential cost ranges for similarly sized, similarly located
projects. As to why there was such a distinction, he didn't know
except to say they had a credible team of experts who were
directed to provide a range of cost numbers to plug into the
model. This is what they came back with. For the purposes of
this discussion, the issue was whether or not this would be the
driving point of a decision. The administration considered a
number of factors with regard to LNG projects and, regardless of
the economic issues, they believed the overland route was
superior because of likelihood of success as well. They were
confident in their conclusions.
3:54:20 PM
MR. WALKER asked Chair Huggins if he could read one paragraph
from a letter that he'd sent to both Commissioner Irwin and
rd
Commissioner Galvin on February 3.
Based upon your testimony before the House caucus on
th
January 30, it appears you intend to utilize
information from the Port Authority's application to
assemble the optimal LNG project. Since the Port
Authority is no longer a participant in the AGIA
process, we offer our assistance to the Palin
administration in that effort. Our advisors have been
engaged in this particular LNG project since 1999 and
in numerous other LNG projects worldwide. The Port
Authority's project team will bring much value to the
state's analysis of an LNG project. The Port
Authority's experts are the most qualified to work
with and analyze the data submitted, therefore in any
analysis, the Port Authority's data and information
should include the integral involvement and
participation of the Port Authority's project team.
He added, that certainly would have included Bechtel, so we
attempted to make all of our experts available to that process.
3:55:54 PM
COMMISSIONER GALVIN pointed out that the nature of their
analysis was not a critical assessment of the Port Authority's
application or the information that was submitted. That wasn't
the nature of the administration's analysis. Their analysis was
to look at LNG as an alternative to the license project. In that
regard they did not feel it was appropriate to go into one
particular project's application and do an analysis of that.
3:56:36 PM Chair Huggins called a short at-ease.
Chair Huggins called the meeting back to order at 4:08:22 PM. He
asked for Mr. Shipkoff and a representative of the
administration to come forward.
4:09:38 PM
CHAIR HUGGINS said they had about 10 minutes to cover lingering
issues regarding the Port Authority presentation before Mr.
Palmer's presentation was scheduled to begin.
RADOSLAV SHIPKOFF said that, with regard to Mr. Sparger's
suggestion that the Port Authority had changed the numbers used
in his presentation yesterday from those that were used in the
application, that was not so. He directed the committee to
tables 8 and 9 in the replacement application and reviewed those
numbers briefly to illuminate his point. He explained that they
didn't break out the numbers between LNG and the pipeline side
in their application; but they did do that today in order to
compare more closely with the administration's numbers.
Regarding the quote Mr. Sparger read from their application
about Bechtel's methodology, if his contention was that they
performed a top-down estimate using data mining, that was not
done. His understanding was that Bechtel used a number of their
own completed LNG projects as a starting point for their work.
They used numbers for projects using the same plant design with
specific adjustments for the Anderson Bay location. He added
that they anticipated the administration would have discussions
with Bechtel under a confidentiality agreement and would have
access to the confidential data that was not included in the
application.
MR. SHIPKOFF continued that, with respect to the cost estimation
methodology using Monte Carlo simulation analysis versus cost
estimates not in a probabilistic sense, they understand and
appreciate the difference.
4:16:29 PM
He insisted that two important factors have to be considered:
The wide range of probability distribution in the Monte Carlo
simulation skewed the P50 result to a higher number, which Mr.
Sparger explained very well. To the Port Authority that approach
introduced an inconsistency in the evaluation between a project
that had probability distribution only on the basis of 2
pipelines using 1 type of methodology and another project that
had a pipeline and an LNG plant with a very broad distribution.
He said he did not want to spend time talking about the validity
of different methodologies; he was sure they would not be able
to convince the administration that their numbers are wrong, nor
did he say they were. Neither did he believe they would be able
to convince the administration or the committee that their
numbers are correct; they cannot say that is true. His concern
had to do with the process which prevented the narrowing of
differences between the results of the different approaches. He
agreed with Mr. Galvin that the market has to decide which
project is more attractive. The Port Authority did not think
either of the projects would proceed on the basis of arguments
about whose methodologies was correct; ultimately it would come
down to which project can convince the producers and the state
that the project is in a position to offer concrete contractual
terms about gas purchase. Until then they won't know which
project is more attractive.
