Legislature(2015 - 2016)HOUSE FINANCE 519
02/23/2016 01:30 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Aklng Update: Funds Expended and Fy 17 Funding Requests | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 23, 2016
1:34 p.m.
1:34:39 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Marty Rutherford, Deputy Commissioner, Department of
Natural Resources; James Cantor, Deputy Attorney General,
Civil Division, Department of Law; Representative Mike
Chenault; Representative Dan Ortiz; Representative Chris
Tuck; Representative Jonathan Kreiss-Tompkins;
Representative Louise Stutes.
PRESENT VIA TELECONFERENCE
Martin Schultz, Attorney VI, Civil Division, Oil, Gas, and
Mining Section, Department of Law.
SUMMARY
AKLNG UPDATE: FUNDS EXPENDED and FY 17 FUNDING REQUESTS
Co-Chair Neuman discussed the meeting agenda.
^AKLNG UPDATE: FUNDS EXPENDED and FY 17 FUNDING REQUESTS
1:35:43 PM
MARTY RUTHERFORD, DEPUTY COMMISSIONER, DEPARTMENT OF
NATURAL RESOURCES, provided a PowerPoint presentation
titled "DNR AKLNG Budget Overview FY2015 - FY2017" dated
February 23, 2016 (copy on file). She scrolled to the state
gas team organizational chart on slide 2 titled "State Gas
Team." She turned to Slide 3 that listed the roles of the
various agencies in AKLNG.
Co-Chair Neuman asked Ms. Rutherford to provide a brief
description of the agency roles in the project.
Ms. Rutherford provided the information on slide 3:
Agency Roles in AKLNG
Department of Natural Resources (DNR) - North Slope
Gas Commercialization Office (NSG)
· Upstream [AS 38.05.180(hh), (ii)], in consult
with DOR [AS 38.05.020(b)(10),(11),(12)]
· Royalty In-Kind/Royalty In-Value decision (AS
38.05.182)
· Marketing, in consult with DOR [AS
38.05.020(b)(10),(11),(12)]
· In-state Gas coordination, in consult with AGDC
(SB 138, Section 73)
· Midstream Agreements, in consult with AGDC [AS
38.05.020(b)(13)]
Department of Revenue (DOR)
· Identify and recommend financing options (SB 138,
Section 76)
· Recommend statutory changes to property taxes
under AS 43.56 and AS 29.45.080 (SB 138, Section
74)
· Develop Impact Fees and Flow Rated Property Tax
Proposals (SB 138, Section 74, AO 269 MAGPR
Board)
· Allows producers to pay tax as gas (TAG) (AS
43.55.014)
· Consult with DNR on contracts negotiation [AS
43.05.010(16)]
Department of Law (DOL)
· Legal support to agencies and AGDC
Alaska Gasline Development Corporation (AGDC)
· State's ownership of project infrastructure (AS
31.25.080)
· Assist DNR/DOR in maximizing the value of the
State's gas [AS 31.25.005(3)]
· Provide project services to the State at cost
(i.e. without profit) [AS 31.25.005(5)]
· Deliver domestic gas to in-state customers at
commercially reasonable rates [31.25.005(6)]
Ms. Rutherford elaborated on the slide. She related that
DNR was primarily involved with the commercial negotiations
and established a structure for interaction between the
project's entities. The department was negotiating the
upstream issues such as the field cost allowance, gas
balancing and supply, the terms of gas availability for the
domestic market, the mid-stream agreements, the
expandability of the project, and the terms for third party
involvement. She added that the department developed the
gas marketing structure when the project was operational.
She spoke to DOR's role in determining the value of the
"royalty-in-kind" option that would offer the producers the
opportunity to pay its production taxes to the state as
gas. She detailed that in-kind payments would account for
the royalties and production tax for the 25 percent equity
ownership with the equivalent throughput of gas. The
department would determine the project's financing
structure; i.e., how the state would pay for its 25 percent
equity ownership. In addition, the municipalities' impact
fees and flow rated property tax proposals that would be
paid by the projects would be established by DOR. She
continued that the Department of Law (DOL) provided legal
support to agencies and the Alaska Gasline Development
Corporation (AGDC). She described the project's
infrastructure that included two pipelines from Prudhoe Bay
and Point Thompson units, which connected into the gas
treatment plant, the pipeline to Nikiski, the LNG
(liquefied natural gas) plant and the marine terminal. She
noted that AGDC was responsible for delivering gas to
domestic markets and would work with utility companies and
municipalities on gas delivery systems. She shared that
AGDC recently formed a subsidiary to help aggregate supply
and act as an intermediary on pricing between the domestic
purchasers and producers.
