Legislature(2015 - 2016)BUTROVICH 205
10/27/2015 03:00 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| Appropriation Details: Department of Labor and Workforce Development, Department of Natural Resources, and Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
SENATE BILL NO. 3001
"An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), ch. 1,
SSSLA 2015; and providing for an effective date."
3:07:47 PM
^APPROPRIATION DETAILS: DEPARTMENT OF LABOR AND WORKFORCE
DEVELOPMENT, DEPARTMENT OF NATURAL RESOURCES, AND
DEPARTMENT OF REVENUE
3:07:55 PM
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
(OMB), OFFICE OF THE GOVERNOR, relayed that additional
detail had been requested from the committee in response to
a an October 25, 2015 PowerPoint presentation titled
"TransCanada and Pre-FEED Supplemental Appropriations
Summary" (copy on file). She moved to slide 7 and turned
the presentation over to the Department of Natural
Resources (DNR).
MARK MYERS, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
looked at slide 7, "Department of Natural Resources State
Gas Team." He discussed that the supplemental budget was
derived out of a recognition that the department had
requested a budget of approximately $13 million for FY 16
and had been given $9 million with direction from the
legislature to make a supplemental request if needed. He
relayed that DNR needed the additional money. He detailed
that one of the primary reasons for the need was due to the
major negotiations involving the state gas team. He pointed
to the slide and noted that a significant amount of money
was needed for contractual services [$1.480 million] to
obtain individuals with the most expertise and experience.
He stressed that the state was taking on a commercial
enterprise and wanted to ensure that it had highly
qualified individuals with the appropriate industry
backgrounds and experience. He noted that the individuals
were expensive. He offered to detail qualifications needed
for specific positions at the request of committee members.
He added that the department had benchmarked the costs of
the positions elsewhere in the industry.
Commissioner Myers communicated that when he had worked as
the director of the Division of Oil and Gas in 2001, with
the help of the legislature, the exempt employee structure
had enabled the department to hire individuals with 20 to
30 years of industry experience (e.g. geologists,
geophysicists, and commercial analysts). He acknowledged
that the cost for these types of positions was high, but it
was not possible to do the work without individuals with
the prerequisite experience. He explained that the slide
addressed the department's additional funding request
associated with personal and contractual services. He
relayed that the structural meat of the negotiations was
currently being addressed. Negotiations included the
overall governance structure and oil and gas balancing. He
detailed that with oil and gas balancing it could not be
guaranteed that the pipeline capacity was full or that the
gas was available to buyers. Additional items were related
to the security of supply and matching out supply. He noted
that because the state was not a producer it required some
special conditions to guarantee its supply.
3:11:50 PM
Commissioner Myers stated that the gas balancing agreement
and governance structures were fundamental components of
the deal, which were still in negotiation; the items
provided a structural framework for negotiating other terms
such as the lease modifications. He relayed that to create
a predictable state gas volume it was necessary to convert
its net profit and sliding scale leases to a flat royalty.
He specifically referred to lease terms at Point Thomson;
negotiations were currently under way, with ExxonMobil
taking the lead. The state had agreed to a volumetric
structure for the leases. He noted that with the net profit
share lease it was necessary to make an assumption about
costs associated with the lease. He explained that with a
sliding scale royalty it was necessary to understand the
appropriate allocation of cost associated with the lease.
He remarked that it was a complicated negotiation that was
somewhat dependent on the oil price prediction. He
reiterated that the negotiations were currently underway,
which required experienced geologists, engineers,
geophysicists, and commercial analysts. He noted that the
department was utilizing the expertise of employees under
the Division of Oil and Gas, who had been taken away from
their other commercial work. He explained that two of the
department's three commercial analysts were fully engaged
in the AKLNG work and were not able to perform their work
associated with other oil and gas issues.
Commissioner Myers addressed other positions specific to
liquid natural gas (LNG) and relayed that one of the
biggest increases was the need to start developing the gas
marketing organization. He explained that the reason to
begin the work was due to the fact that the state had to
build some type of gas marketing organization. He
elaborated that the type of organization was dependent on
how the state chose to market under a royalty in kind (RIK)
situation. Generally the state's default position was a
joint venture marketing structure where it would share the
marketing with the producers. He furthered that the state's
perfect world would be for all three producers and the
state to lump their gas together for marketing as a group.
He explained that the structure would mean less internal
competition, cargo could be maximized, balancing would be
less of an issue, and it would enable the optimization of
the project to the market. Additionally, security of supply
would be better for the market. The advantage of the
structure to the state was that it would benefit from the
expertise of the companies; the state would embed people
with expertise within the companies' structure. However, it
was unlikely that all four companies would agree to joint
venture marketing; some liked equity marketing better and
others could be concerned about antitrust issues with the
large amount of gas coming to market.
Commissioner Myers continued that there were many
conditions and the state could not guarantee that it would
get to the joint venture marketing solution. He relayed
that the state may end up with several joint marketing
deals with producers, which would require the state to have
a marketer in each of the deals. Additionally, buyers
wanted to be assured of supply; long-term customers would
bring expertise to look at the reservoir to understand the
deliverability. Therefore, DNR needed an upstream
geoscientist and engineer in order to warranty supply to
the people. He explained that the companies would also
second expertise into their structure or would provide
access to the upstream component. He relayed that it was
important to bring the first leader into the structure at
present because once the project entered the FEED [Front
End Engineering and Design] structure, negotiations with
the market would begin and the structure with producers
would be established. He furthered that the lead person
would go to buyers in the eastern markets to show them the
state had a confident supply; the process would occur in
cooperation with other companies if there was a joint
venture marketing agreement. He stated that because the
project made the state one of the largest gas marketers in
the world, the lead person would need to be very credible
to the market; therefore, the individual's salary would be
significant. He added that the salary had been benchmarked
through a company called Human Capital (a leading provider
of recruitment for the oil and gas business in Houston,
Texas and internationally) using the standards for someone
with 10 to 15 years of LNG experience. The structure
included slightly higher pay for Alaska due to the state's
higher cost of living. He noted that the salary may not
reach the highest amount specified, but the state did not
know; the salary was based on what consultants had
specified as realistic for a lead marketer and analyst.
3:17:23 PM
Commissioner Myers discussed the different contractors
within the organizational chart of the gas team. He
referenced Greengate LLC as an example, which had presented
on financial components of the project earlier that day.
Other contractors were LNG experts with 15 to 20 years of
experience. Additionally, the state had a contractor with
specialty in LNG transport. He cited Black and Veatch as
another contractor for the state. He stressed that the
state heavily relied on the individuals in negotiations.
Senator Dunleavy referred to the "State of Alaska AKLNG
Integrated State Gas Team" organizational chart dated
October 26, 2015 (copy on file). He noted that there were
five boxes (including the governor) in the "decision
makers" category at the top of the chart. He asked for
verification that it was accurate.
Commissioner Myers replied in the affirmative.
Senator Dunleavy asked if the Alaska Gasline Development
Corporation (AGDC) board was a decision maker through
Daniel Fauske (AGDC president) or if Mr. Fauske acted
independently. He noted that AGDC also appeared
occasionally in other locations in the organizational
chart. He asked for a description of AGDC's role in the
decision making process.
Commissioner Myers preferred that AGDC answer the question,
but relayed that he would explain AGDC's role from his
perspective. He discussed that the design under SB 138
[legislation passed in 2014 related to a gas pipeline,
AGDC, and oil and gas production tax] was that the
liquefaction plant and potentially the pipeline and GTP
[gas treatment plant] components (i.e. the transportation
system) would be managed through AGDC. He looked at
negotiations with the producers who were involved in the
operational component of the project on the management
committee. He noted that DNR did not have a seat on the
management committee, but AGDC did; therefore, the
information would flow through AGDC with respect to the
issues he had outlined. Essentially, AGDC was the
infrastructure owner; whereas, DNR's responsibility was for
many of the upstream issues and the marketing components.
He elaborated that DNR would be the upstream management and
the transportation corporation, which was a very separate
entity from AGDC's role.
3:20:54 PM
Senator Dunleavy asked if Mr. Fauske was speaking on behalf
of AGDC or independently as the head of the corporation.
Commissioner Myers asked for verification that Senator
Dunleavy was asking about the role of the AGDC board versus
the role of the AGDC president.
Senator Dunleavy replied in the affirmative. Commissioner
Myers answered that he could not answer the question
because he was not personally on the AGDC board and did not
interface with the board. His correspondence with AGDC was
limited to communication with Mr. Fauske, Joe Dubler (vice
president and chief financial officer), and Frank Richards
(vice president of engineering and program management).