He reiterated that he does not see why they have to decide
between one project or the other.
4:21:18 PM
COMMISSIONER GALVIN commented that Mr. Shipkoff's final
statements served to show their common interests. With regard to
what the committee has heard, he commended the Port Authority
for the work they have done for many years and agreed that LNG
has the right to participate in the competition to get the gas
commitments to bring the gas to market. He said they look
forward to continuing to work with both the Port Authority and
other proponents of LNG as they move toward an open season.
4:22:38 PM
BILL WALKER asked if he could reserved his closing comments
until after Mr. Palmer's presentation.
CHAIR HUGGINS said he hoped they would have representatives of
the Canadian government available via teleconference at 1:00pm
tomorrow.
4:23:37 PM
CHAIR HUGGINS asked Mr. Palmer to talk them through the concept
of simultaneous open seasons.
TONY PALMER said, as they indicated in their application and had
clarified over the course of the last 50 days, if TransCanada
was granted a license under AGIA by the first of August, they
would hold an open season by July of 2010. That open season
would provide potential customers with commercial terms as well
as updated cost estimates and other terms they would have to
meet to be a customer on the pipeline. They would have the
opportunity to nominate deliveries along the pipeline route in
Alaska, through the Yukon and all the way to Alberta, or to
Valdez. They would have the opportunity to do that for a
simultaneous open season. By that, he said, he meant they would
be able to nominate Valdez, Tok, Fairbanks, or Alberta. At the
conclusion of that open season, those customers would know the
volumes TransCanada had received. Each customer would have to
meet the same terms and conditions no matter what is the
location of their delivery point, which is a standard procedure
they apply throughout their business.
4:25:52 PM
SENATOR WIELECHOWSKI told Mr. Palmer that they heard testimony
yesterday that a TransCanada official said they would consider
building a line to Valdez after the main line was built. He
asked if that is true.
TONY PALMER thanked Senator Wielechowski for bringing that up
and said he followed up on it with the individual who gave that
presentation. He clarified that what was said was:
A continental pipeline, a pipeline going to the lower
48, is TransCanada's basic proposal with a possibility
of a Y line coming most reasonably post the
continental trunk line, but with the provision the
market will decide the fate of any LNG option via the
open season.
He was never asked about an alternative where they only got LNG
volumes, for example; but hoped he had been very clear on the
record that, in the event they only receive volumes to Valdez,
if there is sufficient to make the project economic and if those
customers meet the conditions that any other customer has to
meet, TransCanada would construct a line to Valdez instead of to
Alberta.
4:27:36 PM
SENATOR WIELECHOWSKI said he understood if they conducted an
open season to Valdez, it wouldn't include an open season for
the liquification plant. He asked if TransCanada would object to
the legislature funding a liquefaction plant.
TONY PALMER agreed that TransCanada's proposal was to build a
gas treatment plant and a pipeline and not facilities beyond
that point to Valdez; so it would be the customer's
responsibility to make arrangements to have liquifaction,
shipping and ultimate markets. It would clearly be up to the
state to choose whether to participate in the liquifaction
project if the party is a customer on their pipeline. If
however, it was a competitive project and were to go outside the
bounds of AGIA, they would take issue with it.
4:29:12 PM
SENATOR WIELECHOWSKI asked about the timing of the Alaska
project. He quoted from a TransCanada representative regarding
the timeline for building the Alaska pipeline:
The Alaska project is a long way off. Just to put
everything in time sequence, we would the $5 billion
phase one of the Keystone over the next couple of
years, then we move into the Keystone expansion we
announced today; then our plans would see us construct
the Mackenzie Valley pipeline and only in the later
part of the next decade would the Alaska pipeline be
built.
He said it concerned him a lot, because he thought they were
going to be building it in the middle or early part of the
decade and now they seemed to be pushing it off. He wanted to
know if TransCanada still planned to adhere to the timeline they
agreed to under AGIA.