1:41:32 PM
Co-Chair Neuman referred to Ms. Rutherford's testimony that
part of AGDC's job was to deliver domestic gas to in-state
customers and the possible changes to the structure of
AKLNG development team. He asked whether the work to
provide gas to local communities would continue. Ms.
Rutherford replied in the affirmative. She expounded that
AGDC regarded the task as one of its highest priority. The
corporation worked with the project, municipalities and
utilities to determine demand, the types of delivery
systems necessary, and to present a plan to the legislature
to help assist with domestic gas delivery. She moved to
slide 4, titled, "North Slope Gas Commercialization (NSGC)
AKLNG Team" that contained the team's organizational chart.
She noted that the DNR commissioner, Mark Meyers and
herself in the role of deputy commissioner were leading the
team and providing oversite. She related that the next
level depicted the core team that worked with consultants,
experts, DOL, outside counsel, and other state agencies to
negotiate the commercial agreements for the project. The
agreements provided the structure for engagement in the
project.
Representative Gara remarked that everyone wanted an in-
state line to deliver gas locally; it was not a negotiable
point for most legislators. He asked about cost savings. He
spoke to the need for a buyer of the gas. He wondered
whether "it made sense" to wait to develop offtake portions
of the pipe until the project was certain and save $5
million. He wondered whether waiting would adversely impact
delivering gas domestically. Ms. Rutherford could not speak
"definitively" to the $5 million. However, she believed
some degree of work that identified offtakes and potential
volumes needed to proceed commensurate with the wrap up of
the pre-FEED [Front End Engineering and Design] stage. She
shared that the FEED decisions were currently "at risk" due
to the low price environment. She ultimately thought that
the design work embedded in the pre-FEED stage included the
delivery of the domestic gas supply. Representative Gara
requested further information regarding the amount of in-
state work that could be delayed without adversely
impacting the ability to deliver the gas domestically. Ms.
Rutherford replied that she would follow up with the
information.
Co-Chair Neuman believed that the in-state offtake
information was necessary to determine the costs to proceed
to the FEED stage. He understood that the development team
comprised of all four partners scrutinized every dollar
that was spent because the costs were equally shared.
1:48:24 PM
Ms. Rutherford responded that the project was working very
hard to keep cost down during pre-FEED and lower the costs
of the project. She had heard the project representative
speak to the need for the data associated with domestic
demand in order to build it into the project design and for
the resource reports required by the Federal Energy
Regulatory Commission (FERC). She furthered that domestic
gas supply and the degree the region's populace benefitted
from the project was a critical aspect of FERC's evaluation
of the project.
Representative Wilson asked how many of the individuals
named on the chart were DNR employees before the project
began (slide 4). Ms. Rutherford answered that most of the
positions were in place when she returned to work for DNR
in December, 2014. She mentioned that the North Slope Gas
Commercial Lead, Anthony Scott was recently rehired by the
department. Representative Wilson wondered why contractors
were not being used instead of hiring employees within the
department. Ms. Rutherford replied that the chart included
a combination of the two. For example, Steve Wright, North
Slope Gas Upstream Lead, was a contractor and was denoted
on the chart in blue. She was not part of the decision
regarding personnel status. She voiced that most of the
team could operate under contract because the positions
were not necessary beyond the final investment decision
(FID). Representative Wilson asked whether the two vacant
positions remaining on the team would be filled via
contract. Ms. Rutherford replied that the positions were
not currently necessary and she had no intention of filling
them. She located a contractor to assist the department in
negotiations over the marketing structure and was
considering contracting for the service.
1:52:32 PM
Ms. Rutherford turned to slide 5 titled "FY2015 NSGC
Budget." She noted the chart depicted the FY 2015 budget
for gas commercialization. She cited the $10 million
authorized by the legislature and reported that $8 million
was spent primarily on contractual services and that $2
million was lapsed. Co-Chair Neuman asked what work was
accomplished listed as services. Ms. Rutherford highlighted
slide 6 titled, "FY 2015 Expenditure Details Personal
Services & Travel" for the answer. She indicated that the
chart identified the seven positions plus the deputy
commissioner, and the two long-term non-permanent positions
that were funded since the 2015 authorization. She listed
the long-term non-permanent (LTNP) Gasline Liaison and the
LTNP Permitting Liaison positions. She noted that the
permitting liaison preceded the current structure that
separated the permitting liaison specifically for AKLNG and
was funded through the project. In addition, the previous
deputy commissioner Bob Swenson, Deputy Commissioner,
Department of Natural Resources billed a portion of his
time to the AKLNG project. She reported that $57.1 million
[thousand] was spent in travel mostly to project meetings
in Calgary and Houston.
