Legislature(2005 - 2006)SENATE FINANCE 532
06/07/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| Roundtable Question and Answer Session - Legislators, Consultants, Producers, Administration | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| SB2001 | |||
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
June 7, 2006
9:14 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Lyda Green
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Senator Thomas Wagoner
Senator Ben Stevens
Senator Kim Elton
Senator Albert Kookesh
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Gene Therriault
Senator Hollis French
Senator Gary Stevens
Representative Kurt Olson
Representative Paul Seaton
Representative Berta Gardner
Representative Ralph Samuels
Representative Max Guttenberg
Representative Les Gara
Representative Jay Ramras
Representative John Coghill
Representative Peggy Wilson
COMMITTEE CALENDAR
Roundtable Question and Answer Session - Legislators,
Consultants, Producers, Administration
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the production tax;
providing that provisions of AS 43.55 do not apply to certain
oil and gas subject to a contract executed under the Alaska
Stranded Gas Development Act; amending the definition of 'gas'
as that definition applies in the Alaska Stranded Gas
Development Act; making conforming amendments; and providing for
an effective date."
BILL HEARING CANCELED
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JIM CLARK, Chief Negotiator
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
NICK SPILIOTES
Morrison and Foerster
Counsel to the Governor
Office of the Governor
PO BOX 110001
Juneau, AK 99801-0001
POSITION STATEMENT: Participated in the round table discussion
BOB LOEFFLER
Morrison & Foerster
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO BOX 110001
Juneau, AK 99801-0001
POSITION STATEMENT: Participated in the round table discussion
DONALD SHEPLER
Greenberg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT:
PHILLIP GILDAN
Greenberg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Participated in the round table discussion
DAVE VAN TUYL, Commercial Manager
Alaska Gas Group
BP Alaska
Anchorage, AK
POSITION STATEMENT: Participated in the round table discussion
MARTIN MASSEY, Joint Interest Manager for U.S. Operations
ExxonMobil Production
Houston, TX
POSITION STATEMENT: Participated in the round table discussion
RICK HARPER
Econ One Research, Inc.
Consultant to the Legislature
Three Allen Center, Suite 2825
333 Clay Street
Houston, TX 77002
POSITION STATEMENT: Participated in the round table discussion
JAMES BARNES
Barnes & Cascio LLP
Consultant to the Legislature
POSITION STATEMENT: Participated in the round table discussion
WENDY KING, Director of External Strategies
ANS Gas Development Team
ConocoPhillips Alaska, Inc.
PO Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Participated in the round table discussion
LOUISIANA W. CUTLER
Preston Gates & Ellis
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
KEN GRIFFIN, Deputy Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99801-1724
POSITION STATEMENT: Participated in the round table discussion
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 9:14:17 AM. Present
at the call to order were Senators Lyda Green, Gary Wilken, Ben
Stevens, Fred Dyson, Kim Elton, Donny Olson, Lyman Hoffman, Con
Bunde and Chair Ralph Seekins; Senator Thomas Wagoner arrived
shortly thereafter, and Senators Bert Stedman and Albert Kookesh
arrived as the meeting was in progress.
^Roundtable Question and Answer Session - Legislators,
Consultants, Producers, Administration
CHAIR RALPH SEEKINS announced the committee would have a
roundtable discussion among legislators, consultants, producers
and the Administration.
9:19:05 AM
Senator Thomas Wagoner joined the meeting.
SENATOR BEN STEVENS asked the reason that Alaska was using an
LLC based in Delaware. He expressed concern that this would
cause a jurisdiction conflict.
9:21:47 AM
JIM CLARK, Chief of Staff for Governor Frank Murkowski, advised
that he is also Chief Negotiator for the pipeline project. He
recognized and thanked the team of consultants for their work on
the project. He deferred the question to Nick Spiliotes.
9:24:27 AM
NICK SPILIOTES, Counsel to the Governor, responded to Senator
Ben Stevens' question. He advised the committee that he had over
20 years of experience in project development and finance and
has been working with the State since 2004 on LLC issues. He has
worked with Steve Porter, Deputy Commissioner of Revenue, on the
pipeline negotiations from the beginning. He spoke to the issue
of Alaska versus Delaware and said it was an issue that drew
extended conversations with the sponsor group. The Alaska
Natural Gas Pipeline will be one of the largest and most complex
civil engineering projects in the world and would need a
corporate governance document that guarantees the parties
certainty and predictability in outcomes and one that would
minimize disagreements that might result in arbitration.
After extensive analysis, Delaware was the agreed jurisdiction
for the LLC based on the desire for certainty. There are over
150,000 LLCs in Delaware and so the jurisprudence is very
developed there. They reviewed the duties required under both
states and felt this was in the best interest for all parties.
9:26:36 AM
The group concluded that Alaska law creates a higher legal duty
of the LLC members to each other. In a voting context, the State
could owe a higher duty to the LLC and to the oil companies than
it would to act solely in its own interest. That is a concern to
consider. Even though the Alaska Natural Gas Pipeline will be a
public corporation it will also be a commercial entity; as
commercially possible under Alaska law. One concern is that the
State could be subject to second-guessing and/or subject to
external standards where obligations are imported from the law
into the LLC when it makes a decision on a vote. There could be
times when the State has an interest in promoting the hiring of
certain companies or experts for the LLC and that consideration
may not be in the interest of the LLC. The vote that the State
makes should not be subject to challenge on the basis that it
doesn't advance the commercial interest of a particular LLC.
Remember, the State is a political entity with broad interest in
the outcome of this project, he stated.
Another example could be settlement of major litigation with a
third party. It could be in the interest of the LLC and other
members to settle the claim but the State might have a different
view. The rationale for Delaware is that Delaware permits great
flexibility for how the members structure contractual
arrangements. Delaware permits members to vote in their own
interest for any reason without threat of suit. Alaska law
creates a higher duty to the other members.
9:30:44 AM
MR. SPILIOTES continued there has also been much discussion
about the State being a minority member. The fact is oil
producers assert their positions as aggressively as possible
with each other, against each other and in various combinations.
So in this LLC and in all the project entities, there will be no
majority member. The real cleavage in the LLC will be the one
operator and the three non-operators. The three non-operators
will have an alignment of interest to make sure the operator
does its job properly. The operator must take instruction from
the management committee of the LLC and is subject to oversight.
The State is a sophisticated and powerful entity with many legal
and economic resources and so there is no reason to think that
the State will need minority protection. Another element to
consider is a developed jurisprudence on corporate governance.
The parties will not want to go to litigation for every issue
that arises. The parties will want certainty to particular
outcomes as permitted under law.
"Duty of Care" is the issue of what is owed to the LLC or what
duty an entity owes to the other members. In Alaska there is
only one case on Duty of Care so if the project is under an
Alaska LLC there is uncertainty as to how a dispute would be
considered in the courts. There is no real precedence whereas in
Delaware there are hundreds of cases on Duty of Care and the
landscape is very well established.
9:35:01 AM
MR. SPILIOTES summarized there are 150,000 LLCs in Delaware,
there are a couple dozen cases already decided on the LLC
interpreted through Delaware statute and as far as Alaska law
goes, it would be very restrictive and would require the duty to
act in the interest of all the shareholders. The State must act
in its own interest and so the idea is to define the legal
environment so that legal disputes can be avoided.
9:35:59 AM
CHAIR SEEKINS made the announcement that Attorney General David
Marques was present and also that the House members were absent
due to a Floor Session.
9:36:39 AM
MR. SPILIOTES continued his summary. Lenders who are very
familiar with Delaware law and have a preference for it will
finance the project. That certainty issue works in the best
interest of the State. The State would be able to act in its own
interests at all times for any reason and not owe any duties to
any companies or the LLC.
MR. CLARK interjected the negotiations by the team were an
attempt at preserving State sovereignty and preserving
independence for the project.
SENATOR KIM ELTON referenced Mr. Spiliotes' comment regarding
making the LLC as commercial as possible and asked whether that
would implicate the State in federal tax law in any way.
MR. SPILIOTES replied the LLC would be a "pass-through entity
for tax purposes" and so because the State is tax-exempt, the
State will not pay tax on its interest. The LLC will pay taxes
to the State of Alaska but the State would not be taxed on
distributions.