Senator Dunleavy wondered if some of the positions,
especially in the lower portion of the chart, represented
contractors. He asked how much funding was attributed to
each of the positions and if each of the blocks represented
a full-time position, contractor, or state employee. He
observed that there were many company titles included.
Commissioner Myers stated that the blue blocks represented
contractors and the green were state employees. On a long-
term basis, the state envisioned that some of the blue
blocks would turn to green. He explained that some of the
positions included under project areas would go away once
there was a project. He shared that the producer and state
integrated teams including EAGR [External Affairs and
Government Relations], expansion, finance, fiscals,
governance, and in-state gas, typically had individuals
engaged from DNR, the Department of Revenue, the Department
of Law, consultants, and sometimes combined with AGDC.
However, most frequently the negotiating teams for the
upstream, commercial, and marketing issues did not involve
AGDC. He expounded that because TransCanada was currently
representing the pipe, expansion discussion was done out of
the DNR, DOR, and DOL team and consultants with TransCanada
related to pipeline size, compressor stations, and
geotechnical issues. He reasoned that once the pipeline was
constructed there would be no reason for DNR to have a
pipeline contractor; if the TransCanada buyout occurred,
the individual would be the responsibility of AGDC. He
reiterated that some of the roles were temporary through
the negotiations and would switch over once pipeline
construction began. He explained that the issues would be
negotiated for the upstream piece, but then under the
buyout AGDC would gain additional responsibilities to
manage it.
3:24:13 PM
Senator Dunleavy discussed that the past session the Senate
had made significant reductions and had been told that it
had gone too far to some extent. He elaborated that the
legislature was currently addressing the proposal to add
funding for needed individuals with expertise. He surmised
that the administration would probably get questions about
how the state would pay for the increase. He wondered if
the funds would come out of the existing budgets. He
believed that as the cost grew there would come a point
where the state had to consider other things it could put
aside in order to pay for the project. He was interested in
getting more information on salaries for the positions
shown in the organizational chart.
Co-Chair MacKinnon appreciated that Marty Rutherford,
Deputy Commissioner, Department of Natural Resources had
provided the organizational chart the previous day. She
discussed that the information was a start towards helping
the legislature understand the inner workings of the
department's work on standing up a commercially ready
project and the technical expertise to work on the state's
behalf. She noted that the organizational chart was
available online for the public. She asked for verification
that some of the state employee positions (represented in
green) had been filled and others were vacant.
Commissioner Myers replied in the affirmative.
Co-Chair MacKinnon asked for verification that most of the
contractor positions had already been filled (shown in
blue). Commissioner Myers answered in the affirmative.
Co-Chair MacKinnon asked for confirmation that the orange
blocks on the chart represented AGDC employees.
Commissioner Myers replied that he did not know if some of
the orange blocks were contracted employees.
Co-Chair MacKinnon remarked that the chart included several
groups of lines to indicate decision makers. She noted that
the governor was at the top of the chart with the following
decision makers: Craig Richards, Attorney General,
Department of Law; Randall Hoffbeck, Commissioner,
Department of Revenue; Mark Myers, Commissioner, Department
of Natural Resources; and Daniel Fauske, President, Alaska
Gasline Development Corporation.
3:27:43 PM
Co-Chair MacKinnon addressed SB 3001, Section 1, subsection
b. She explained that the administration was proposing an
additional appropriation of $13,607,000. She noted that
subsection c specified that DNR would receive $2,126,000 of
the funds. She asked if the funding would be considered a
one-time or recurring appropriation.
Commissioner Myers replied that the funds would be
recurring at least into the FY 17 budget related to
negotiator positions. He elaborated that the permanent
positions (e.g. the gas marketer) would be recurring long-
term as the structure was built out. The contractual
component would recur until the negotiation support was no
longer needed.
Co-Chair MacKinnon queried the benefit of a marketing
position filled by a state employee versus a contractor.
She noted that the state would not have a pension
obligation for an employee if they worked for ten years,
but it would have a health obligation to the employee. She
reasoned that the project was about ten years out. She
wondered what a person making $860,000 (as suggested in a
recent newspaper) would do to the state's healthcare
system. She asked for additional information on the
decision to hire someone as an employee versus a
contractor.
Commissioner Myers replied that with respect to health
insurance, the salary would not really affect an employee's
health benefits because they were not under the Defined
Benefit program or Tier IV. He noted that the state did pay
22 percent for Tier IV, but it covered other employees
under Tiers I through III. He strongly believed in having
employees [involved] due to accountability to the state. He
detailed that the chief marketer would be negotiating deals
in the billions of dollars in the long-term on behalf of
the state. He stated that sometimes contractors came and
went and even the best ones may not be retained longer than
six months to one year. He stressed the importance of
continuity. He noted that it was possible to build an
organization that included contractors, but the core leader
needed to be an exceptional person. He noted that it was
possible to have technical employees who were very good,
but were lousy managers or team builders. He furthered that
the state was looking for unique attributes in the key
leader: someone who could build a team, was held
accountable to the people of Alaska, and would be on the
project long-term. He remarked that the state wanted a
sense of "golden handcuffs" around the key leadership
positions. He did not believe all of the individuals in the
organization had to be employees. However, in the past two
negotiations the state had hired world-class consultants,
but had then lost the expertise and had to start over on
the cycle. He reiterated the importance of continuity of
effort, leadership capacity, and technical expertise for
the lead position. He added the individual should live in
Alaska while doing the job.
3:32:07 PM
Co-Chair MacKinnon queried the approximate number of
employees DNR was proposing to bring on for the marketing
team. She asked what the finance subcommittees could expect
to see as an underlying recurring cost to support the
project (associated with DNR only). Commissioner Myers
answered that the marketing organization would depend on
how the state chose to market. He detailed that many more
personnel would be needed if the state chose to equity
market. He explained that under equity marketing the team
would need to be independent and autonomous with respect to
building a core capacity. He furthered that under equity
marketing the state would be doing billion dollar-type
deals in the marketplace, which would require individuals
to work on a multitude of contracts. He added that the
state would be doing the marketing by itself. Under joint
venture marketing, the state would need far fewer
individuals because its individuals would be seconded into
a team. Under the scenario, the team would consist of a
leader, a lower paid analyst, geoscientist and engineer
(for upstream assurance of deliverability), and an
assistant. He elaborated that if there were two joint
venture marketing deals the state would need a couple of
additional individuals (for a total of 6 or 7 positions).
He relayed that the state did not foresee a very large
organization built for marketing under the joint venture
marketing profile it hoped to achieve.
Co-Chair MacKinnon asked for verification that the term
"secondees" pertained using employees from another
organization for their expertise for a limited amount of
time on a project. She asked Commissioner Myers to expand
on the definition.
Commissioner Myers replied with an example about the
Prudhoe Bay oil field managed by BP. He explained that the
working interest owners included ConocoPhillips and
ExxonMobil. He furthered that under management when
decisions were made most of the individuals in the
structure were BP employees, but there were engineers and
geologists from the other companies as well who were
assigned and worked as part of the team. He explained that
seconded meant that the employees were paid by their parent
organization to move into the joint venture organization.
He referenced the Alyeska Pipeline Service Company as
another example; there were employees working in the
company from other companies. He furthered that the state
would take a state-paid employee and put them into the
structure of the overall marketing infrastructure. Under
joint venture marketing the state and producers could
nominate parties for contracts and the group would then
decide the best optimization of the contracts. The
advantage of having a state employee seconded into the
organization was total transparency in the data. He
explained that because it was a joint organization there
would be limited duplication. He noted that the state would
need at least one senior person who was seconded or living
in the joint venture marketing organization.
3:36:08 PM
Vice-Chair Micciche shared that one of his fears was about
not taking full advantage of the partnership. He noted that
three of the involved companies had decades of oil and gas
experience. He was hopeful there would not be any redundant
positions, where the need for the state could be met by
seconded individuals into AKLNG. He queried the exercise
did DNR undertake to determine which positions the state
would need under its umbrella versus being seconded from
the other organizations.