Representative Gattis asked whether the amount was $57
million or $57 thousand. Ms. Rutherford corrected that the
amount was $57 thousand for travel. She elaborated that
slide 7 titled "FY 2015 Expenditure Details Contractual
Services & Commodities" addressed the contractual services
implemented in FY 15 and that many of the contracts
currently remained in operation. She relayed the following
on the slide:
Services:
Black & Veatch for support, advice, analysis, and
expertise in commercial negotiations, strategy,
modeling, FERC and resource report drafting and
review, and marketing. $1,505.3
Pingo International, Pat Anderson for expertise in
arctic pipeline engineering and design to support
midstream activities. $ 156.2
RyderScott for resource evaluation and reservoir
engineering support for the upstream team. $ 96.1
Steve Wright for expertise in project management and
support in upstream activities. $ 299.0
Audie Setters for expertise in marketing and lead
marketing negotiations and activities. $ 374.0
Breaux Leadership for risk management facilitation and
risk analysis work. $ 32.5
Petrotechnical Resources of Alaska (PRA), Ben Ball
support for the upstream team with facilities
engineering expertise. $ 29.8
Steve Swaffield for commercial and governance support
and expertise. $ 229.4
RSA to UAF - Antony Scott for commercial support in
commercial agreement negotiations. $ 79.7
I/A RSA to DOL for Legal Support. $ 3,500.0
Core Services (IT, HR, leases, software,
telecommunications, etc.) $ 60.8
Other services $ 863.1
Training and conferences -two day workshops relating
to risk management and risk analysis for the state gas
team with Breaux Leadership prior to determining the
need for a contract. $9.8
Total: $ 7,235.7
Commodities:
Office equipment, furniture $ 28.7
IT Equipment (computers, conference room equipment,
phones, etc.) $ 19.2
Office supplies, oil and gas regulations, statute
books, subscriptions $6.8
Ms. Rutherford noted that commodities totaled $54.7
thousand.
1:57:39 PM
Ms. Rutherford addressed slide 8 titled "FY2016 NSGC Budget
All Funds." She reported that the slide contained two
charts: one depicted the regular session budget and the
other contained the Special Session funding. The regular
session budget authorization in FY 16 was $8.9 million of
which $8.7 was spent or obligated leaving and estimated
lapsing balance of $256 thousand. The department was
appropriated an additional $1.8 million during special
session and was currently at a projected expenditure level
of $1.5 million and expected to lapse approximately $200
thousand.
Representative Pruitt relayed that DNR originally requested
$13 million for FY 16. He wondered what had been done
differently by the department to make the lesser
authorization of approximately $9 million work. Ms.
Rutherford replied that the $13 million was based primarily
on how DNR had dealt with some of the marketing contracts.
She delineated that the contracts had not progressed as
quickly as expected and she ended up not filling via
contract or department employee any of the marketing
positions. Representative Pruitt surmised that the
contracts had not moved forward due to lack of progression
to an expected level and not due to decisions relating to
how to move marketing forward. Ms. Rutherford replied in
the affirmative. She commented that "the analysis
associated with marketing was difficult" and made it a
complicated issue. In addition, the positions of the
various partners "morphed" overtime. She indicated that the
department continued to determine how the issue of
marketing and upstream gas supply was best integrated.
Vice-Chair Saddler asked whether the contract work provided
by Audie Setters retained value. Ms. Rutherford replied
that the project had not progressed enough to definitively
know what work to date contained future value. However, Mr.
Setters brought knowledge that produced great value in
understanding certain issues but no tangible product
resulted.
Vice-Chair Saddler asked whether the contract cost was
worth the $374 thousand spent. Ms. Rutherford replied that
the contract had preceded her. She was not convinced that
the type of expertise was applicable at the time, which
dealt with government handling of upstream issues and was
not related to working interest owners. She reported that
DNR was attempting to ensure that future contractors held
"first chair" and understood the role of government without
the upstream interest of a working interest owner and how
marketing structures would assist or undermine its
position. Vice-Chair Saddler asked what "first chair"
meant. Ms. Rutherford replied that first chair was the
primary negotiator.
Representative Gara voiced that given the current oil and
gas prices the "gasline was in trouble." He stated that if
there was an "insatiable demand for natural gas" the state
might slow the project down and wait for prices to rise and
without demand the state "risked having the last good
contract" taken by a competitor and get "locked out of the
market." He wondered how the issue he described was
analyzed.
2:05:12 PM
Ms. Rutherford answered that all of the forecasts on the
Asian market predicted that between 2023 and 2026 many of
the existing contracts were up for renewal and in some
cases the supply was exhausted. She remarked that the
growth in LNG demand was "fairly flat" over the next ten
years. She voiced that attempting to respond to the market
window was a critical issue for the state and the partners.