SENATOR ELTON asked Mr. Spiliotes whether he saw anything that
might obligate the State under federal tax laws.
MR. SPILIOTES deferred the question to Louisiana Cutler.
LOUISIANA CUTLER, Partner, Preston Gates & Ellis LLP, responded
to Senator Elton's question. She said they have specifically
designed AK Pipe so that it will have the best possible chance
of obtaining its tax-exempt status. It is her understanding that
Mr. Gildan testified in the House Judiciary Standing Committee
recently and complimented the work done by her team.
9:40:48 AM
SENATOR WAGONER asked Mr. Clark to speak about the indirect
interests of the State when it comes to the non-owner producers
or explorers who want to become producers. Somebody has to look
out for these people in the LLC and make sure they have access,
he stated.
MR. CLARK deferred the question to Bob Loeffler.
9:42:06 AM
BOB LOEFFLER, Partner, Morrison and Foerster, Consultant to the
Governor, introduced himself for the record. Under the Delaware
LLC, the State would have more freedom to pursue that expansion
objective. There will be an expansion article within the LLC and
beyond that there is a special expansion right granted to the
State under the contract.
SENATOR WAGONER asked how difficult it would be to provide
expansion to the pipeline. The presentations at Centennial Hall
seemed to suggest that the pipe would not be accessible for
expansion for at least 20 years.
MR. LOEFFLER responded Alaska would need more gas in order to
fill the demand for the pipe for 20 years so expansion will be
definitely encouraged. At the end of 20 years the initial FT
commitments will expire and people will have some rights to the
capacity on the pipeline so there will be a natural incentive to
fill up the pipe. The design of the pipe is 4.5 bcf per day with
the possibility of an easy expansion to increase capacity by 37
percent.
9:46:27 AM
MR. LOEFFLER continued there is three different ways to the
expansion as far as the legalities are concerned. FERC lacks the
authority to order an expansion in the lower 48 but because the
pipeline is likely to be the only road out of Alaska, Congress
gave FERC the power to expand it. The expansion works under the
Alaska Natural Gas Pipeline Act. The person that sponsored the
process that resulted in mandatory expansion gets that capacity.
Any other kind of voluntary capacity is subject to the open
season requirements where everyone is bidding for the capacity,
including the independents and the North Slope majors. The
person that puts in the best bid wins. So if Alaska wants to
lock in the capacity, mandatory expansion is the best way to do
it.
The State negotiated "State Initiated Expansion" as an
additional right to call for expansion. Beyond that the LLC will
have voluntary expansions where the members of the LLC take a
vote to expand.
MR. CLARK added the voluntary expansion is in the contract and
it was very hard to get that proposition in.
SENATOR WAGONER asked the reason it was such a hard fight to get
that into the contract if it is such a good deal for the
producers.
MR. LOEFFLER replied the Lower 48 pipeline industry was worried
about precedent. The other reason is the mandatory conscription
for capital that companies worry about in terms of free
enterprise rights.
9:50:02 AM
SENATOR CON BUNDE asked whether the committee could hear the
opposing point of view on that point.
SENATOR HOLLIS FRENCH said according to the contract, any
disputes would go to a tribunal. He asked whether disputes
amongst LLC members would end up in court or in a tribunal.
MR. SPILIOTES replied there are two different kinds of
agreements. The fiscal contract is a royalty tax. Any
relationship between the State as regulator and the producers on
complex tax issues would go to arbitration. The LLC is strictly
a corporate governance document and so that should be handled in
a Delaware court. There will be some overlapping, which Mr.
Loeffler should speak to.
MR. LOEFFLER pointed out under the dispute resolution clause of
the contract the substantive law of Alaska is applied for
disputes at the fiscal contract level.
MR. SPILIOTES added one issue that was identified is how to
juxtapose the two regimes. They are two very different
provisions so there will not be a huge overlap but there will be
some and that still needs to be addressed.
SENATOR FRENCH clarified the disputes amongst the LLC members
will go to a Delaware court and disputes under the fiscal gas
line contract will go to a tribunal.
MR. SPILIOTES agreed. He added there would be three or four very
technical items under the LLC such as determination of fair
market value and tax related matters to which a separate dispute
procedure would apply. So Delaware courts would decide corporate
governance issues, the yet-to-be decided mechanical overlaps,
and the technical issues under the LLC.
9:54:51 AM
SENATOR FRENCH asked whether there would ever be a set of
circumstances where the State would end up before an Alaska
court.
MR. LOEFFLER responded when the arbitration tribunal is done,
that award would be taken an Alaska court for enforcement. Other
than that, he couldn't think of a case where there would be a
dispute before an Alaska court.
9:55:44 AM
MR. SPILIOTES clarified the interpretation of the contract would
be in Delaware but the LLC would be sued in an Alaskan court.
CHAIR SEEKINS clarified internal matters would be settled in a
Delaware court under the tribunal. Enforcement terms would be
heard in the Superior Court of Alaska.
MR. CLARK advised the committee that the negotiators fought long
and hard to protect the interests of the State of Alaska. The
key thing was to come up with a quick dispute resolution process
that would get matters resolved and keep things moving. He asked
Mr. Loeffler to speak of the rationale behind Exhibit C.
MR. LOEFFLER referred to page 257 of contract where it deals
with audit cases that could go to the Alaska courts. The biggest
foreseeable dispute would be under the PPT/PILT where
arbitration is available but general discovery limitations do
not apply to that. That is where the tribunal defines what
discovery is appropriate. These are big disputes that cost a lot
of money, he said.
Secondly, in one of the appendices dealing with the PPT/PILT is
something that is possibly better than existing law. If the
Department of Revenue (DOR) issues a subpoena, it can go to a
single arbitrator under dispute resolution and get a much
quicker result. That single arbitrator then becomes a standing
arbitrator for any further disputes that arise in the DOR
administrative process.
Thirdly the years of litigation on royalty valuation will not
occur under the contract. The State would get its volume of gas
to market without having to fight about the value because of the
provision allowing the State to take its gas.
10:01:53 AM
MR. LOEFFLER referred to page 407 of the contract and continued.
Through the design of the contract they have removed a lot of
big number disputes. However, when the bigger disputes arise the
contract would allow the State better rights and more robust
discovery at the administrative level.
SENATOR FRENCH noted that PPT/PILT payments were an item of
concern for him because the contract seems to give a lot away.
For example, it gives away the presumption that the work done by
the DOR employees is accurate and factual. There is no
presumption in favor of that as it now stands in Alaska courts.
He said it was odd that the Administration would give that
deference away.
MR. LOEFFLER responded there is a multi-tier process under the
DOR, which will result in a better ability for the State to get
information at the departmental level. He explained that the
quality of information in court would be better through this
process.
MR. CLARK asked that Dan Dickinson come forward and speak to the
issue.
10:06:15 AM
DAN DICKINSON, Consultant to the Governor, explained frequently
when the State is either in a dispute or is deciding whether
there is a dispute, much information is needed to put the facts
together. He said he does not believe the State has given up any
rights to get information and they have built in an expedited
process. Even though the Department has subpoena power it isn't
used it very often.
10:09:24 AM
CHAIR SEEKINS brought the topic back to Delaware versus Alaska
LLC advisability. He noted testimony from the State prefers to
form the LLC under Delaware law and asked whether anyone had an
alternate position to consider.
DONALD SHEPLER, Greenberg and Traurig, Consultant to the
Legislature, advised the committee that Phillip Gildan was on
the line ready to speak about the choice of establishing the LLC
in Delaware.
PHILLIP GILDAN, Greenberg and Traurig, Consultant to the
Legislature, introduced himself for the record. He complimented
Mr. Spiliotes for his presentation. He advised the committee
that he would list options for them to consider regarding the
issue. There were four items that Mr. Spiliotes highlighted and
the first was protection for the State and the freedom to act
contrary to the entity if the State had other interests in mind
with a particular management or vote. While that provides the
State protection, it also provides protection to the oil
producers, which gives them the right to act in their own self-
interest. It is important to understand that the benefit applies
to both sides.
The second point is that all four members will be minority
members with the majority shifting back and forth on different
issues. The third point established jurisprudence on corporate
governance where Delaware has a lot of history, albeit more so
on the corporate side than with an LLC.