Commissioner Myers replied that the department asked
outside consultants to look at LNG experts. Additionally,
the department used its internal LNG expert Audie Setters
to help design the minimum system. He elaborated that the
department had assumed the fewest number of employees
possible, under the most efficient structure - the single
joint venture marketing structure. He stressed that the
state had to have someone working inside the joint venture
structure. He noted that the department felt that it was a
smaller structure, which was its baseline assumption. The
department also needed employees ready to go in case the
structure did not happen. He noted that DNR did not believe
it needed a geologist or engineer right away, but the
positions would ultimately be needed. The key had been to
hire the lead position to build up the appropriate
structure in the beginning of the FEED structure (once the
marketing structure had been negotiated). He reminded the
committee that a joint venture marketing structure would
require only a few additional employees; however, under an
equity marketing structure it would require a much larger,
self-sustaining organization. He noted that an equity
marketing structure was not DNR's preference; however, he
noted that there were other people who believed an equity
structure would be more beneficial to the state. He
elaborated that it would be possible to do a combination of
the structures. Additionally, DNR was aware that how the
state chose to market may impact how the project financing
worked. He explained that there had been discussion about
some equity going to other parties. He concluded that from
the perspective of the team and consultants, joint venture
marketing would be the lowest cost with the least number of
employees. He spoke to the importance of a lead position to
construct the necessary components and to help the state
negotiate with the producers. He noted that the state also
needed a marketing professional to start going to the
market to warranty the gas. He added that the marketing
professional should be someone well known in the market and
not himself or someone else on the state's team.
3:39:23 PM
Vice-Chair Micciche asked if a new position would be
created [on the organizational chart] for a team with
responsibilities associated with construction due
diligence. Commissioner Myers replied that the department
had assumed the specific work would be done through the
AGDC structure. He emphasized the importance of ensuring
transparency between AGDC and the DNR, DOR, DOL team. The
state's assumption was that AGDC would have people in the
project on the pipeline and GTP side. He explained that DNR
felt it was critical to have experts on the commercial
areas of in-state gas expansion while the negotiations were
underway. Additionally, the state wanted the technical
expertise (such as Pat Anderson) during the review of a 48-
inch versus a 42-inch pipe to represent the broader state
interests. He detailed that a pipeline interest would not
necessarily represent all of the state's upstream
interests. The producers were particularly interested in
the production from the two fields. The state also had that
interest, but it wanted to be assured there was capacity
for the other gas on the North Slope. He referred to a
discussion earlier in the day with the Alaska Oil and Gas
Conservation Commission (AOGCC) on the resources. He
relayed that there was about 50 trillion cubic feet (tcf)
of proven resource on the North Slope and potentially up to
200 tcf more in undiscovered resource. He stated that the
numbers were very large and the state wanted to ensure
there was capacity. He noted that no determination had been
made, but the state wanted to understand the ability to
expand. The ability to expand depended on whether the
infrastructure was built correctly to make expandability
reasonable in economic sizes and whether the commercial
arrangement allowed for it.
Vice-Chair Micciche remarked that there were several state
employees that would probably not be necessary even in the
later stages of FEED, expansion, governance, and perhaps
regulatory. He reasoned that state bureaucracies were
resistant to eliminate positions, but its head count was
expensive. He wondered what would happen with the positions
as stages of the project were phased out.
Commissioner Myers believed the organization should be fit
for the purpose at the time the capacity was needed. As
constructed, the AKLNG office would cease to exist if the
project was successful at the operational stage. As various
negotiations were finished certain associated work would no
longer be needed. For example, when PILT was fully decided,
DNR's current work on the subject would become unnecessary.
The organization would be adjusted appropriately at the
right phase. He noted that the operational marketing
organization had yet to be built (currently the state had a
negotiating organization). He expected the structure to
look very different when the project reached the next
phases.
3:43:19 PM
Vice-Chair Micciche surmised that each box on the
organizational chart represented a decrease in the ultimate
value from AKLNG. He remarked that one of the fears
discussed around potential new revenue was the decrease in
value caused by a bloated bureaucracy. He noted that the
structure may not be bloated in the organizational chart
before the committee; he had significant faith in
Commissioner Myers' abilities. He hoped the department
would do its best to keep the organizational structure
lean.
Senator Bishop commented that in relation to the gasline
the current cost would probably be the cheapest check the
legislature would write until the state made a gas sale. He
asked if his statement was accurate.
Commissioner Myers replied that because the state would be
a partner with only 25 percent of the infrastructure that's
where the costs would shift. He detailed that the
transition from pre-FEED to FEED would greatly increase the
engineering and development costs. He stated that when the
full stage was reached, even though the state was
financing, it would still be writing a very large check. He
stressed that the project entailed a huge level of capital
investment. He stated that when it came to the employee
costs the focus should be on AGDC's budget because it would
house the majority of the employees. Under a TransCanada
buyout scenario the state's 25 percent interest in the
capital costs would reside with AGDC. He stated that the
value was in the upstream gas. He furthered that the state
would be in good shape if it negotiated well, a well-
functioning marketing organization had been created, and
the right kind of commercial arrangements had been
established.
Commissioner Myers discussed the importance of having the
state's commercial negotiations lead to verifiable and
straight forward outcomes. He stressed that he did not want
to skimp on the lawyers and external experts at present
because the state wanted to build durable agreements that
would not take extra auditing or confusion. He relayed that
one of the reasons for RIK was to eliminate some of the
problems the state had with checking valuation. However,
the state needed to be competent at marketing gas or it
could have a catastrophic failure. He reiterated the
importance of building a durable framework in the joint
venture marketing structure. He stated that a durable,
fair, transparent organization was critical, which took
significant work given the number of involved parties. Once
the framework had been established, the state's operational
team could really shrink. He noted that building the right
management agreements based on what the state had
historically learned was incredibly important. He stated
that the structure would be easier to manage from an
upstream royalty accountability and tax accountability
because of the gas conversion. He stressed that the state
had to be very competent as an oil and gas company in terms
of running the infrastructure. Additionally, the state's
marketing had to be very good.
3:47:22 PM
Senator Bishop agreed. He wondered if Mr. Myers would
personally double check resumes before a final decision was
made when hiring for positions pertaining to DNR.
Commissioner Myers replied in the affirmative. He stated
that the department would look hard at applicants'
technical qualifications.
Senator Bishop appreciated Commissioner Myers' comments. He
stressed that the organizational chart was just a piece of
paper unless the state had good people in the positions.
Co-Chair MacKinnon asked for verification that the
$2,126,000 for DNR (in SB 3001) was to create a marketing
team and that the analysis supported the request.
Commissioner Myers replied that there were multiple
components related to the appropriation. He detailed that
the document provided to the committee went through the
specifics [four-page document provided to the committee
from the Office of Management and Budget on October 25,
2015 titled "FY2016 Supplemental Request for State Agencies
- $13.6 Million." (copy on file)]. He communicated that
$646,000 would go to marketing and $900,000 would go to
contractual services. He addressed existing contracts and
listed the following: Audie Setters worked on marketing and
had taken a leadership role within DNR historically; Deepa
Poduval with Black and Veatch; Radislov Shipkoff with
Greengate LLC provided financial advising; Nan Thompson
(former oil and gas attorney and current Enstar vice
president) had been hired to as the lead to write a finding
to help achieve a decision on RIK; Pat Anderson (former
TransCanada vice president on Arctic pipelines) with Pingo
resources; Simon Lisiecki (former vice president of
shipping for an LNG company) was working on LNG shipping
and financing marketing; and Steve Swaffield (former BG
Canada Group president) was working on commercial
financing; Steve Wright (former Chevron Alaska manager and
petroleum geologist) was DNR's overall coordinator. In
order to save money and keep the head count down, DNR had
been pulling significant expertise out of its Division of
Oil and Gas. He detailed that two of the division's three
commercial analysts were spending 80 to 90 percent of their
time on AKLNG project related work (meaning the individuals
were not available on the oil side when needed). He
elaborated that the individuals conducted the economic
analysis on lease sales and royalty reopeners. He stressed
that it was necessary to find a way to fund the work that
needed to be done in the Division of Oil and Gas in
addition to its work.
3:51:07 PM
Co-Chair MacKinnon remarked that there had been a footnote
showing a $4 million credit from TransCanada. She asked how
the administration would audit the bills from TransCanada
in order to ensure double payment was not made and that
complete payments were made. She thought she had heard that
the $4 million had been paid and that it was being carried
forward as a credit. She attributed the question to Senator
Bert Stedman.
Ms. Pitney replied that there was a $4 million credit and a
$3 million cost (there had been an offset as a result). She
deferred to Commissioner Myers regarding the audit portion
of the question.