The low price environment was difficult and capital was
harder to commit to projects. She emphasized that the
partners were discussing ways to move the project forward
and maintain the progress towards FEED. She thought that a
delay in FEED would not necessarily delay the investment
decision.
Representative Kawasaki asked whether she believed it was
important to retain the budget request for marketers in FY
17. Ms. Rutherford replied that the department had already
cut back on the marketing request for FY 17. She reiterated
that the commercial negotiations had not moved as
expeditiously as the administration had wished. She
explained that initially the department had proposed a
"worst case scenario market structure" where the state had
to maintain three joint venture markets. Lead Marketers
were very costly. She indicated she cut back from three to
one lead marketing positions. She deduced that given the
rate of negotiations the lead marketer was not necessary
until late FY 17. She offered that the marketing expense
could be included in a supplemental budget. She pointed out
that it was necessary to have the marketing structure in
place by FEED. Representative Kawasaki asked whether other
partners had marketing structures in place or were scaling
back due to the current situation with gas prices. Ms.
Rutherford replied that each of the partners were already
active in the LNG market and had marketing in place. She
acknowledged that each company was reducing its operating
costs and eliminating positions but not necessarily
marketing structures. The partner's marketing expertise was
"brought to the table" when discussing the various
marketing options for the state.
2:10:57 PM
Representative Pruitt referred to the "other services" line
on slide 7 expending $864.1 thousand in FY 15. He wondered
what the costs were for. Ms. Rutherford answered that the
funds were most likely for RSAs (Reimbursable Services
Agreement) within the department for additional contracts.
The department was working on identifying the expenditures
and would provide it to the committee as soon as possible.
Representative Pruitt remarked that eventually the
project's costs would continue to increase.
Ms. Rutherford addressed slide 9 titled "FY 2016 NSGC
Budget One Time Item" and slide 10 "FY 2016 Expenditure
Details One Time Item Funding." She noted that there were
several vacant positions. The marketing lead was vacant and
would not be filled until necessary. She discussed slide 11
titled, "FY 2016 Expenditure Details One Time Item Funding"
that listed expenditure details and one-time funding. She
offered that the total appropriation was over $7.6 million
and would lapse $200 thousand. She remarked that the
"average spend for DOL" was fairly high and would be
addressed by the department. She named the outside legal
firms as Greenberg Traurig and Milbank, Tweed, Hadley &
McCloy. She relayed the information on Slide 11 as follows:
Services:
· RSA to Law for legal support in negotiation and
drafting of commercial agreements $ 3,000.0
· RSA to Revenue for services provided by commercial
analyst in support of upstream activities $ 187.5
· Black & Veatch for support, advice, analysis, and
expertise in commercial negotiations, strategy,
modeling, FERC and resource report drafting and
review, and marketing, estimated spend rate of
$150.0/month $ 1,636.7
· Audie Setters Contract - expired Dec 2015, supported
the state gas team on marketing negotiations and
activities $214.8
· Petrotechnical Resources of Alaska Contract - expired
Dec 2015, supported the upstream team with facilities
engineering expertise $ 2.8
· Nan Thompson for support in drafting RIK/RIV decision,
estimated spend rate of $20.0/month $ 200.0
· Rick Harper for midstream pipeline project support and
technical review support, estimated spend rate of
$40.0/month $ 331.8
· Greengate LLC, for advice, expertise, analysis and
support on financing options and sources of financing,
financing structures, finance considerations of
commercial negotiations, and property tax support;
financing and financial modeling support and analysis,
estimated spend rate of {left blank] $ 778.0
· Pingo International, Pat Anderson for expertise in
arctic pipeline engineering and design to support
midstream activities, estimated spend rate of
$57.0/month* $ 696.1
· Lummus was subcontracted by Pingo to take a third
party look at the current ASAP data from AGDC.
Contract is for $310.0, with 192.5 spent to date.
· Steve Wright for expertise in project management and
support in upstream activities, estimated spend rate
of $35.0/month $ 334.8
· Gaffney Cline contract $5.3
· Core Services (IT, HR, leases, software,
telecommunications, etc.) $ 47.7
Total: $ 7,435.5
Commodities:
Office supplies, IT equipment, etc. $ 8.5
[Figures included were the projected total spend for FY
2016. The allocated amount and spending to date was also
included on the chart.]