10:16:25 AM
One point to consider is that the State could utilize a Delaware
corporation or corporate jurisprudence but still have venue for
actions in Alaska in front of an Alaska court simply requiring
the Alaska court to apply the jurisprudence of Delaware.
Application of other state laws happens all the time in
commercial settings. He suggested the committee could consider
that option and the benefit is that Alaska jurors have extensive
experience in the oil business.
10:18:11 AM
The fourth point regarding benefit of the Delaware LLC is that
anything the parties agree to can be put into the document so
that duties and such can be outlined there. This creates
flexibility as to importing duties into the project. For example
the item of the Alaska hire intent is one of great interest to
the State as well as a duty to get the project completed.
10:20:27 AM
MR. CLARK asked the Chair for permission to respond to Mr.
Gildan's testimony. He recognized that Mr. Gildan brought valid
points and that the Administration considered those points but
had to make some policy decisions. As far as reciprocity is
concerned they negotiated with the best interests of the State
of Alaska in mind. He said they felt it preferable to make the
choices that they made.
10:21:46 AM
MR. SPILIOTES said on the issue of protecting the State and
recognizing that it is a reciprocal right that the other LLC
members would have, everyone is going to act in their own
interest. It was concluded that the State must protect itself
and that doesn't mean the State is likely to be oppressed.
Everyone will be able to act in self-interest without being
subject to second-guessing or legal challenge. The issue is
getting the pipeline built as quickly as possible and in the
best interest of Alaskans and of the State. In regards to the
point on venue in Alaska, he said, they have a preference for
venue in Delaware based on the vast volumes of experience that
the Delaware courts have.
10:24:00 AM
MR. SPILIOTES continued there could be other legal regimes
applicable to the project; particularly in Canada where they
lack the design of the LLC such as it is in the U.S. In an
unincorporated joint venture in Canada there will be no
corporate entity. There will be contracts and arrangements among
the four parties and the Canadian courts will want to look at
the Canadian piece as well.
In terms of the issue of importing concepts from the fiscal
contract into the LLC, first of all the LLC will be a signatory
to the fiscal contract and so the LLC will be a contractual
party to the fiscal contract and will participate in the fiscal
contract's dispute resolution regime as a party. There is a
provision in the LLC that commits the members and their
affiliates to be devoted to the project.
MR. CLARK asked Mr. Loeffler to add a point to that topic.
10:26:37 AM
MR. LOEFFLER referenced Mr. Spiliotes' point regarding duties or
obligations in the fiscal contract that the LLC will have to
respect. The leading one is the diligence standard under the
work commitment clause. The LLC is not free to ignore the
diligence standard.
10:27:37 AM
MR. GILDAN said he was glad to hear of the highlights that would
be seen in the LLC agreement because they will resolve some of
the issues brought forth. As far as substance goes, it boils
down to a degree and a choice and that is what he meant to point
out in his consultation.
MR. SHEPLER said he would like to echo Mr. Gildan's comments and
said he would be glad to move toward getting the LLC so that the
document could be reviewed and any further issues resolved.
CHAIR SEEKINS announced a brief recess at 10:29:32 AM.
10:45:26 AM
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP Alaska,
agreed with Mr. Spiliotes' testimony on the reasons the Delaware
LLC is the appropriate structure for this mission. He said he
agreed with the provision that requires entities to maintain
allegiance to the project. He emphasized the point that Delaware
has the largest body of case law on LLC matters and said it
provides certainty, a clear stabile regime, and access to low
cost financing. Under Alaska law there would also be a
requirement of duty of loyalty to the LLC and that has a
particular implication. Any actions taken by a member outside of
the LLC have to be consistent with the positions of the LLC
itself. For example, the State would be prevented from voicing
it's own position before FERC if the LLC had the position that
was not the State's preference.
10:49:32 AM
There was a question on the expansion provision to which he
spoke. The reason BP was resistant was they didn't see the need
to preempt FERC. It is FERC's role to adjudicate rates and
tariffs for interstate pipeline systems and that policy could
change over the years. There are certain rights preserved under
the Alaska Natural Gas Pipeline Act that protect the rights of
those that would like to expand.
10:50:52 AM
MR. VAN TUYL continued Mr. Loeffler testified that 20 years
would be the term for the FT and that is a common and acceptable
duration but nobody knows what the term for transportation will
be. Concerning the role of Alaska courts in the case of
disputes, specifically involvement of enforcement of an award,
under Article 26.2 of the contract, the duration that an Alaska
court has is 365 days.
10:51:53 AM
CHAIR SEEKIKS recognized Senator Gary Stevens, Representatives
Paul Seaton and Kurt Olson.
WENDY KING, Director of External Strategies, ANS Gas Development
Team, ConocoPhillips, informed the committee that she was not
the team member representing ConocoPhillips in the LLC
negotiating team. She emphasized the LLC team needs to be set up
for success since this is one of the biggest commercial
enterprises the company has pursued. When the LLC is available
it will be presented to the committee. She agreed that Delaware
has a well-established body of law to operate and negotiate the
LLC in. She clarified that the LLC would be added as a party to
the fiscal contract. Article 31 in the fiscal contract allows
for the addition of a party. When each entity of the LLC is
formed, they will be added to the fiscal contract. She pointed
out that Alaska law applies to how the entities are treated in
the fiscal contract. So when the LLC is in a dispute with the
State, Alaska law will be applied.
10:55:10 AM
MS. KING highlighted Article 6.3 and said each mid-stream entity
shall advertise for available positions. Article 6.4 states each
mid-stream entity shall work with the State to develop these or
other publicly funded programs. She said they specifically set
Article 6 up to address Alaska hire concerns and that mid-stream
entities also have to adhere to the provisions.
SENATOR GARY WILKEN asked whether there would be a major rewrite
of the contract when the LLC gets adapted into the fiscal
contract.
MR. CLARK deferred the question to Mr. Spiliotes.
MR. SPILIOTES responded the LLC agreement would create an entity
called the Alaska Gas Pipeline Company. The LLC agreement
governs the relationship between the members, distributions,
voting and a full range of activities. The LLC entity would then
become a party to the fiscal contract because the fiscal
contract imposes obligations on the mid-stream entity and the
other project entities, which will own the various components of
the pipeline. Each of the other parts of the project will be
owned separately, such as the Canadian entity and the potential
natural gas liquids plant. There will not be a need to rewrite
the fiscal contract to pull those in. Once the entities sign up
on the project, they will be subject to the contractual
obligations.
SENATOR WILKEN said he keeps referring back to Mr. Barnes'
possible pipeline structure because that is the best
illustration they have so far. He asked Mr. Barnes whether Mr.
Spiliotes' testimony lines up with what he knows.
JAMES BARNES, Barnes and Cascio, Consultant to the Legislature,
said he had a question of whether the LLCs would become
signatories of the agreement because the fiscal contract uses
generic terminology in certain places. "It's almost as though
there has to be synchronization that needs to be reflected in
the agreement." He asked whether there would be an amendment to
the fiscal contract that would clarify which of the obligations
are mainline LLC obligations versus which are other obligations.
11:01:00 AM
MS. KING referred to Article 31.1(d) and said it highlights "a
producer shall add to this contract any person that owns
midstream element in which one or more producers or their
affiliates have an interest." "Each of the obligations in the
contract have been drafted so that if an additional person is
added, and the midstream entities have obligations, the fiscal
contract is designed to put the midstream obligations directly
to those midstream entities by adding them to this contract as a
party to this contract," she stated.
11:01:34 AM
SENATOR ELTON asked whether the party being added would have the
ability to renegotiate any component of the contract.
MR. SPILIOTES responded there is no separate approval process.
There is no step that would allow any party to renegotiate the
contract.
MR. LOEFFLER clarified the LLC signs up to the fiscal contract.
There is no negotiation mechanism.
11:04:35 AM
MARTIN MASSEY, Joint Interest Manager for U.S. Operations,
ExxonMobil, introduced himself for the record. He referred to
the topic of the Alaska LLC versus the Delaware LLC and said he
could not add much to the discussion that hasn't already been
said. He agreed with the decision by the Administration to go
with the Delaware LLC plan and said ExxonMobil supports the
decision.
11:06:24 AM
SENATOR LYMAN HOFFMAN asked whether other states were considered
for the LLC formation.