Commissioner Myers answered that the department was working
to obtain the final numbers in order to answer the
question. He had learned that there had been a six month
period under AGIA where work on AKLNG had started;
therefore, there was some credit for the work on the
state's side and some credit to TransCanada for work that
had not been paid under the AGIA license. He explained that
the items subtracted out. He had been asked if there was
any overhead. As far as he knew, the 7.1 percent interest
did not apply to those dollars. However, there had been an
overhead associated with AGIA that did apply. He explained
that it was transitional period money and the exact details
would be obtained as the state worked through it.
Co-Chair MacKinnon queried the process used by DNR to
ensure there was not a bill paying duplication.
Commissioner Myers replied that DOR was conducting the
audits and would better suited to answer the question. He
relayed that had spoken with TransCanada and the state had
commercial experts working on the team who were looking at
a payout to TransCanada followed by an audit and reopener
with the audit. He elaborated that the state would pay out
TransCanada and it would then have a certain amount of time
to conduct the full audit with a true up at the end of the
audit. He communicated that TransCanada was amenable to the
process and he believed the state would be as well, but the
process had not been formalized. He communicated that the
state wanted to time the payments to allow the work plan
and budgets to be voted on and so AGDC had the money for
the work plan and budget. TransCanada wanted to be paid
before it voted on the work plan and budget for the state
or turned the right over to AGDC.
3:54:59 PM
Co-Chair MacKinnon asked if the vote [on the work plan and
budget] was scheduled for December 4, 2015. Commissioner
Myers answered in the affirmative.
Co-Chair MacKinnon explained that the items outlined in the
document provided by OMB typically came in the form of a
fiscal note. She wondered if the committee would see a
fiscal note.
Ms. Pitney responded that she was uncertain a fiscal note
was the appropriate format; however, there was a change of
record backup document showing the detail.
Co-Chair MacKinnon replied that the committee would work
with the Legislative Finance Division on the appropriate
documentation. She thanked Commissioner Myers for his
presentation. She relayed that the committee was still
working to understand the organizational chart related to
the specific hierarchy. She explained that on other
projects there may be each of the components broken out in
an individual organizational chart showing who positions
reported to and how the voting rights were assigned. For
example, Senator Bishop had asked if Joe Dubler [Vice
President and Chief Financial Officer, AGDC] consulted with
AGDC staff, the decision makers (shown on the
organizational chart), or from the AGDC board before
casting a vote on behalf of the state.
3:57:18 PM
Senator Dunleavy wondered if the organizational chart
represented the ideal staffing or the bare minimum for DNR
to do the job.
Commissioner Myers replied that he did not know a lot about
how AGDC was constructed and could not address that portion
of the chart. He stated that the DNR positions on the chart
represented the team that was needed. He stressed the
immense nature of the negotiations. He stated that until
one looked "under the hood" it was not possible to realize
just how complex and difficult the negotiations were. He
stated that there were four parties that did not agree on
much, which were trying to reach alignment on huge issues
with major uncertainty surrounding the issues. He
guaranteed that the producers' teams made the
organizational chart before the committee look miniscule.
He communicated that DNR was relying heavily on consultants
and would not have the ability to undertake the work with
only a state team; the state did not have the availability
of expertise to hire the right people and to get them in
place as long-term employees. He stated that it was the
"coalition approach" where it was necessary to bring in the
best expertise possible to push as hard as possible. He
stated that it was one big push that would last months;
therefore, it was necessary to lock-in the high end
consultants, which meant the contract money was critical.
Commissioner Myers addressed efficiency in negotiations and
acknowledged that negotiations had been scattered. He
stated that everyone was still learning how to "crack the
nut" in terms of critical issues such as governance and gas
balancing. He used a Super Cub airplane as an analogy. He
explained that the Super Cub's strength was in its frame,
but it would not fly without fabric on its wings; however,
the fabric could not be installed before the frame was
created. He explained that there were certain structural
framework agreements that needed to fall into place and
there were other commercial agreements that were needed
prior to doing the finding. He explained that it was not
possible to speculate on some of the huge values and a
conditional finding would not be satisfactory to many
people. He stated that he ready to get the skin on the
plane as soon as possible, but first the frame had to be
assembled. He reiterated that a team of the size shown on
the organizational chart was needed to build the framework.
He stressed the need for outside consultants and remarked
that people were working an extraordinary number of hours.
He relayed that many of the state's employees were working
a significant amount of unpaid overtime.
Commissioner Myers continued that it was necessary for the
state to keep checking itself to ensure accuracy. He
stressed the complexity of the negotiations. He believed
the positions shown on the organizational chart represented
the right balance for the state (not an over balance).
4:01:05 PM
Senator Dunleavy encouraged the inclusion of a fiscal note.
He wondered where the administration believed the money
would come from to pay for the bill. Ms. Pitney replied
that the funding would come from the Constitutional Budget
Reserve (CBR) savings. She explained that the funds would
require a majority vote because there was a buffer of $500
million from previous legislation and FY 16; however, it
would result in an additional draw from savings.
Senator Dunleavy remarked that in the coming year the
Senate Finance Committee would be asked to look at
alternative revenue sources (primarily the Permanent Fund
and taxes). He wondered if there were any additional
efficiencies that could be garnered in the administration
that could render some money to pay for some of the project
costs. He did not believe many people believed it was the
last time money would be requested for potential expansion
in various areas needed to support the pipeline.
Ms. Pitney replied that there had been significant work on
efficiencies to date. The budget reduction between FY 15
and FY 16 for agency operations exceeded $340 million
including an unallocated $30 million reduction. She
stressed that the administration was looking for all
possible savings and intended to submit additional
reductions going into the FY 17 budget. She emphasized that
the administration was looking for every opportunity to
reduce the cost of government. She furthered that the
tradeoff of funding the project and its potential for long-
term revenue to the state was immense. She continued that
the project was an area that required investment; at the
same time the administration was taking significant
reductions in the current fiscal year and was proposing
additional agency reductions in the coming year.
4:04:08 PM
Co-Chair MacKinnon addressed the state's preferred joint
marketing agreement structure. She asked if there would be
a possibility of downsizing the expensive marketing
position once the agreements were reached. Alternatively,
she wondered if the position would be long-term with less
expense going towards the positions if the state was able
to establish joint marketing terms.
Commissioner Myers believed one critical person at the
senior level was important. He was uncertain of the salary
and the department would do the best it could. He explained
that the included salary was closer to the upper end of the
range that had come from the consultants' reports. He
relayed that the petroleum geologists who had been hired
were not paid anywhere near industry wage; however, they
were paid significantly more than the other employees. He
communicated that senior petroleum geologists and engineers
were paid between $200,000 and $300,000 per year in Alaska
(the salaries in Houston, Texas were very similar). The
state was also looking for the leadership piece on top of
the other positions. He relayed that consultants like Ms.
Setters would exceed the salaries if consultants were
maintained (the hourly cost was very high). The other
challenge with LNG marketing was that marketers were paid a
significant bonus, which could easily equal close to the
person's total salary depending on the year. He did not
believe it was a good model for the state to be offering
those types of bonuses; therefore, it was necessary to up
the base salary to offset.
Co-Chair MacKinnon addressed the technical expertise that
would remain in the system after TransCanada's departure.
She relayed that Deputy Commissioner Rutherford had
testified that 15 TransCanada executives were working on
the project. She wondered if the department anticipated
holding the individuals in the project. She wondered about
continuity over the coming 6 to 9-month period.
Commissioner Myers answered that if TransCanada was
terminated it would allow its seconded employees to stay
until May [2016], which would get the project through the
initial pre-FEED deliverables (not the extended
deliverables) and the analysis between a 48-inch pipe
versus a 42-inch pipe. He expounded that beyond that time,
the core competency would be needed under AGDC or fewer
secondees from the state. He believed the 15 secondees
would come from the other project companies once the
TransCanada left the project. He noted that the state may
have a few secondees in the structure.
4:08:08 PM
Co-Chair MacKinnon stressed the importance of project
stability and continuity. She believed it had been Senator
Bishop and Vice-Chair Micciche had spoken about continuity
and not politicizing the process. She wondered if the
department's fiscal note (if provided) include exempt
employees versus non-exempt employees to indicate which
positions could move in and out of the project at a higher
level.
Commissioner Myers replied that the department could
identify which positions were exempt versus non-exempt. He
relayed that almost all of the positions were exempt and he
did not believe any of the anticipated positions would be
non-exempt.
Vice-Chair Micciche remarked that his only concern about
the TransCanada buyout was over the lack of evidence that
the decision making processes would be institutionalized.