2:15:56 PM
Ms. Rutherford addressed the third special session funding
on slide 12 titled "FY 2016 NSGC Budget Third Special
Session Funding" and on slide 13 titled "FY 2016
Expenditure Details Third Special Session Funding." She
reported that over $1.8 million was authorized and would
lapse approximately $200 million. She moved to slide 13 and
explained that the funding was allocated for two new
positions; a marketing lead and a marketing analyst. The
department created the PCN's (Position Control Number) but
both positions remained vacant until necessary. She
mentioned that the contractual services were reiterated
from previous slides. The department retained the
contracted expertise as much as possible. She reported that
the expected unexpended balance was $70 thousand. She
turned to slide 14 titled "FY 2017 NSGC Budget Request"
and commented that the amount was roughly $7 million less
than the original request due to the reduction of the two
lead marketers and a reduction of positions to 11 from the
anticipated need of 21 positions. Included in the 11
positions were: the 7 unfilled positions from FY 15, one
position appropriated from special session, and the three
new positions included in the FY 17 request.
Co-Chair Neuman referred to a conversation with Ms.
Rutherford about ensuring departments had enough funds to
advance to FEED. He believed it was critical to demonstrate
to the investors and the world that the state was invested
in the project. He expected that more information regarding
funding required subsequent to FEED would be addressed
"further down the road."
Representative Wilson pointed to slide 13. She referred to
the expenditures in FY 16 related to marketing contractors
and wondered why the items were included based on her
testimony regarding the slow progress on marketing
contracts. Ms. Rutherford answered that the $1.6 million
total expenditure was associated with the costs of existing
contracts. She reminded the committee that DNR did not have
a current marketing contractor and had not filled the other
marketing positions. Representative Wilson looked at the
allocation of $350 thousand on the fourth line for a
marketing contractor and recounted the testimony that DNR
had not filled the position. Ms. Rutherford affirmed that
DNR did not retain a marketing contractor. She added that
DNR would only hire a marketing contractor unless the
department was heavily engaged in a marketing structure,
however she still expected that would happen during FY 16.
2:21:33 PM
Representative Wilson surmised that all of the items
allocated for marketing may not all be needed and would
lapse at the end of FY 16. Ms. Rutherford replied in the
affirmative and ensured the department would not spend
money unless absolutely necessary. Representative Wilson
deduced that the money would lapse and become new money in
FY 17. Ms. Rutherford affirmed the statement.
Co-Chair Neuman pointed to slide 11. He looked at an RSA
for DOL in support of commercial agreements. He asked
whether they were working under her direction or other
entities. Ms. Rutherford answered that the outside counsel
she previously named and several assistant attorney
generals that worked exclusively on AKLNG together worked
as part of the "matrix structure in place" as part of the
legal team. She provided the example that AGDC led the
"governance commercial agreement team" but included members
from the legal team, DNR, and DOR. She stated that the
legal team's ultimate boss was the attorney general but
also worked on a daily basis at the direction of the teams.
Co-Chair Neuman relayed that the legislature had concerns
regarding the issue and ensured that DNR had the funds to
contract for its own outside legal counsel and "work at its
own discretion." He interpreted her answer to mean that "99
percent" of the legal work was performed under her
direction. Ms. Rutherford replied in the affirmative and
offered that "the team effort was well identified and
effective under the negotiations." She reported that
directives to outside legal counsel was given in
coordination with the assistant attorney generals and that
she characterized the matrix as a "cohesive group."
2:25:39 PM
Representative Pruitt asked what work the state gained from
Rick Harper for midstream pipeline project support for $40
thousand per month. Ms. Rutherford responded that Mr.
Harper had much experience with midstream work and gas
projects. He held Chief Executive Officer (CEO) positions
on various organizations related to natural gas projects
and provided support for midstream technical reviews. She
offered to provide his resume to the committee.
Representative Pruitt asked whether he had worked in Alaska
before. Ms. Rutherford replied in the affirmative. She
relayed that he had previously been hired by the state for
his midstream expertise. Representative Pruitt referred to
the Pingo International and Lummus expenditures. He
expressed particular concerns with Lummus's granted access
to ASAP (Alaska Stand Alone Pipeline) data from AGDC. He
asked for an explanation of what Lummus had done and what
would be the end result of its work. Ms. Rutherford
answered that the administration had hired Lummus
subcontracted through Pingo to take a third party look at
the current ASAP data from AGDC and determine its value to
the state. She reported that the administration added $310
thousand to Pingo's contract for the Lummus effort and
spend $192 thousand to date.
Ms. Rutherford continued that Lummus reviewed the
publically available data. She relayed that Dan Fauske,
former president, AGDC, Dave Haugan, Project Manager, AGDC,
Marcia Davis, Deputy Chief of Staff, Office of the
Governor, and Rigdon Boykin, former gasline consultant,
worked with Lummus to provide access to confidential data.