MR. CLARK said he did not believe so.
MR. SPILIOTES agreed. Delaware was the only state considered. It
is the location of choice for many corporation formations and
corporate governance.
CHAIR SEEKINS noted there is a recent publication done by the
U.S. Chamber of Commerce that rates Delaware as number one in
fairness of the jurist and the speed of which they can dispose
of motions. Alaska was in the mid-thirties.
11:09:29 AM
SENATOR BEN STEVENS referred to his question to Mr. Gildan the
previous day regarding the memorandum and the proposed
amendments of the operating agreement. He read Item 9 in Exhibit
A. "The operating or the LLC or the management agreement shall
provide that in the event that entity elects to contract with a
vendor to operate the entity or implement the project such
vendor shall be independent and not an affiliate of a member of
the entity." He asked for a response from the Administration,
the producers, and the consultants.
MR. SPILIOTES commented that is contrary to how most contracts
are structured. Most pipeline projects have integration with the
various entities and their activities across the project. There
will be four to six entities owning pieces of the project and
those entities will contract with operators who will be
responsible for constructing and operating the project. Those
operators will be affiliates of the managing member of the LLC
or the equivalent position in the other projects.
The construct is a managing committee in which all members are
represented. That management committee is responsible for
managing the entity. The management committee would delegate
responsibility to a managing member and that managing member is
the one that signs the agreements on behalf of the LLC. There
will be a contract or operating agreement that will be with an
affiliate of the managing member that will govern the terms
under which the project will be constructed and managed over
time.
The concern with having an independent unaffiliated operator is
that there are too many differences in the way different
companies operate. For example, Company X and Company Y might
attempt to "marry-up" their engineering divisions and they might
have different approaches to technical problems and different
procedures to handle day-to-day operations. The two must be
integrated so as to minimize distortions and artificial delays.
"The preferred structure is to have an integrated set of
companies that are part of an affiliated group charged with
constructing the project under the supervision of the LLC," he
stated.
One of the sponsor groups will be the operator and they will
have affiliates throughout the project, working to build the
project under the operating agreement under the supervision of
the LLC. That operator will be subject to scrutiny of the non-
operator. If legislation is introduced requiring that the
operator be independent it will introduce major inefficiencies
and disputes. The non-operators are very interested in making
sure that the operator does a good job. It's a check and balance
within the operating structure, he said.
11:17:34 AM
MR. GILDAN responded the issue of the independent operator arose
after listening to a presentation by a member of the
Administration team explain the requirements of securing a
successful mega-project. The presentation suggested that in
order to secure a successful mega-project, one must have the
entities in the project all aligned and moving in the same
direction at the same time. It is concerning that there will be
a cleavage between the owner that has the operator obligation
and the other three. By having the operator be an affiliate of
one of the owners it automatically establishes that cleavage and
that creates different relationships of self-interest with the
others.
That said, it seems to make sense to have the four owners who
are the management of the entity be aligned. Having their
combined interest creates much stronger control overseeing the
operator.
MR. VAN TUYL advised that he would like to add a few other
points for the committee to consider. In addition to the
efficiencies that Mr. Spiliotes pointed out, the three companies
have experience in delivery of mega-projects. BP is currently
completing a mega-project in the Caspian Sea. ExxonMobil and
ConocoPhillips are involved in mega-projects as well. That is
important to consider on the resume of an operator. The three
companies have also pioneered arctic operations so they have
experience in the field and know the importance of preserving
the environment. The producers share the common objective with
Alaska of delivering a project at the lowest possible cost.
MR. MASSEY added since this is a huge project, it will be very
difficult to decide who amongst the four entities will be the
operator. Having an independent make major project decisions is
beyond contemplation, he stated. The three companies coming
together on the project know how to do big projects. ExxonMobil
has an affiliate called the ExxonMobil Development Company that
builds worldwide projects for all the affiliates that operate
within the countries. If ExxonMobil were the operator, they
would contract with the development company to build the project
and they have the expertise to put this project together.
11:24:55 AM
MS. KING echoed the previously made point that efficiency and
alignment are extremely important and the producers have
experience in this arena since they have worked together before.
The industry has learned the processes and how they should work.
All three companies have project management experts that will
help deliver the project in the best means process. The
expertise in the three companies that the State is dealing with
is tremendous. Personally speaking, she said she had never been
involved in a project where one of the owners was not the
operator so it would be very atypical to have someone other than
an owner be the operator of a project.
11:27:01 AM
MR. CLARK pointed out that all three participants in Prudhoe Bay
operate that way. BP is the operator in that unit with the
others. From the State's point of view, the model that is
currently working is what they chose to use.
MR. SPILIOTES added having an owner of the pipeline as an
operator adds to efficiency and cost saving since the State
would not have to pay the independent operator to come and take
upon risks.
SENATOR FRED DYSON said he would like to hear from one or more
of the consultants about the pros and cons of an independent
operator.
MR. BARNES responded typically with large projects usually the
operator is selected from among the parties. The debate is
focused on disclosure of the nature of the transaction. There is
usually a higher level of scrutiny before the affiliate is
engaged and typically that is covered in an operating agreement
or the governance document. He said he is confident that
affiliate transaction will be dealt with in those documents.
There is another paradigm under which large projects are done.
For instance in the "gutter project" there is a corporate
entity, a joint stock company that is set up and each
participant places people in that company. Alaska has a similar
arrangement with Alyeska where the parties don't agree to have
one of them as the operator but they form that joint stock
company. They have advantages and disadvantages.
SENATOR DYSON voiced hope that the citizens of Alaska could have
the option of stockholders in the pipeline. He asked whether
there were any independent-operated pipelines in North America.
MR. BARNES said he believed so and deferred the question to Mr.
Loeffler.
MR. LOEFFLER replied in natural gas there are relatively few.
Independent companies own them but an independent operator does
not own them. El Paso Natural Gas has ten pipelines but it is
the operator. He said he could not think of any pipeline that is
run by an independent operator.
RICK HARPER, Consultant to the Legislature, observed two types
of operations at issue. One is the operation of construction of
the pipeline and related facilities; the second is the ongoing
operations after the pipeline is constructed. It is important to
note that when one considers the implications of ownership,
operator-ship and layering of subsidiaries. It is wise to be
concerned about the expansion issue. The reserves and
deliverability are two different issues when looking at the
operation of the pipeline. Also, remember that the pipeline will
be fully subscribed in terms of firm capacity for 20 years so
the fact that some capacity will not be utilized in the out
years does not necessarily mean that the capacity will be
available on a reasonable basis or on a basis that is attractive
to other independent explorers.
11:33:51 AM
MR. LOEFFLER responded unless the operator was imposed by the
Department of Justice of the FTC, the operator is subservient by
law to the member companies that control it so it's not as if
the independent operator could do whatever it wants.
MR. HARPER said that might be how it works from a legal
standpoint but an operator has tremendous control over
information, in managing committees, and in managing decision-
making and so to indicate that an operator is merely an agent is
not entirely correct.
MR. LOEFFLER countered there is a whole body of FERC law that
controls intent. It is designed to make sure there is no
preferential or discriminatory treatment of the owners versus
the non-owners.
MR. HARPER agreed that was true in theory but a holder of firm
capacity has contractual rights. Once he makes the capacity
available those laws go into effect but the basis upon which he
makes those means available determines who might be interested
in it. Just because there is physical capacity in the out years
and in the first 20 years does not mean that will necessarily
satisfy the needs of the independent producers.
MR. LOEFFLER agreed with that assessment and said he did not
know of a natural gas pipeline in the United States that has an
independent operator.
MR. HARPER quipped, "I don't know of an interstate natural gas
pipeline in the United States that's owned by a producer
either."
MR. LOEFFLER said the ownership has changed but the producers
built the alliance and the interests were sold off.
MR. HARPER said there was producer ownership but the producers
did not own and operate that system and that was a Canada-based
system. That is the only example in recent times of any
ownership and to this day there has not been producer ownership
of any natural gas pipeline that he is aware of.
MR. LOEFFLER said his point is that interstate gas pipelines
with independent operators are just not done.
MR. HARPER countered the El Paso system operates all of its gas.
The owner of the pipeline does not have an independent operator.