He did not believe there would be an answer before the bill
was processed, but he believed it needed to be considered
in the future. He opined that the team could look very
different in the post-operational phase and could be
significantly reduced. However, there would be an added
burden on the tax employees who were currently processing
heavier hydrocarbon and primarily North Slope issues. He
wondered if the department would assume it would need an
additional headcount to account for the other process once
AKLNG became operational.
Commissioner Myers believed that based on the activity the
state had seen with Armstrong and Repsol related to new
unitization, provided that the fields went forward, and
with reserves of 500 million P1 [proven] and P3 [possible]
of almost 4 billion barrels, things were moving forward. He
stated that the new units and territory would be very
complicated. He referred to conventional plays related to
drilling and stated that with the expansions of the Torok
formation at Nuna, new players were coming in and new
drilling was occurring. He detailed that the drilling was
leading to production and was no longer only exploratory.
He discussed that the environmental permitting components
would be huge; he pointed to the Colville River delta was
an environmentally sensitive area. He continued that the
state would have to work with partners on the Arctic Slope
and the North Slope Borough. He stressed that bringing the
new units to fruition would take substantial work. He
continued that the state would have to do participating
areas for production and tracked allocation and equity
decision making. He emphasized that it was very good news,
but it meant there would be much more work. He stated that
when the industry transitioned from a few large fields to
smaller fields or expansion of less conventional oil sands
with horizontally frack wells there was significant work to
do. He noted that the evolution to smaller, more spread out
fields (and the large Colville field) would keep DNR's
staff very busy.
Commissioner Myers discussed that the state still had
active exploration licensing if it chose to continue that
and was successful. He explained that the state wanted to
have the capacity to do the things correctly and to
accelerate them. He relayed that given his current staff
was stretched thin, he had seriously considered slowing
down the oil and gas lease sales in his current year
budget. He elaborated that the environmental permitting
pieces were becoming much more difficult for the
department; much more public notice was required and there
was increased acrimony particularly with respect to recent
legal cases such as REDOIL [Resisting Environmental
Destruction on Indigenous Lands]. Additionally, there were
new water reservation issues for the department to address.
In relation to development, he saw a significant increase
in work would be necessary to do things right. He addressed
that two recent timber sales had been appealed and were
currently at his level. He stressed the complexity of the
issues and stated that it was not possible to take
shortcuts. Simultaneously, the federal permitting was
becoming much more difficult. He addressed maintaining the
state's control in areas such as SMCRA [Surface Mining
Control and Reclamation Act].
Commissioner Myers could not see shrinking the size of DNR
staff because the work load was increasing. He stressed
that the consequences of doing things poorly meant the
state would be in court indefinitely. He referred to the
department's relationship with the federal government and
noted that DNR was adjudicating going to court on water
rights. He reiterated that resource management was becoming
more difficult for the department for a multitude of
reasons. He stressed the importance of having the capacity
to do things right. He noted that some of the staff may
switch roles from less geotechnical roles to more
environmental geotechnical roles - working on wetlands
mitigation banks for example. He addressed the effort of
coordinating permitting that was done through the
department's Office of Project Management and Permitting
(OPMP); however, the office had almost no general fund
left. He stated that coordination was not available if
there were no funds to pay for it. He could see the [AKLNG
project] organization becoming dramatically smaller, but
other parts of DNR would have to be maintained in order to
address resource development.
4:14:58 PM
Vice-Chair Micciche remarked that although DOR enjoyed
collecting the checks, the revenue was a result of DNR's
labor. He hoped the legislature would remain focused on the
fact that DNR was the only true profit center in the state.
Senator Hoffman queried the proven and potential volume of
natural gas. He also wondered what involvement DNR had
between a 42-inch and 48-inch pipe.
Commissioner Myers replied that the resource numbers were
roughly 6 tcf proven [P1] at Point Thomson and about 24 tcf
proven at Prudhoe Bay. He noted that the Point Thomson
number could be larger. Additionally, there was
approximately 20 tcf proven scattered in a multitude of
other fields. He relayed that all of the oil fields also
had solution gas (as oil was produced some of the gas came
out). Some of the proven gas was well outside of the
production area and would require additional pipeline
infrastructure, which may not be economic. On the
undiscovered resource side, a number of people had put out
approximately 200 tcf of conventional (some offshore and
some onshore). He stated that the foothills had a very high
probability and most of the wells hit gas. He explained
that there was a strong indication of a basin center gas
system that may be huge (well above 10 tcf). He stated that
the gas was not confined to a single structure, but held in
a broad area; as long as there was sand, gas would be hit.
He continued that the National Petroleum Reserve-Alaska
(NPRA) contained significant gas. He offered to have the
Division of Oil and Gas provide a complete outlay of the
resources.
Commissioner Myers spoke to unconventional resources
including natural gas hydrates, which was currently
estimated at 85 tcf; a significant portion of the amount
was at the Prudhoe Bay, Milne Point infrastructure. He
communicated that the department was moving toward a 2017
DOE [U.S. Department of Energy] and Japanese funded well in
Prudhoe Bay. He relayed that the operators had been very
cooperative working with DOE, the state, USGS [United
States Geological Survey], and others. He relayed that if a
sustained technical flow could be sustained out of the
hydrate accumulations it would be a big step forward. He
noted that it was gas that was probably decades away from
being commercial. He communicated that the state was hoping
to see success oil success on the Chukchi Sea, but the gas
was estimated at 14 tcf.
4:18:03 PM
Co-Chair MacKinnon asked about the pipe size. Commissioner
Myers replied that currently the state was part of working
with AKLNG to evaluate a 42-inch versus a 48-inch pipeline.
The state would bring in 48-inch pipe for testing. He
relayed that a 48-inch pipe was easily expandable to a much
larger level, with fewer compressor stations (its base
design required 4 versus 8 compressor stations, which used
much less fuel gas). He continued that a single-wall
thickness (X-80 pipe) was probably good for the entire
route and was expandable to a much larger size. He
discussed that the cost figures for expansion were
relatively modest. He reasoned that if it was not done when
the pipeline was built, it would never be done. The
disadvantage of the larger pipe was that if the project was
optimizing for Prudhoe Bay and Point Thomson only, it would
not be done; a 42-inch pipe was optimized in terms of fuel
use, which would require 8 compressor stations. He detailed
that expansion to another 800 billion cubic feet (bcf)
would require another 10 stations. He stated that a
combination of X-80 and X-70 steel may need required. He
relayed that steel was much lighter weight and easier to
transport, the width of the gravel was less and the
development work on the smaller pipe was further advanced.
Senator Hoffman wondered what the three major producers may
see as an advantage and disadvantage of the different pipe
sizes.
Commissioner Myers replied that that from the perspective
of a producer the 42-inch pipe would be optimized if the
primary goal was production from Prudhoe Bay and Point
Thomson and if a producer was willing to wait until there
was space available in the pipeline (approximately 2040) to
put additional gas into the line. Additionally, a 42-inch
pipe was less expensive and the design was further along.
He explained that it depended on what someone was
optimizing for. He furthered that from the state's
perspective a 48-inch pipe made more sense when looking at
opening up the basin and providing additional
opportunities. He noted that the issue was not only about
the pipe size, but the terms for expansion. He explained
that if good terms for expansion were achieved, the 42-inch
pipe could be better or acceptable; however, if poor terms
for expansion were achieved, the larger pipe would be
optimal. He noted that some of the items could be mitigated
commercially, but ultimately DNR was appreciative that the
project was doing a full geotechnical analysis of the two
options. He believed it was premature to make the decision
on the pipe size until the review was completed in May
[2016].
4:21:30 PM
Senator Dunleavy referred to talk about exhausting the
field over a certain period of time. He detailed that under
HB 4 [legislation passed in 2013 related to AGDC and the
Regulatory Commission of Alaska] the idea had been gas for
Alaskans first and exporting gas to drive the cost down for
Alaskans. He wondered how the concern related to the size
of the pipe and the life of the field. He wondered about
the life of a field under a 36-inch and 42-inch pipeline
scenario.