The Lummus employees signed confidentiality agreements. She
indicated that the contractor would soon release a public
report that analyzed the usefulness of the ASAP data for
the state.
2:30:46 PM
Representative Pruitt asked about the other data being
publically available. He wondered if the confidential
information would eventually be shared. Ms. Rutherford
responded that any confidential data contained in the
report was purged from the public report. She directed
Lummus to send the confidential data back to AGDC.
Co-Chair Neuman reminded members that there was a one page
document in their packet titled, "Questions & Answers
Concerning the Lummus/Pingo Contracts" (copy on file)
provided by DOR in their backup packets.
Ms. Rutherford added that the committee also had a letter
[dated February 10. 2016] to Representative Mike Hawker
distributed by AGDC regarding the issue (copy on file)
included in their back up packets.
Representative Pruitt asked whether "anything" was analyzed
outside the scope of AKLNG or ASAP or "data that could be
utilized by the state in any future decisions outside of
the two parameters." Ms. Rutherford explained that Lummus
was asked to look at the data to determine how useful the
information was under four separate scenarios. She
mentioned the four versions; ASAP as configured, a buildup
of ASAP, a project similar to AKLNG, and a forth version
"in-between" the two projects.
Representative Pruitt wondered and why the state would need
to look at 4 different scenarios wondered whether it
created uncertainty with the state's AKLNG partners. He
stated that the action gave the impression that the state
was "preparing for a potential failure of the AKLNG
project" by analyzing other avenues. Ms. Rutherford did not
believe so. The analysis was intended to be a "cold third
party review of a state asset." She remarked that
"obviously the project the state was committed to" was the
larger AKLNG line. She asserted that "the larger the gas
project, the lower the tariff structure, the better the
economics." The analysis was merely a "data point." She
revealed that the report demonstrated that the other
scenarios were economically "problematic."
2:35:58 PM
Co-Chair Neuman asked whether it was the state's intent to
remain a 25 percent partner in AKLNG. Ms. Rutherford
responded affirmatively.
Representative Wilson asked when in March that the analysis
would be ready. Ms. Rutherford explained that she had asked
Lummus how quickly the report would be available. She
expected to disseminate the report in the first week of
March [2016]. She commented that the delay was caused by a
delay in Lummuses access to the confidential materials.
Representative Wilson asked whether the legislature would
have to sign confidentiality agreements to access the
report or where it could be found publically. Ms.
Rutherford answered that she would make the report
available on DNR's website and send copies to every
legislature.
Ms. Rutherford turned to slide 15 titled, "FY 2017 Budget
Request Details Personal Services & Travel." She explained
that the chart showed the detail of the FY 17 budget
requests. She restated that the two marketing positions
would likely be eliminated and would include some requests
for contractual services with DOL. She informed the
committee that the information regarding personal services
on the slide reflected the 11 unfilled positions. She
advanced to slide 16 titled, "FY 2017 Budget Request
Details Services & Commodities." She relayed the following
from the chart on the slide:
· RSA to Law for continued legal support for commercial
agreements negotiation and drafting - estimated spend
rate of $1,000.0/month $ 12,000.0
· RSA to Law for legal support for marketing negotiation
and drafting of joint venture marketing agreements
with Producers - estimated spend rate of $400.0/month
$ 5,000.0
· Continued commercial expertise and support for the
participation in commercial negotiations such as
contracts with Steve Wright and Steve Swaffield $ 600.0
· Engineering expertise for marine, facilities, etc. As
commercial agreements form, the need for expertise in
specific aspects of facilities or transportation may
be required to assess potential disconnects between
the commercial agreements and operations $ 480.0
· Continued analysis and modeling support, specifically
continued contract with Black & Veatch $ 2,100.0
· Other professional services for expertise and support
as required, such as support for midstream through
Pingo, support for upstream through Ryder Scott, and
support for marketing activities $ 2,470.0
· Expansion of the AKLNG office including Core Services
(IT, HR, leases, software, telecommunications, etc.).
$ 350.0
Total: $ 23,000.0
Commodities:
· Office supplies, books, subscriptions and educational
materials $10.1
· IT Equipment $15.0
Total: $ 25.1
Ms. Rutherford acknowledged that the first two items
related to outside counsel totaling $17 million was very
expensive. She stressed that the commercial negotiations
were complex and the success of the negotiations depended
on the support of outside counsel. She qualified that "the
timing on the marketing remained a serious issue."