11:38:02 AM
SENATOR BEN STEVENS quipped they just demonstrated why the
committee doesn't see the LLC operating.
MR. CLARK stressed there are choices out there to be made. The
administration chose among the choices to be made in order to
get the agreement written.
11:38:54 AM
MR. MASSEY argued from a producer's perspective, both gentlemen
were right. There aren't many producer-owned natural gas
pipelines because upstream companies don't want to be in that
business. The upstream companies risk huge amounts of capital
with long term payouts and they expect a high rate of return.
The situation here is an attempt at unlocking a major natural
resource with a mammoth capital investment. The risk of turning
that investment over to someone else to build is not one the
producers are willing to take. Producers have the expertise in-
house to build the project at the lowest cost.
MR. VAN TUYL introduced a couple of points into the discussion.
BP operates the Destin Pipeline so that is one owner-operator.
There was a suggestion that those seeking access to the pipeline
might view presence of an independent operator favorably but
access is actually determined by the regulator of the pipeline
regardless of who the operator would be. As to the specific role
and authority that the operator is vested with, that comes
through the operating agreement. The operator has no more
authority than the other members who sign that agreement.
Lastly, having an affiliate member be the operator introduces
efficiencies since the accounting system and other systems are
already known amongst the producer companies.
MR. HARPER said the Destin Pipeline is a very small, limited-
purpose pipeline and that was not his point. His concern was
over the issue of "layering of affiliates." As indicated in
earlier discussion, there will be a different set of affiliates
in the LLC than in the Stranded Gas Development Act Contract.
That does not appear to represent any significant binding. At
the parent level he said he has not seen anything indicating any
cross under-writings or cross obligations between the LLC and
the SGDA contract.
MR. VAN TUYL said there is a provision in the contract that says
if they are imposing a duty on an entity that is not signatory
to the contract then that duty falls to the signatory. Whether
or not the future entities become signatories, the ultimate duty
would fall on BP Exploration Alaska, for instance.
11:45:06 AM
MS. KING reiterated this is a huge project that will affect the
producer companies tremendously and so they clearly want to be
an active party to it. It is very critical that one of the
owners be the operator.
MR. LOEFFLER emphasized Mr. Harper's point about the two
different periods of operation. In TAPS there was a different
agreement for the construction period and then an operating
agreement afterwards. Some of the concerns about independent
access to the pipeline apply to that period when the pipeline is
constructed and up and running. He suggested the committee keep
those two periods separate because the Independent Petroleum
Association of America (IPAA) testimony was directed at how to
get the project built. The best way to do it is to use an
affiliate that is experienced, he asserted.
11:47:29 AM
SENATOR BEN STEVENS asked Mr. Clark whether any of the other
applicants provided a complete proposal that brought together
the upstream, midstream and downstream applications.
MR. CLARK replied no.
MR. LOEFFLER added there was another possible import to Senator
Stevens' question, which was did the other potential applicants
have an upstream component in the sense that "did they have gas
to ship through an affiliate through the pipeline" and they did
not. The only ones who have gas to fill the pipeline are the
project sponsors.
11:49:53 AM
SENATOR BUNDE said he was impressed with the complexity and the
intention of the negotiators and said he felt they have Alaska's
best interest at heart.
MR. CLARK commented it was one year ago today that the Governor
asked him to head up the negotiating team. At the time he
thought it would take approximately two months to resolve the
issues around the contract.
CHAIR SEEKINS announced the committee would recess for lunch at
11:51:49 AM.
1:27:49 PM
CHAIR SEEKINS called the committee back to order. He asked that
the committee discuss the dispute resolution process as well as
work commitments.
1:29:00 PM
MR. BARNES reminded the group they were talking about how
additional parties would be added and reference was made to
Article 31. Everyone agrees that maintaining alignment between
project entities is important. Article 31.2 says the added
person will have the rights, privileges and obligations that are
assigned to it and then the assigning person will retain the
rights, privileges and obligations other than the ones that are
being assigned. He questioned how the State would know what is
being assigned and what is being retained. He wondered how it
would work considering that it is all done by inference. He
expressed discomfort with this provision from a legal
standpoint.
1:30:28 PM
MR. CLARK suggested that Mr. Spiliotes could address that
concern.
MR. SPILIOTES said Article 31 was intended to offer flexibility
so as to allow the adding of another party for a specific
purpose. He deferred the fiscal side of the question to his
colleagues.
MR. BARNES agreed but questioned the affect of adding a party.
He said in effect it would be a shifting of rights, privileges
and obligations and wondered how the parties would know which
rights, privileges and obligations have been shifted. He said he
was uncomfortable with the notion that it could be done with
inference.
MR. LOEFFLER referred to Section 31.1(b) and said it is
customary to provide a notice when adding parties. The notice
would describe the rights, privileges and obligations that are
assumed by the added party.
MR. BARNES asked whether the unilateral assignment notice would
effectively amend the contract.
MR. LOEFFLER responded he does not view it that way. Some of the
obligations of the contract are identified as connected with
LLCs and until those come into being; obligations cannot be
placed upon that LLC.
MR. SPILIOTES added there are two things going on in Section
31.1. There is a mechanism for assignments of rights, privileges
and obligations by a producer and there is a producer adding a
party to the contract.
1:34:52 PM
MR. VAN TUYL advised in Section 31.1(b) there is an obligation
to provide notice to the State of an entire list of items, such
as a description of the reason for adding the additional person
and the identity of that person. The contract already contains
the language that defines what the obligations would be for the
mainline entity so there would not be an amendment to the
contract. The assignment fulfills the contract.
MR. BARNES added the section on assignment is subject to
approval by the commissioner of the Department of Natural
Resources (DNR). Section 31.1(b) appears to have unintended
consequences and it is difficult to understand how that section
would fit together with the LLC.
1:38:17 PM
MR. LOEFFLER countered the point of adding that was to create an
obligation. He said the intent was to make the LLCs join the
fiscal contract. He suggested the language in that section could
be worked on to make that more clear.
MR. BARNES asked for clarification whether Mr. Loeffler would be
amenable to clean up the language in that section.
MR. LOEFFLER said yes.
CHAIR SEEKINS questioned whether the additional person should
also be subject to approval by the commissioner of DNR.
MR. LOEFFLER responded the point of the approval was that they
are dealing with leases and capturing existing law in Section
31.1(a). Section 31.1(b) is not based on existing law but on the
entities that will come into being. There is a difference.
MR. VAN TUYL informed the committee that the addition of the
additional person is not a unilateral right but an obligation.
It's is defined in the context as "an ownership of a midstream
element" and so it would be only the pieces of the qualified
project that would need to be constructed and operated to
fulfill the contract, he stated. It is not a broad, sweeping
right, it is very specific to the execution of the project.
MR. BARNES agreed but asked what assurance the other parties
would have that the additional party is creditworthy.
1:41:11 PM
MR. SPILIOTES clarified Section 31.1(b) and said the definition
of "midstream element" is the four pieces of the project. The
intent is strictly to have a procedure for adding entities as
they come into existence, not to split up rights and move them
around. The person that owns a midstream element is the
corporate entity that owns the physical assets.
MR. BARNES expressed confusion at the language of the section.
MR. SPILIOTES suggested there was a drafting matter involved
that needs clarification.
1:42:49 PM
MR. VAN TUYL pointed out Section 2.9 includes language to
specify that the parties of the contract retain an obligation to
perform or cause the project entity to perform an obligation.
MR. MASSEY said the State would participate in formation of the
LLCs and every party would sign the LLC together. Each party
will know the creditworthiness of the parties when the entity is
put into place.
CHAIR SEEKINS added under Section 2.9 the obligation is there
for the producers and the State for the performance of the
entity regardless.
1:44:06 PM
CHAIR SEEKINS suggested the committee discuss the dispute
resolution process.
SENATOR CON BUNDE said his question centered on the considerable
dialogue the committee has heard about the arbitration process
and dispute resolution. To oversimplify, Alaska has the
arbitration ability but that ability is so difficult to use that
the State is almost powerless in resolving disputes. Integral to
the process is the definition of what is diligent. He questioned
how the State would be able to determine when a lack of
diligence occurred.
MR. CLARK interjected that during the course of negotiating the
contract the State assured that there was a dispute resolution
clause.