Commissioner Myers replied that net present value (NPV)
drove companies to make the investments; whether the
investment was the best based on upfront cost and potential
revenue. The larger the pipeline, the quicker gas flowed,
and the more cash flow early on, usually meant a higher
NPV. He added that companies liked large projects that
provided gas early because it made their shareholders more
money. He discussed that there was a minimum size pipe
needed for a pipeline system with an expense structure like
AKLNG's to pay back with a regular return to the producers
as well. The larger the pipeline, the cheaper the
transportation costs. He furthered that a project should be
as large as it could, based on the available gas for a
reasonable period of time. He detailed that the payoff was
typically about 25 years for a project like AKLNG; beyond
25 years, the additional gas that a project may see was so
far out it had little economic value in relation to the
investment. He furthered that companies looked for a "sweet
spot" of volume and time frame with gas supplies to back it
up. Companies were also doing long-term contracts and
wanted to ensure they had enough gas to meet the contract
needs. He relayed that AGDC had conducted an evaluation of
a 36-inch line and had determined that it was not
commercially competitive with other projects in the world.
He explained that the throughput volume had to be larger.
He continued if a Prudhoe Bay only project that would
produce at a lower rate through a 36-inch or 40-inch
pipeline, it did not make an economic cut compared to other
projects because the cost of delivery was higher. He
furthered that to backstop a 42-inch line with flows of 3.6
[bcf] per day "you might look out of the system to
deliver," but to deliver enough for the full trains of LNG,
reserves about the size of those at Prudhoe Bay and Point
Thomson were needed. He continued that at about year 16
Point Thomson would decline and a gap in capacity would
begin, which was the reason having a basin with other
potential was important. He explained that the project
would be built based on warrantying the current supply from
both fields, which would maximize economics and assure
suppliers the gas would be delivered. He stated that a
smaller pipeline did not really fit the economic criteria
to build a competitive project.
4:25:06 PM
Senator Dunleavy asked about the horizon on the fields in
terms of years with a 48-inch pipe versus a 42-inch pipe if
Alaskans were looking for a long-term, stable gas supply.
Commissioner Myers answered that there would be maximum
production from the two fields for about 16 years with
declining production to about 25 years and possibly longer.
He added that new gas would be flowing in from other fields
given what was known. He relayed that there were certainly
other proven resources that would go into the pipeline
including solution gas on the other fields, gas caps, and
gas from NPRA. He elaborated that other gas would come in
from the immediate infrastructure. He noted that gas from
NPRA was likely to come in. He added that the Point Thomson
area had upside as well. Another 20 tcf could come in from
other known gas resources in Alaska depending on price,
economics and time. The farther away from the GTP the more
gas the project would need to bring in (unless the gas was
low in carbon dioxide) because a feeder pipeline would need
to be constructed. He explained that there was a minimum
size of additions that depended on the distance from the
infrastructure.
Co-Chair MacKinnon thanked Commissioner Myers for his
presentation. She relayed that the committee was excited
about a project for Alaska.
Vice-Chair Micciche asked what had been plugged in for an
evaluation of excess liquefaction capacity. He noted that
with a 42-inch design the project would have more supply
than liquefaction. He wondered what was under consideration
for a 48-inch pipeline. He noted that if in-state use would
not even meet one of the millimeter marks on a yard stick.
He asked about the thought process and if DNR was hopeful
someone was interested.
Commissioner Myers replied that his understanding was that
the design was being optimized for offtake. He elaborated
that all three facilities were being designed to maximize
winter production and keep production through the existing
trains. He relayed that there was room for another train on
the facility design; another large train would be needed.
He believed there was the space and design capacity for an
incrementally valid expansion. He was not aware of any
commercial discussions about how it would be triggered.
Secondly, there had been many discussions about spur lines,
offtake points, and the possibility of a smaller LNG
project in the Cook Inlet region closer to the Mat-Su port.
He noted that there were certainly people interested in
building smaller scale facilities. He discussed how it
would fit into a design and noted that it would not
necessarily take a large incremental expansion. He stated
that compression would likely have to be increased because
of the optimization for the existing plant. He added that
the same was true related to large amounts of in-state gas
beyond what was being contemplated. He relayed that the
state's view to date had been that it was a very cheap
option to put the pipe in the ground (once it was in the
ground it was there); however, a liquefaction plant was
much more challenging, given the cost structure a large
expansion would be needed. He stated that one of the
challenging components of the 42-inch pipe was the need for
10 compressor stations to make it an economic tranche. He
relayed that it was much easier to do an expansion with the
48-inch pipeline. He stated that it was possible to move
700 [million cubic feet per day], but it would take a 42-
inch pipe to its maximum.
4:29:44 PM
Vice-Chair Micciche noted that Commissioner Myers had given
the same horizon with the 42-inch and 48-inch pipe. He
reasoned that it was likely not accurate unless there was
new gas. He stated if an additional 700 [million cubic feet
per day] was flowing, it would be more like 18 years versus
25.
Commissioner Myers agreed. He explained that his
presumption was new gas. The only thing large enough would
be the foothills in a single tranche or the Chukchi, which
was much less likely. He opined that it was a play on
having the basis under gas and having it developed. He
stated that it was a risk play and he could not say that it
would happen. From the producers' perspective it was an
extra cost to the project, but to the state it was a cheap
option for expansion.
Co-Chair MacKinnon asked DOL attorney Martin Schultz if he
would be available to present on Friday given time
constraints associated with the current meeting.
MARTIN SCHULTZ, CHIEF ASSISTANT ATTORNEY GENERAL, OIL, GAS,
AND MINING SECTION, DEPARTMENT OF LAW (via teleconference),
agreed to present on Friday.
4:32:05 PM
Co-Chair MacKinnon surmised that the appropriation in SB
3001 was placing all of the money into AGDC. She believed
there had been some RSA [Reimbursable Services Agreement]
transfer of funds issues in the past with DNR and AGDC. She
asked if the department was content with the construction
of the appropriation or could the money go directly to DNR.
Ms. Pitney replied that under the construct of the
legislation direct LNG funds would go to each department;
the intent was to have all of the funds show up in the LNG
fund. She noted that in conversations with David Teal
[director of the Legislative Finance Division] there was a
difference in perspective on how it would work. The
administration preferred that direct funding would go to
each of the agencies; however, it believed that the RSA
approach would work as well.
Co-Chair MacKinnon communicated that direct funding to the
departments was her preference as well. She relayed that
with the support of the committee she would work to
construct a committee substitute to directly fund the
departments. She understood that Ms. Pitney had expressed
an interest to ensure all of the funding for the project
could be tracked in order to provide transparency. She
noted that based on her observation RSA transfers could
take a considerable amount of time. She elaborated that the
issue had been flagged in the committee's review of the
bill.
Co-Chair MacKinnon looked forward to Commissioner Myers'
next update and appreciated his presentation. She moved on
to a presentation by DOR. She relayed that the department
was requesting $1,381,000 under the legislation. She asked
the department to address how the appropriation would be
used.
4:34:59 PM
DONA KEPPERS, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
(via teleconference), began by addressing the
organizational chart [State of Alaska AKLNG Integrated
State Gas Team]. She relayed that she coordinated the work
product and led several teams. She pointed to the finance,
fiscals, and property tax columns. She explained that there
were two major work streams dealing with the finance effort
and the property tax effort that was part of a public
process. From a reporting standpoint, the department was
requesting $794,000 for personal services as part of the
supplemental request. She discussed that it was necessary
to look at deliverables to learn how DOR had used its
internal resources. She addressed how the department used
its high level resource employees in the most effective
way. The department employed two audit masters from its Tax
Division, one commercial analyst, and the deputy
commissioner, who supported a major piece of the work
effort. She relayed that DOR did an enormous amount of
coordination and collaboration dealing with its consultants
(blue boxes on the organizational chart) in the work
streams. The department also had an integrated workplace
with its counterparts at AGDC. She elaborated that there
was significant weekly communication with AGDC; the
agencies used the same accounting across the areas in order
to have the continuity of knowledge to move information
forward.
Ms. Keppers referred to the audit masters and commercial
analyst positions and shared the need for a cohesive
knowledge in order to move the work products up to
Commissioner Randall Hoffbeck. She noted that using the Tax
Division employees for the AKLNG project had been difficult
on the division because it had taken them away from their
usual work. She explained that funds were included in the
supplemental request because when DNR's FY 16 budget
request had been cut DOR had not received its piece of an
RSA.
4:38:19 PM
Ms. Keppers pointed to slide 9 of Ms. Pitney's presentation
titled "TransCanada and Pre-FEED Supplemental
Appropriations Summary" dated October 2015 (copy on file)
and relayed that DOR's personal services were in a
collaborative, consulting, and advisory support role to DNR
related to the AKLNG project. She relayed that DOR worked
closely with its consultants and DNR. She reiterated that
the work on AKLNG had constrained the Tax Division and the
department's overall workload was increasing. She referred
to the department's scope of work requirements under SB 138
on slide 8. The slide included a list of items the
department had done and was continuing to work on in FY 16.