2:40:44 PM
Vice-Chair Saddler asked about the $5 million RSA to law
and wondered whether the request "presumed" the marketing
lead contract would be filled and was necessary for the
entire fiscal year. Ms. Rutherford answered that the
negotiations applied to various areas of development and
marketing and provided context for the requests. She
discussed the commercial agreements negotiations that would
determine the state's marketing structure. She elaborated
that the state had "a couple of different significant
options one of which was provided for in SB 138 (Gas
Pipeline; AGDC; Oil & Gas Prod. Tax) [Chapter 14 SLA 14 -
Enacted 05/08/2014]. The first option was as an equity
marketer, where the state set up its own organization with
its own portion of the gas and competed head to head with
other co-venturers and other producers in the world. The
other option found in SB 138 required that each of the
other three partners provide DNR offers to either purchase
the state's gas or sell the gas for the state under the
same terms they sell their gas. Yet another option was a
joint venture structure where the state and partners would
all coalesces the gas to the market and each partner would
have a representative in the market organization. She
ascertained that the last scenario would be the best
structure for the state and eased many of the upstream
complexities produced through having three-quarters of the
gas supplied through Prudhoe Bay and one-quarter supplied
by Point Thompson and the varying ownership structures. The
coordinated structure would optimize costs. She continued
that other options could include subsets of the joint
venture market. She pointed out that while the negotiation
stage was in progress the negotiations were trying to
determine what works for all parties, which required
outside experts on marketing organizations and LNG
structures and how best to sell the gas under the
structures. She relayed that DNR initially thought that
having an in-house employee involved in developing the
marketing organization and initial negotiations that was
eventually transferred to the actual marketing organization
due to the historical knowledge and experience the employee
would offer the structure was in the state's best interest.
She concluded that the position was "expensive and hard to
find" therefore, delayed filling the position until the
structure was developed.
2:45:04 PM
Representative Kawasaki asked whether the low price
environment for gas made experienced gas marketers more
available. Ms. Rutherford replied in the affirmative.
However, the position was very well compensated and she
learned that the individuals received $600 thousand to $800
thousand in salary per year with a 30 percent bonus. She
detailed that the state prohibited the 30 percent bonus and
built the bonus into the base salary with a COLA (Cost Of
Living Allowance) provided as well. Representative Kawasaki
reviewed the old fiscal notes from 2014 for SB 138 and
discovered that the marketing position was delayed an extra
year. He believed that the need for marketing efforts
remained in FY 17 and was not anticipated when the bill was
adopted in 2014. He noted that the RSA to DOL had changed
substantially and was originally expected to cost $3
million and currently "ballooned." He asked why the RSA was
so large in comparison. Ms. Rutherford reiterated the
complexity of the negotiations in drafting the commercial
agreements. She shared that the outside counsels offered
different areas of expertise. She elucidated that Greenberg
Tuareg understood the specifics concerning the state of
Alaska's upstream capacity, royalties, leases, the FERC
process, and how expansion and third party access was
involved. Milbank Tweed offered profuse knowledge regarding
actual LNG projects and financing and how the commercial
agreements supported the financing structure. She reported
that the negotiation "ratcheted up" in FY 16 increasing the
costs and the complexities. She relayed that the average
spend was between $800 thousand and $1 million per month
for the two outside counsels only for the general
commercial negotiations. She added that the additional $5
million was necessary for negotiation on the marketing
structure.
2:49:44 PM
Representative Pruitt surmised that the state's attorneys
"needed a lot of attorneys." He asked whether DOL was in
alignment with DNR. Ms. Rutherford replied in the
affirmative. She detailed that rigorous discussions between
the agencies were undertaken on how the state should
proceed with issues that arise through the negotiations.
She felt that good decisions usually emerged from that type
of process.
Representative Pruitt asked why DNR needed a "middleman"
represented by DOL. Ms. Rutherford believed that statue
mandated the agencies were to go through DOL to hire
outside counsel. She restated that DOL worked with the team
on a daily basis. Representative Pruitt asked if the law
needed to be changed to allow DNR to work directly with
outside counsel. Ms. Rutherford answered that the
department always worked with outside counsel as much as
possible but the billings were always undertaken by DOL and
offered very good comparative billing analysis. She felt
the system was "a reasonable separation of duties."
Representative Gara did not like agencies billing each
other. He thought that DOL should be involved in the legal
work and remain up to date which allowed for determining
whether some of the work could be done in-house at a much
lower cost. He wondered whether the two elements were
happening with DOL's involvement. Ms. Rutherford answered
in the affirmative and added that the DOL attorneys
"opined" on the applicability and interpretation of state
law. She concluded that the outside counsel brought
expertise the state lacked.
Ms. Rutherford concluded the presentation on slide 16
titled, "FY 2017 Budget Request Details Services and
Commodities." She relayed that the slide contained a chart
outlining the services and commodities requested in FY 17
but did not provide details.