MR. LOEFFLER said he wanted to make very clear to the committee
that there is a general dispute resolution process that covers
work commitments and any other dispute such as a PILT dispute.
The work commitment diligence standard applies all the way to
project sanction, he stated. Until project sanction, decisions
by the participants are subject to the diligence standard. Point
number one is that the termination clause for work commitments
and the diligence standard apply to project sanction.
The second point is that work commitments and termination was a
big part of the discussion and it is a balance. Terminating the
contract is a serious step that should be a clear decision. It
is important that the tribunal make a decisive decision as to
whether the contract should be terminated. Instead of the term
"burden of proof" they settled on "clear and convincing" because
they wanted the decision to be clear and convincing.
1:51:31 PM
MR. LOEFFLER continued if a termination action were to be
brought the State would not be looking at a case where they want
discovery. The State would have been a participant through the
LLC all along the way through the actions or inactions that
would cause a termination action to be brought. The State would
be "inside the fence" and would have questioned that behavior
far before coming to a situation of termination.
A number of the things that are cited as affecting the burden of
proof, such as not entering into a commercial arrangement with
another party and not settling a dispute, may be adversely
affected by factors such as the U.S. regulatory process. Those
things would be taken into consideration by a tribunal. In The
Wall Street Journal today there is a story about a Chevron L&G
project in Australia where a decision by a regulatory agency
denied the permits because of environmental concern. "These
things happen and it's not a failure of diligence when the
regulatory process doesn't go perfectly," he stated.
1:54:37 PM
MR. LOEFFLER continued the most obvious circumstance where the
State would see the project subject to termination would be
where no activity is happening inside the LLC to further the
project along or where the pace of spending becomes minimal.
That would be all the proof needed to bring the termination
clause about.
1:56:26 PM
MR. VAN TUYL added the definition of diligence under the
contract is "advancing the project as diligently as prudent
under the circumstances." He noted that Mr. Loeffler touched on
some of the qualifications that a tribunal might or might not
consider in the case of a dispute involving termination.
Previous testimony brought attention to the phrase, "errors in
judgment" yet it is very easy to play Monday morning quarterback
and second-guess actions taken. In even the best of companies,
the most diligent operators make errors in judgment and that
does not necessarily constitute a lack of diligence. For
example, the LLC might choose to source a turban driver from a
vendor that has state of the art technology reported to lower
the cost of the project. The vendor might have some material
delivery problems that the LLC was not aware of and in
retrospect someone could pinpoint that decision as a mistake.
That may well be an error in judgment but not necessarily a lack
of diligence in advancing the project, he said.
1:59:40 PM
MR. HARPER said in discussing "clear and convincing evidence"
pre-sanction termination is a right and a remedy. Post-sanction
once construction begins is another thing so it is important to
divide the two periods. He suggested dividing the two in terms
of discovery and deposition issues. In his experience, "clear
and convincing" is a standard that might be applied in cases of
determining fraud or in assessing punitive damages. He said he
is not accustomed to seeing it applied as a standard throughout
a contract. He asked Mr. Loeffler to comment on that idea. He
asked whether it was the agreement that "errors in judgment" do
not include negligence and gross negligence.
2:01:22 PM
MR. LOEFFLER responded dispute resolution covers more than just
the development of the project. The standard "clear and
convincing evidence" was negotiated into the contract simply
because the State wanted to be in the position where there was
an easy burden to meet.
MR. HARPER said he struggles with that because "clear and
convincing" seems to be a standard to apply throughout the term
of the contract.
MR. LOEFFLER said that is not the way he understands it. "Clear
and convincing" applies to termination through project sanction,
he stated.
MR. CLARK interjected to say he was an attorney for a 50-year
contract that was terminated - The Alaska Pulp Corporation in
Sitka. He said in situations where the outcome is a serious
consequence, the trier will take an extremely serious approach.
A tribunal would not simply go to a preponderance of evidence
standard. In a situation prior to sanction, where the companies
and the State have spent hundreds of millions of dollars, there
would be a serious level of concern by the trier of fact.
2:04:33 PM
MR. HARPER opined he has personally never seen a situation where
the standard and burdens of proof were altered based upon the
size of the consequences of litigation. He asked Mr. Loeffler
whether it was the party's view that negligence and gross
negligence were separate and apart from errors in judgment or
would negligence and gross negligence in judgment constitute
errors in judgment.
MR. LOEFFLER responded in his view, an error in judgment was
something far less than gross negligence and less than
negligence.
2:05:50 PM
MR. VAN TUYL agreed with Mr. Loeffler and emphasized that the
body understands the undertaking of getting the project to
sanction. The commitment is up to $1 billion dollars to advance
the project to sanction.
MR. LOEFFLER added the "clear and convincing" standard is not
applied to anything post-sanction. It only applies to work
commitments and termination.
MR. SHEPLER referred to Section 5.5(b) and asked whether there
was another provision in the contract that sets forth a
different standard for post-sanction dispute resolution.
MR. LOEFFLER said no. The contract is silent on standards for
any other dispute. That is common for arbitrations.
2:07:51 PM
MR. HARPER said earlier in the discussion it was pointed out
that "diligence" means advancing the project. However, "project"
as defined is something that can be amended as many times as the
parties so desire. So the term "project" as it is used is
different than the project overview. He asked Mr. Loeffler to
comment on his view of the amendment, the extent that the
project might be amended, and the number of times it might be
amended.
MR. LOEFFLER responded that was discussed in length during the
negotiation of the work commitment clause, including whether the
State wanted a specific approval right on each time it is
amended. Essentially, if the State objects to any changes, such
as the project plan stating that work on the pipeline would
begin in the year 2020, the State would immediately bring action
for termination for lack of diligence if that were the nature of
the amendment. In the matter of changing the size of the pipe,
the State would certainly want to know the reasons why but that
situation wouldn't amount to a failure of diligence.
MR. CLARK added they have a summary of the qualified plan that
is an attachment to the contract and they are working on the
inside. The State is in the LLC and is right on top of any
changes. The State intends to very clearly understand the reason
for any amendments to the qualified project plan. That plan, and
any changes, will be made public annually as well.
2:11:03 PM
MR. VAN TUYL added the qualified project plan or project summary
is located on the State's website as it has been for two years.
He offered to provide a copy to committee members.
2:12:23 PM
MR. BARNES said he could not find it on the website. He asked
whether the qualified project plan was an attachment to the
contract or whether it was the summary that would be the
attachment to the contract.
MR. VAN TUYL replied neither will be an attachment to the
contract. The project summary will be an excerpt of the
qualified project plan. The project summary will be made
publicly available and updated annually.
MR. SHEPLER referred to Mr. Loeffler's example of if the
qualified project plan changed to a 2025 start date, where the
State would immediately begin termination procedures. He said
his concern was, to use a phrase of Dr. van Muer's, the risk of
"being nibbled to death" or a cumulative affect of delaying the
project. He asked whether it would be better to give the State
the right to consent to material changes.
2:14:29 PM
MR. LOEFFLER said there is nothing that precludes the State from
doing that. However, if the requirement for approval of material
change is added, there will be disputes over what is material or
substantial. Also there is a potential for the State to threaten
to deny approval without some kind of continual renegotiation of
the contract each time.
MR. SHEPLER expressed concern that by relying on the termination
right it puts the State behind the eight ball as opposed to
having to consent as the changes occur.
MR. LOEFFLER said that statement overlooks the fact that the
State is a 20 percent participant inside the LLC. If the
representatives are doing their job, there should never be a
circumstance arise that would lead to consideration of
termination.
2:17:19 PM
MR. CLARK added that if the case is a serious issue, the State
could always file a dispute.
MR. LOEFFLER said at one point there was a proposal that the
State, if it brought a termination case and lost, would have a
required time delay before it could bring another termination
clause. That was ultimately rejected.
MR. VAN TUYL said in a sense he feels this is the wrong
conversation to have. BP Alaska is in the business of bringing
energy to markets and of developing big projects. BP Alaska
intends to advance the project. He reminded the committee that
they spent two years negotiating a fiscal contract with the
State of Alaska. The terms of the contract allow sufficient
incentive and sufficient motivation to make the project happen.
The contract is structured to align common interests of the
parties. BP Alaska is motivated commercially in every way.