She relayed that going forward a major component for the
department was related to property tax, the impact and
benefit of the AKLNG project, making recommendations to
property tax statute, impact payment processes, revenue
distribution, and coordinating with the Municipal Advisory
Gas Project Review Board (MAGPR). She stated that
coordinating with the MAGPR was a huge piece of stakeholder
work for the department, which would continue through the
spring [2016]. Another part of the department's involvement
was related to the financing work. She relayed that the
state's consultants Lazard and Greengate LLC were dealing
with reports and financing options; however, the work
effort was collaborative with DOR. She stressed that DOR
was involved in a critical part of project negotiations.
She communicated that the department needed to retain its
current resources in order to achieve commercial agreements
going forward.
Ms. Keppers addressed the department's work related to the
audit of TransCanada development costs. She explained that
there was a travel and audit services component DOR was
responsible for, which was included in the appropriation
request. Another portion of the DOR request was $500,000
for a bankability review. She explained that the capital
funds would go towards conducting an independent review of
the project commercial structure and the financing plan for
the state. She elaborated that the work represented the
state's due diligence to determine prior to final
investment decision (FID) whether the commercial structure
and financing plan for the project was bankable. She noted
that the component had been added subsequent to the FY 16
budget.
Ms. Keppers referred to questions related to how the
TransCanada audit worked. She referred to an earlier
question about TransCanada final billings and whether the
state was current on the invoices. She relayed that it was
necessary to take a step back. The department had gone
through the AGIA audit process. She discussed a $330
million figure and relayed that there had been an annual
audit; the final audit had been completed and extra due
diligence had been conducted to ensure that the invoices
billed by TransCanada were split correctly in regard to
AGIA work versus AKLNG work. She reminded the committee
that there had been a transition period between the two.
Subsequently, special reports had been run as the AGIA
systems had been closed.
Ms. Keppers continued that two audits would be conducted,
the first dealt with TransCanada's development costs. She
elaborated that the audit provisions were stipulated in the
Precedent Agreement (PA) with TransCanada. The state was
about to procure services for the audit and was currently
working with TransCanada on determining the total costs.
She relayed that from an accounting process standpoint
there was no provision in the PA for the state to audit any
TransCanada development or transporter costs until a notice
of termination was received. She elaborated that once the
notice was given the state would initiate the audit process
according to the provisions established in the PA. She
noted that the audit guidelines in the PA were contractual,
not statutory. She referred to a question about the audit
payment process and whether any delays would be triggered.
She relayed that the PA did set out the auditing process
and the payment timing requirements. The department was
currently creating two or three diagrams to walk the
committee through the timeline, dates, decisions, estimated
amounts, and interest costs based on timing of decisions.
4:44:50 PM
Ms. Keppers referred to a question about how the state
would challenge TransCanada's numbers as part of the audit
process. She explained that TransCanada's costs were
challenged as part of the audit process; anything that was
disputed by the state was placed into an escrow account
established by the parties. The disputed amounts were
determined through an executive level dispute resolution
process and paid out within 30 days. She explained that
anything left unresolved would be tried in Alaska court.
She relayed that there was also a joint venture audit done
through AGDC. She deferred any questions related to the
specific audit to AGDC. She concluded that there were three
audits: 1) historical, 2) current, and 3) through the joint
venture agreement.
4:46:18 PM
Ms. Keppers urged support of the appropriation that would
enable DOR to work through AKLNG commercial agreements. She
stressed the importance of maintaining the continuity of
its employees and consultants in order to bring successful
agreements forward. She relayed that the department was
working diligently and had very dedicated employees. She
addressed an earlier question about what would happen going
forward. She detailed that the commercial agreements needed
to be established in FY 17. The department hoped to see a
taper in FY 17; there was staff currently working on
commercial agreements, which would transition to people
implementing the agreements. Additionally, there would be
regulatory work. For example, the department would set up
impact payments, processes, and distribution systems
related to property tax. The department was constantly
doing a reassessment based on where the state was in the
negotiations and the deliverables as specified in the
agreements. Some work on the marketing plan was beginning
in FY 16 with DNR; some collaborative work had been done
with Audie Setters and her group, but the work would
increase.
4:49:06 PM
Co-Chair MacKinnon stated that she was interested in an
update from DOR on the different items in SB 138.
Specifically, the committee was wondering about the
progress of evaluating the possibility for individual
Alaskans to take part in funding the pipeline. She asked if
the department had started work on the issue.
Ms. Keppers replied in the affirmative. She furthered that
with FirstSouthwest and others the department had held
conference calls and meetings with corporations and several
municipalities. The department had spoken with the entities
to gauge their interest on investing in the project. Lazard
had compiled collected information, which would be included
in its final report. She did not have details on how much
the entities would want to invest and types and ranges of
portfolios. She relayed that the conversation with multiple
parties had been very engaging. She noted that the Lazard
report would also include a plan on how to move the effort
forward. She offered to follow up with Lazard to provide
further information to the committee.
Co-Chair MacKinnon queried the progress on the framework of
how the information may be compiled. She discussed that
before the passage of SB 138 the involved committees had
discussed the idea of a check box for individuals on their
Permanent Fund Dividend. The discussion had considered
whether it would be possible to create the dynamic to allow
individual Alaskans could purchase shares in a project
going forward while remaining inside the federal
government's commerce laws. She furthered that the money
would be held for the construction with the hope that the
pipeline would provide a guaranteed rate of return for
Alaskans, municipalities, Native corporations, and other
businesses.
Ms. Keppers agreed to request the detail from the Lazard
team and FirstSouthwest.
Co-Chair MacKinnon relayed that the committee was
interested to know about the legality of the idea.
Senator Dunleavy wondered if there had been discussion
about the idea of establishing investment corporation
vehicles by the state where shares would be sold or
individuals could invest their money and the corporation
would hold an interest in the project. Alternatively, he
wondered if the department was only looking at the idea of
selling bonds to individuals.
Ms. Keppers answered that it was a little early to hold the
discussion, but she believed that FirstSouthwest and the
Lazard team could speak to the options. She would follow up
with the financial consultants.
Co-Chair MacKinnon expressed that the committee was anxious
to show support for the project in a more personal way. She
relayed that the framework would help the committee to see
if Alaskans would be willing to invest in the project.
4:53:54 PM
Co-Chair MacKinnon referred to the department's request of
$1,381,000 and new responsibilities the department had been
assigned in relation to the AKLNG project. She listed
responsibilities including coordinating MAGPR, negotiating
property tax payments, and making recommendations for
changes to property tax statutes. She reasoned that several
of the responsibilities should be close to fruition or
completed. She wondered why there was no visible cost shift
as opposed to the cost request. She believed most of the
work should be finished.
Ms. Keppers asked for clarification on the question.
Co-Chair MacKinnon explained that it appeared some of the
property tax issues asked of DOR were complete or close to
completion; however, there were recurring costs imbedded in
the budget to support the activities. She wondered why the
department was requesting additional funds and not using
the funds that were already allocated to the positions.
Ms. Keppers answered that the department was at a different
phase on the property tax work with the MAGPR Board related
to the impact payment process, creating process, and
working with the board on the allocation and distribution
systems as part of the stakeholder engagement. She
explained that the property tax issues were coming to
alignment on a target with the producers, but currently the
department was working through the discussions with the
MAGPR Board; therefore, the department's work stream had
remained the same and had just shifted to a different type
of work within property tax.
Co-Chair MacKinnon asked how many new employees the
department was planning to hire under its personal service
request.
Ms. Keppers replied that DOR could not hire any new
personnel; the department was using its current audit
masters, commercial analyst, herself, and Commissioner
Hoffbeck. Additionally, DOR had one employee who was part
of the North Slope Gas Commercialization Office and was
totally dedicated to the AKLNG property tax work. She
reiterated that the department was not able to hire any new
employees. She elaborated that it would take one to two
years to hire individuals and to train them; it would be
very difficult to do.
Co-Chair MacKinnon asked for clarification on the
supplemental appropriation request for DOR for $1,381,000,
which showed personal service increases of $794,000. She
believed some money was being added to the deputy
commissioner allocation. She pointed to page 3 of a
document from OMB titled "FY2016 Supplemental Request for
State Agencies - $13.6 Million" (copy on file).