TONY PALMER stated that Mr. Kvisle went on to say, "In our
perfect plan, it fits really well; but in reality it may turn
out differently." What he set forth is what TransCanada hopes
occurs going forward. When he referred to the latter part of the
next decade, 2018 in service is the same time frame they had
been talking about for the last 50 days of testimony and is
indeed the latter part of the next decade. He conceded that
whether or not MacKenzie would be completed on this time frame
was an open question, as it was still in the regulatory process
in Canada. He added that Mr. Kvisle's comments in that interview
were primarily to address the Keystone project.
He summarized that TransCanada's commitments remained the same.
st
If they had a license by August 1, they would be concluding an
open season by July of 2010 and targeting a September 2018 in-
service date, all subject to getting customers and the necessary
regulatory approval.
4:33:04 PM
SENATOR THOMAS asked Mr. Palmer to explain their involvement in
the MacKenzie pipeline project.
TONY PALMER responded that TransCanada is a small owner in the
project, which is owned primarily by a subsidiary of Exxon,
Imperial Oil Canada. The other major players are Shell and
Conoco Phillips. TransCanada is funding the interests of an
aboriginal pipeline group, so they have the right to take a 3 to
5 percent ownership in that project and are paying about 1/3 of
the bills.
SENATOR THOMAS asked him to comment on TransCanada's involvement
versus the producers' in the tar sands.
TONY PALMER answered that TransCanada has no ownership in the
oil sands. They have gas pipelines that supply service to and
from that region of Alberta and the Keystone project will move
some oil away from the oil sands fields. That is their interest,
but they are not producers of oil or gas in Canada or the United
States; they transport other people's gas.
4:36:21 PM
SENATOR THOMAS said his last question was whether the producers
in Prudhoe Bay have any relationship to the tar sands.
TONY PALMER said he thinks almost all of the major international
oil companies have an interest in the oil sands.
4:37:32 PM
SENATOR HUGGINS commented that the Chinese also have a position.
TONY PALMER said that is true, they are partial owners in a
development opportunity.
4:37:52 PM
SENATOR STEDMAN asked Mr. Palmer to talk a little about the
labor pool and source of materials from a pipeline company's
perspective with regard to the MacKenzie Valley line and the TC
proposal. He wondered if it was possible to do both
simultaneously from a manpower and materials standpoint.
MR. PALMER replied, although it would not be impossible, it
would be very difficult and costly for both to proceed with the
same schedule. He admitted there is already a shortage of both
labor and materials and, although adjustments are occurring and
should eventually relieve some of the pressure, it will take
time. He said if MacKenzie stays on track, they will be in
service in 2014 or 2015 and if Alaska proceeds with the
timeframe they hope for, it will be in service by 2018. The bulk
of the employment would occur during the construction phase,
which means somewhere in that 2014-2015 timeframe onward. It
will be a good thing if MacKenzie stays 2 to 4 years ahead of
the Alaska line as far as cost savings and synergies. If they
pancake on top of each other somehow, that will be a problem for
both projects.
4:40:44 PM
BILL WALKER said they receive calls from Alaskans frequently
asking them to continue what they are doing, and they are
concerned about the continuing delay. He firmly believes it is
best for Alaska to take control and do its own project now. The
Port Authority will absolutely work within the AGIA process if
they must; but they don't think it is the best option. They
think the best option is to start immediately on an all-Alaska
project owned by the state of Alaska.
4:44:46 PM
SENATOR ELTON expressed his appreciation to all parties. He
commented that he would read the book Mr. Walker suggested; but
said another lesson they could take away from that book is that
the Canadian Parliament made decisions based on what they
thought the federal imperatives could and should be, and that's
one of the concerns he said he has about the all-Alaska gas
pipeline. The federal government, our federal government, may
decide they want to control the direction of the flow of energy
and there has, in fact, been some discussion about this. He said
he is concerned that our federal government may mandate that
Alaska have a project that will deliver energy to the lower 48
states rather than to foreign markets. He told Mr. Walker he
would appreciate getting the title of the book and where he can
get a copy.
MR. WALKER offered to provide his copy of the book to Senator
Elton and said he looks forward to the opportunity to sit down
with the federal government to talk about the project. If they
have to take LNG to the lower 48, he said, that won't be a deal-
killer.
SB 3001 and HB 3001 were held over.
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