MR. CLARK asked Chair Seekins whether the committee could have
Ken Griffin discuss the practicality of the project management.
2:21:18 PM
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources (DNR), noted that over his 25-year career in Alaska he
has been involved in several major projects and that is the
perspective he brings to the committee. He agreed with Mr. Van
Tuyl that the committee was having the wrong conversation. "The
bottom line is you cannot fake diligence in a project of this
nature," he stated. The project will start with a planning phase
and will move to permitting, open season and engineering design.
Through each step there will need to be a dedicated
organization, authorities and accountabilities, multi-
disciplinary demands, schedules and timelines, and continual
measurement of deliverables. Not everything is going to fall in
line and so there will have to be adjustments and corrections so
that the project can move on.
Project plans that change as time progresses are expected. The
contract provided for reality of the fact that participants
cannot see the end of the project today. A project of this
nature will have a strong control and reporting function. AK
PipeCo will have access to all of that. There is a commitment in
the project to get us to the open season and to permitting.
Beyond that Article 5 brings the commitment to the project
sanction position.
2:25:23 PM
MR. GRIFFIN concluded there is a thorough entity that will be
extremely visible. It would be impossible to fake a project
development phase for something of this size and nature.
CHAIR SEEKINS said the process of getting Alaska's gas to market
began in the late 1970s with Governor Jay Hammond. He said many
people in Alaska question whether the project is going to
happen. There have been a lot of false starts and promises.
People want assurance of intent to get the pipeline built.
2:28:13 PM
MR. CLARK said on May 24 the Administration announced that all
four parties were willing to sign the contract. After the
Legislature ratifies it, it will go into effect within 60 days.
Within 90 days the planning process must be started and the
parties have to start spending money. One strategy of the State
is to get the companies to spend enough money on the front end
that they would not be able to turn their backs on the project.
CHAIR SEEKINS called a brief at ease at 2:31:00 PM.
2:52:29 PM
CHAIR SEEKINS called the meeting back to order. He asked Wendy
King to speak about work commitment.
MS. KING said she wanted to highlight what project sanction
means. The activities that will be pursued under the diligence
standard are conducting an open season, preparing and filing
applications, supporting applications during the two-year
process. These are all highly transparent work activities. The
Canadian government and the State of Alaska will be working with
the companies during this time. The first version of the project
summary was posted on the website in May and that summary
includes a number of items, such as the project overview, the
description of the work accomplished, the project schedule, the
proposed development activities and the description of the
expenditures and programs in Article 6.4. Everyone in the nation
will be able to see how the project is advancing. She emphasized
that this project will draw national attention. ConocoPhillips
is excited about this project and committed to it, she stated.
2:55:59 PM
MS. KING continued project sanction is the time when
ConocoPhillips would be able to book the reserves as proved
reserves with the FCC and they will be working to advance the
contract toward that point. "This contract creates a unique and
unprecedented partnership," she said. It creates alignment so
that whatever the current price of gas is, it affects all
partners directionally the same. She added ConocoPhillips is
excited to be able to continue to explore for new gas in Alaska.
2:57:31 PM
MR. MASSEY addressed the question of whether the oil companies
were committed to the project. ExxonMobil has every intention to
diligently advance this project, he stated. Once the contract is
available to sign they will sign it and then advance to the work
commitment stage. The oil companies have spent $125 million
dollars since 2001 studying the development of the case.
Execution of the business plan is ready to go. They have spent
almost three years negotiating a fiscal contract with the State.
"No other party besides the producers have invested the time and
effort both financial and technical in an effort to
commercialize this gas," he stated. He assured the committee
that the oil companies were committed to the project.
2:59:42 PM
MR. MASSEY continued within 90 days of contract execution the
producers must begin project planning. He listed the activities
stated in the project summary that they are required to do. The
obligations to progress the activities are so firm that they are
required to continue the work even in the face of a judicial
challenge. He assured the committee that the producers were
committed to the project.
3:02:24 PM
MR. HARPER surmised that Alaska would be competing with
ConocoPhillips, ExxonMobil, and BP Alaska as marketer and
capacity holder in the financial and derivative markets. He
asked Ms. King to comment on how that fact would affect the
"alignment" or relationship of the four parties.
3:03:14 PM
MR. CLARK commented that sounded like a new topic. He offered to
provide handouts of the qualified project summary to committee
members. The handout included a Gantt chart of the initial work
plan.
MR. SHEPLER informed the committee that the summary is in the
draft findings. He asked for a copy of the full-qualified
project plan.
MR. GRIFFIN said the qualified project plan is one document in
the application that the producers filed. The producers
application is on the website and the qualified project plan is
part of that. It has not been updated. One section of Article 5
is the qualified project plan and the next section is the
project summary, he stated. That project summary is updated on
an annual basis and is public information. The handout that was
passed out is the project summary.
CHAIR SEEKINS informed the committee they were still discussing
dispute resolution as to the work commitments.
3:05:39 PM
SENATOR ELTON referred to the dispute resolution and said the
draft contract defines dispute as "a dispute matter controversy
or claim between the State and a participant arising out of or
relating to any of this contract's articles or exhibits
including it's interpretation, construction, performance
enforcement, privileges, rights or obligations." He said the
words he wanted to focus on for his question are the words
"between the State and a participant." The way he reads that
definition then the Articles 26, 27, 28 and Exhibit C would
refer only to a dispute between the State and a participant. The
way the definition reads those articles may not cover a dispute
between ConocoPhillips and ExxonMobil. He asked whether his
interpretation was correct.
MR. LOEFFLER replied a dispute between the State and the three
other parties is an eligible dispute. A dispute among the three
other parties is not covered by the dispute resolution and the
State would not be a part of it.
SENATOR ELTON said that seems as if the contract puts the State
at an entirely different level than the other three parties. He
said it was curious that the limitation of arbitration was set
up only for the State.
MR. LOEFFLER replied the fiscal contract is the contract between
the State and the three companies. The dispute resolution is
intended to cover that. In the LLC agreements, each LLC
agreements will have dispute resolution clauses. Since those
have not been seen yet, he could not comment as to how they
would cover those types of disputes.
3:08:58 PM
SENTOR ELTON reiterated his concern that the State seemed
limited on how to resolve disputes with the three companies.
MR. LOEFFLER disagreed. He said, "The nature of the disputes
under the contract, given how the clauses are set up, given the
structure of the contract, would be between the State and one or
more of the participants of the contract."
3:09:46 PM
MR. MASSEY added they went through great pains in drafting the
contract such that it had defined obligations between the State
and the participants. It does not define obligations between the
producers. He agreed with Mr. Loeffler that the obligations
between the producers would be defined in the LLC agreements.
MR. CLARK referred to the Stranded Gas Development Act (SGDA)
and said that is how the process is directed to be. The fiscal
contract is to be entered between the State and the applicant.
The reason for that is it ties into the whole underlying fiscal
plan. It defines the agreements between the parties under
Article 9, Section 4 of the Alaska State Constitution.
3:11:35 PM
MS. KING added the dispute resolution provisions were written
between the State and a participant and the obligations were
clearly written. With respect to each individual LLC, there will
be dispute resolution provisions within that. Some of those
provisions are already written because the relationship at
Prudhoe Bay, for example, is an established relationship between
the working interest owners in that asset.
3:12:36 PM
MR. LOEFFLER noted page 1 of the contract says, "The Alaska
Stranded Gas fiscal contract is entered into between the State
of Alaska on the one part and BP, ConocoPhillips and ExxonMobil
production on the other part," and so that clearly reflects the
relationship as intended for the fiscal contract.
MR. BARNES said he was struggling with how the dispute
resolution mechanism would work.
MR. LOEFFLER responded on a conceptual level; the rights, duties
and obligations of the fiscal contract are intended to be set up
to be between the State and all of the participants. He
committed to check on the definition of "participant." A dispute
under the LLC agreement would be handled under the mechanism set
up with the LLC agreement. He asked Mr. Barnes to repeat the
question.
MR. BARNES said:
As parties are added and they become participants,
either in the form of assignee or capacity holder, how
does that interact with the application of the
definition of dispute and then the dispute resolution
provision?"