Ms. Pitney explained the DOR request for $793,000. She
detailed that the individuals under the request had shifted
out of their existing roles to support AKLNG related work,
which left divisions without the capacity to do their
typical work. The elaborated that the budgeted positions
had been taken out of the work they normally did, reduced
the capacity, and were trying to substitute the work that
was not getting done. She explained that it would have to
be done on a temporary basis or by contract. She furthered
that the increments represented what the added requirement
would be going forward. For example, the two audit masters
had been taken out of the Tax Division and the division did
not have the ability to backfill the positions. The
increment would enable the Tax Division to bring on
capacity to conduct auditing.
4:59:38 PM
Co-Chair MacKinnon reasoned that the expenditure of $1.4
million for DOR was backfilling something. She believed new
employees must be coming in somewhere. Ms. Pitney replied
that the position focus was $793,000; the bankability study
was $500,000, which was contractual and not related to
additional people; and the related supplies and travel. She
explained that the funds would go towards the lost capacity
in the divisions for the employees being wholly dedicated
to the AKLNG effort.
Co-Chair MacKinnon referred to the lost work capacity and
wondered how the work would be completed if no new
employees would be hired. She wondered who would do the
work. Ms. Pitney replied that the work would be done either
with contractual or temporary support.
Co-Chair MacKinnon noted that a request for a personal
services increment usually pertained to bodies. She
wondered if non-permanent employees would be hired. She
reasoned that a fiscal note would provide clarity. She was
aware that the positions would not be full-time, but
surmised that someone would have to work the hours. Ms.
Pitney replied that the intent was to provide capacity to
allow the department to complete its typical work, which
was currently not possible because the individuals had been
assigned to substantial AKLNG related work.
Co-Chair MacKinnon asked for verification that the
department was not planning to hire anyone to complete the
work. Ms. Pitney answered that a non-permanent position may
be needed, especially related to audit work. She stated
that in the future it would be necessary to restore
capacity to the divisions as the project moved forward.
Senator Bishop surmised that the funds could be backfilling
part of the supplemental for the positions that had not
been funded in the regular budget. He noted that some of
the positions were affiliated with money that would have
come from DNR [funds were not received due to cuts to the
DNR budget].
Ms. Pitney responded that there had been an expectation
under DNR's original $13 million request that RSA funds
would be provided to DOR; however, that had not occurred.
Additionally, there had been reductions to DOR, which had
compounded the capacity loss.
Co-Chair MacKinnon relayed that the committee would work
with the Legislative Finance Division to clearly understand
how the money was flowing to personal and contractual
services. She asked for verification that the $13,607,000
was a supplemental request related to the expansion and
growth of the work plan for the pre-FEED stage of the AKLNG
project.
Ms. Pitney asked for clarification.
5:03:26 PM
Co-Chair MacKinnon observed that the bill contained a
TransCanada buyout for around $70 million, which included
some form of interest payment. Additionally, the bill
contained a work plan to demonstrate the state's desire for
an AKLNG project. She noted the intent to approve and fund
the work plan. According to a letter from Governor Walker,
the work plan had changed from $511 million to $693 million
and the state was responsible for picking up its share. She
thought the $13,607,000 was not only a supplemental for the
state, but a part of the work plan.
Ms. Pitney replied that the $13.7 million was the state's
support related to AKLNG, but it was not within the work
plan budget. She stressed that the state paid cash calls
for the specific AKLNG project. The bill included three
components including the TransCanada buyout; the remaining
cash calls; and the supplemental request for the agencies
to support the commercial agreements, tax implications, and
contractual services for law firms associated with the
bankability.
Co-Chair MacKinnon looked at the capitalization of funds in
Section 1 of the bill, which showed that approximately $70
million would buyout TransCanada. She observed that the
state's portion of the increase in the work plan for pre-
FEED was approximately $74 million. She stated that the
third component was a supplemental appropriation for
department work to support the project at the state level.
Ms. Pitney agreed.
Senator Hoffman discussed that the supplemental request
included $144 million for capital; $68 million of the total
request would go to reimbursing TransCanada and $75.6
million would go towards funding remainder of the state's
pre-FEED share. He referred to slide 20 of a DOR
presentation ["TransCanada's AKLNG Participation: Financing
Issues" dated October 24, 2015 (copy on file)] and
addressed the department's recommendation to use CBR funds
and the earnings reserve fund for the project. He noted
that the CBR was shown as the funding source for SB 3001.
He observed that the slide included the option of using
long-term financing to be reimbursed once bonds were sold.
He believed that under the scenario (on slide 20) the
department was not considering the bill's current
structure, the pre-FEED of $144 million, and the FEED of
$675 million. He asked about long-term financing and also
wondered if everything was under consideration for direct
appropriations from sources to be determined at a later
date.
Ms. Pitney replied that the $157 million to get through FY
16 for the agencies and pre-FEED would be an additional
draw on the CBR. There would then be a decision on FEED,
which the administration did not yet have a recommendation
on. She believed a likely recommendation would be the
concept of a rolling the principal of the FEED cost into a
project revenue bond and having interest only payments
until a construction decision was reached. She emphasized
that how the state would get through FEED from a financing
standpoint was high on the administration's priority list.
The administration felt that given the current risk level,
the pre-FEED would be funded with existing savings. She
added that FEED would entail a larger cost that the
administration would want to finance.
5:09:40 PM
Senator Hoffman referred to slide 20, which eluded to the
fact that the pre-FEED cost of $144 million could also be
rolled into the long-term financing. He wondered if the
option was off the table. Ms. Pitney responded that the
scenario (on slide 20) was a possibility, but this was a
timing issue. She explained that the state had to have the
funds for the upcoming work plan and budget decision in
early December [2015].
Senator Hoffman wondered if the decision on rolling in the
pre-FEED cost of $144 million needed to be made prior to
passage of SB 3001. Alternatively, he wondered if the
determination could be made at a later date and could be
rolled into long-term financing.
Ms. Pitney believed that the bill did not preclude the
state's ability to finance the portion if desired. She
would verify her accuracy.
Senator Hoffman asked for verification she was referring to
long-term financing. Ms. Pitney replied in the affirmative.
Co-Chair MacKinnon looked at Section 2 of the bill that
contained a $5 million statutory program receipt request
for field work. She wondered if the state was currently
collecting statutory receipts from its partners for other
items. Ms. Pitney replied that the request was for a new
concept. She detailed that the state had the ability to
bill and collect funds from its partners for work that had
been done; the collected funds would revert to the General
Fund. The statutory program receipt authority would allow
the funding to go to AGDC to offset its costs for providing
the work.
5:12:10 PM
Co-Chair MacKinnon asked why the state would not hold the
amount as a credit inside the working group that could
later be deducted from money owed by the state. Ms. Pitney
agreed to provide that information. She thought Mr. Dubler
could help answer the distinction between the cash call
component and the AGDC organizational work. She believed
the reasoning was that it was AGDC organizational work that
the project could pay for.
Co-Chair MacKinnon referred to the $13 million supplemental
request. She surmised that DNR was able to quantify the new
personnel that Alaska was considering taking on. She
believed Senator Dunleavy and others had discussed the
long-term implications [of bringing on new personnel] when
the state was trying to balance or reduce its budget to a
sustainable level in order to have revenue to support the
budget. She asked for verification that DOR was not
bringing in new state employees (exempt or non-exempt).
Ms. Pitney responded that the positions listed in the
detail were existing positions. She detailed that by
dedicating existing department positions to the AKLNG
project, it had left divisions without the capacity to do
their work. She relayed that it was necessary to determine
how to ensure that the divisions could get their work
completed. She stated that the work could be done through
short-term full-time temporary or contract positions. She
added that if the capacity for the AKLNG project extended,
it would require some backfill in the divisions.
Co-Chair MacKinnon asked Ms. Pitney to work with the
Legislative Finance Division to clarify whether the workers
would be temporary, part-time, or new state employees. She
wanted more clarity on DOR's personal service request.
Co-Chair MacKinnon thanked Ms. Pitney for her testimony.
She addressed the schedule for the week.
SB 3001 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 3001 102515 Pitney - FY16 Supplemental Budget Presentation.pdf |
SFIN 10/27/2015 3:00:00 PM |
SB3001 |
| SB 3001102715 State of Alaska AKLNG Intergrated State Gas Team.pdf |
SFIN 10/27/2015 3:00:00 PM |
SB3001 |
| SB 3001 10.27.15 Senate Finance Questions - Answers.pdf |
SFIN 10/27/2015 3:00:00 PM |
SB3001 |