MR. LOEFFLER responded if the genesis of the dispute is the
fiscal contract, it's handled under the dispute resolution
mechanism of the fiscal contract. If a dispute arises under the
LLC agreement then it's handled under that mechanism.
3:16:40 PM
CHAIR SEEKINS clarified that "participant" means BP, ExxonMobil,
ConocoPhillips, assignees, or any other person added under
Article 31 excluding the State and it's affiliates except that
the State may hold an interest in a participant.
MR. LOEFFLER agreed with that summarization.
CHAIR SEEKINS asserted the committee should see the LLC template
before they could examine the issue any further.
3:18:16 PM
CHAIR SEEKINS asked whether the committee and its consultants
were comfortable in their understanding of the dispute
resolution process between the State and the participants.
MR. HARPER said he had a point on topic. The committee has
discussed the very serious limitations on discovery and
depositions in all matters except PPT/PILT. It has been
suggested that the biggest dispute that might arise under the
contract would be in PPT/PILT. He asked the reason there are no
limitations on discovery and depositions for PPT/PILT and asked
the reason for the distinction. He surmised that was because the
State would have a lot of documents and witnesses that would
need to be addressed. Other disputes within operations would
have a very serious limitation on discovery. Again, he asked the
practical impacts on the nature of dispute with PPT/PILT as
opposed with construction and other disputes.
MR. LOEFFLER explained disputes about construction and
operations would occur under other agreements and since those
agreements have yet to be seen, it is impossible to address
whether there are limitations of discovery.
MR. HARPER posed a hypothetical situation where BP as the
operator simply failed to construct the project and asked
whether that would fall under the LLC agreement or the SGDA
contract.
3:20:57 PM
MR. LOEFFLER clarified that depended on the timeline. If that
were to happen before project sanction, it would be under the
termination clause pertaining to work commitments. It would also
be handled under the LLC agreement mechanism of dispute
resolution.
MR. HARPER asked whether failure to act diligently to get to
project sanction would be a dispute subject to arbitration and
subject to the serious limitations on discovery and deposition.
MR. LOEFFLER replied he just stated the opposite.
3:22:20 PM
MR. HARPER asked Mr. Loeffler whether it was his position that
if the participants failed to diligently pursue the project that
instance would not subject to serious limitations on discovery
and deposition.
MR. LOEFFLER reiterated that he had just stated the opposite.
The failure to diligently pursue the project up to project
sanction is a dispute that is covered by the work commitments
clause.
MR. HARPER countered that situation would be subject to very
significant restrictions on deposition of discovery. He asked
the practicalities that led to that particular structure in the
contract.
MR. LOEFFLER said he gave a quite complete answer to that before
lunch. He offered to repeat it:
Under a termination for failure of diligence, we're
going into that process with the understanding, the
knowledge we've gained from being a participant, in
the LLC. So, it's not that we're an outsider as is the
usual case; we're an insider and we expect to have our
case together what we know. We'll see the documents
inside the LLC. But beyond that, if we should need
discovery, discovery is graduated to the size of the
dispute and on larger disputes, not talking about
PPT/PILT, we have some discovery rights and we can
certainly ask for more discovery under the general
standard of the clause.
MR. HARPER said, "I still don't understand the distinction why
would one blow the doors open on discovery and depositions in
PPT/PILT and not on the other side. Wouldn't you be an insider
on PPT/PILT the same way?"
MR. LOEFFLER responded not in the same way.
MR. CLARK advised Chair Seekins that Mr. Spiliotes could clarify
the point.
3:25:02 PM
MR. SPILIOTES said he was not prepared to speak on that point
but would like to speak on another point.
CHAIR SEEKINS asked Mr. Spiliotes to respond to the question
regarding the dispute resolution process.
MR. SPILIOTES advised the LLC would have a contract with an
affiliate of one of the members of the LLC, such as one of the
producers. Once the LLC becomes a party to the fiscal contract,
the LLC is the vehicle by which the producer's subsidiaries on
the upstream side have signed the fiscal contract. That
essentially implements their obligations so the producer's
pipeline affiliates would own the interest in the LLC along with
the State. That LLC will be the one that has to implement the
obligations under the fiscal contract and if they don't, then
that dispute is resolved under the fiscal contract. The dispute
resolution under the LLC is solely related to the relations
among the members. The LLC is responsible under the fiscal
contract for the performance of the operator.
3:27:23 PM
MR. HARPER said it was his understanding that there was a
different set of subsidiaries in the LLC than the subsidiaries
in the Stranded Gas Contract. He asked how one set of
subsidiaries that is legally and distinctly different could be
intertwined.
MR. SPILIOTES said that question relates to how the different
pieces would be coordinated. One thing they talked about in the
fiscal interest finding was the need for coordination among all
the different entities. The sanction under the fiscal contract
is directed at the upstream producer subsidiaries so they lose
fiscal certainty if their pipeline affiliates don't cause the
LLC to meet the work commitments, he stated.
MR. HARPER said he does not debate that but expressed concern
that he has not heard anything about coordinating the legal
relationships between the various producer subsidiaries.
3:28:43 PM
MR. SPILIOTES said the coordination is if they do not cause
their pipeline subsidiaries to deliver then they lose fiscal
certainty.
MR. VAN TUYL interjected the question was addressed earlier in
the contract. In Article 2.9 there is a provision that states
each of the parties are obligated to compel its project entities
to perform. If they don't perform, the obligation falls on the
producers.
MR. HARPER stated he was talking about dispute resolution and
satisfying concerns over discovery.
3:29:47 PM
CHAIR SEEKINS asked Mr. Clark to speak on limitations of
discovery that are imposed in superior court in the State of
Alaska versus an arbitration process.
MR. CLARK replied there would be a scheduling order through the
court for the depositions. The parties are normally able to
stipulate but if for some reason they cannot they would go back
to court. The courts routinely provide more discovery and more
opportunities for discovery to the parties.
3:31:37 PM
MR. LOEFFLER added the Alaska Rule of Civil Procedure (38)
limits the maximum number of depositions to three. Rule 30(d)
imposes a six-hour limit on depositions of experts.
CHAIR SEEKINS said that lines up with his experience in the case
of discovery. However, in the case where millions of dollars are
concerned, he wondered how that would "line up."
3:34:11 PM
MR. HARPER apologized that perhaps his question was confusing.
He said he was simply contrasting what was called for in non-
PPT/PILT situations and wondered the reason there were no
limitations on discovery in PPT/PILT situations.
CHAIR SEEKINS agreed and asked whether anyone could explain
"what would be, under arbitration, the limitations on discovery
that would be normally opposed on those on which we have not
established - any limitations in the contract."
3:35:19 PM
MR. HARPER did not understand the question.
CHAIR SEEKINS rephrased the question. "What would the normal
limitations be by an arbitration panel to discovery, since there
are none and we've said in this arbitration situation on
PPT/PILT there are no limitations on discovery? What would the
arbitration panel normally impose?"
MR. HARPER said that would depend on the circumstances. Normally
when the stakes are very large, jurists are reluctant to inhibit
discovery and depositions unless it becomes clearly abusive.
3:36:21 PM
MR. LOEFFLER advised the committee he would review the rule
overnight. In large disputes there is a tendency to allow free
discovery and for the parties being "discovered against" there
is a tendency to allow filing of protective orders. The same
thing would happen under this contract.
3:37:47 PM
CHAIR SEEKINS opined the burden of discovery is sometimes meant
to be oppressive enough to compel someone to use a less costly
dispute resolution process.
MR. LOEFFLER agreed it sometimes does have that effect.
MR. HARPER asked whether, in a multi-party dispute, would the
State be limited to two oral depositions.
MR. LOEFFLER clarified in a multi-party dispute, each side would
be entitled to no less than two.
3:40:15 PM
CHAIR SEEKINS advised the committee there was a Senate floor
session scheduled for 4 p.m.
REPRESENTATIVE JOHN COGHILL asked the reason the State would
take its gas in-kind.
SENATOR BUNDE said he would also like to know the reason the
State is required to have an equity position.
CHAIR SEEKINS advised committee members and the participants
that the previous questions would be contemplated over the
evening and would be addressed at the following meeting.
CHAIR SEEKINS adjourned the meeting at 3:42:56 PM.
| Document Name | Date/Time | Subjects |
|---|