Co-Chair Neuman clarified that he was working with all of
the departments involved in AKLNG on "tightening" up their
AKLNG figures.
2:56:08 PM
AT EASE
2:57:30 PM
RECONVENED
JAMES CANTOR, DEPUTY ATTORNEY GENERAL, CIVIL DIVISION,
DEPARTMENT OF LAW, provided a PowerPoint presentation
titled "Department of Law AKLNG Project Budget" dated
February 23, 2016 (copy on file).
Mr. Cantor addressed slide 2:
FY 2017 AKLNG BUDGETREQUEST
•DNR/DOR Reimbursable Services Agreements for outside
counsel and experts -$17.5 million
-DNR Commercial Agreements -$12.0 million
-DNR Marketing Negotiations -$5.0 million
-DOR Financing & Bankability -$500,000
•DOL annual internal funding for gasline work -
$700,000
Representative Kawasaki spoke to the 2014 fiscal notes
related to a $3 million RSA for DOL. He wondered why the
legal costs escalated.
Mr. Cantor replied that the negations had gotten to the
heart of a very complex transaction. He reported that the
outside counsel of Milbank, Tweed had global expertise in
LNG and that only 6 other law firms worldwide had similar
experience
Mr. Cantor continued on slide 3:
DOL BUDGET NEEDED
•Negotiation & drafting of AKLNG Project commercial
agreements
-Upstream Agreements
-Midstream Agreements
-Marketing Agreements
-Governance Agreements
-Fiscal Agreements
-Finance & Tax
•Annual internal funding for assistant attorneys
general
Mr. Cantor indicated that the slide listed the types of
commercial agreements the department was negotiating.
Co-Chair Neuman noted that the presentation did not include
any numbers. He wondered about the specific costs
associated with the various negotiations on slide 3. Mr.
Cantor replied that a gross accounting was $12 million for
the commercial agreements and $5 million for the marketing
agreements which had not started. Co-Chair Neuman asked
whether the marketing negotiations would begin before the
FEED stage. Mr. Cantor replied in the affirmative. Co-Chair
Neuman requested more detailed information regarding costs
and negotiations.
Representative Munoz asked whether the funds were
sufficient to complete the project. Mr. Cantor responded
that the funding was dependent on how the project would
proceed in FY 18.
3:03:09 PM
MARTIN SCHULTZ, ATTORNEY VI, CIVIL DIVISION, OIL, GAS, AND
MINING SECTION, DEPARTMENT OF LAW (via teleconference),
answered that it was a difficult question and depended on
the pace of negotiations with the other AKLNG partners. He
guessed that if the negations proceeded more aggressively
the funding would meet the bulk of the expenses.
Representative Munoz asked whether DOL had expended money
towards the commercial agreement to date and if so, how
much. Mr. Schultz answered that DOL expended money in FY 16
for the commercial agreements. He noted that through the
first 6 months of FY 16 approximately $5.1 million was
spent on outside counsel and the work was in progress. He
estimated the costs at $850,000 per month. Representative
Munoz asked whether the $5.1 million was in addition to the
$12 million request for FY 17. Mr. Schultz replied that the
$5.1 million was the expenditure to date in FY 16.
Representative Munoz asked what the $5.1 million had
achieved for the state. Mr. Schultz answered that
agreements with the project partners were negotiated,
commercial and regulatory work was accomplished including
FERC efforts, and some agreements had been drafted and
others were in progress.
3:07:31 PM
Co-Chair Neuman believed that another presentation was
necessary to include specific budget numbers containing
much more detail regarding negotiations and projections on
future work and budgetary needs. He emphasized that the
committee needed more information. Mr. Cantor agreed to
comply with the request.
Vice-Chair Saddler referred to slide 2. He wondered about
the $700 thousand expenditure and what work was
accomplished. Mr. Cantor turned to slide 4 titled, "DOL -
AKLNG Team" to assist in answering the question. He
explained that the department had a small team of assistant
attorney generals [depicted on the slide] who worked
exclusively on AKLNG and had many years' experience working
on previous gasline projects. The funding requests for the
gasline projects were done on a yearly basis. He noted that
requests were as high as $3 million and as low as $700
thousand. He listed the names of the assistant attorney
generals (AAG) who were primary members of the team; Jerry
Juday, Martin Schultz, and Elena Romerdahl and clarified
that the $700 thousand expenditure pertained to their work.
Vice-Chair Saddler asked whether the $700 thousand paid for
their entire costs. Mr. Cantor clarified that the
department employed an hourly rate system as opposed to a
salary per position and the hourly rate was billed to the
project and included the entire costs which included
support staff, utilities, etc.
3:11:25 PM
Vice-Chair Saddler thought that the process was unusual.
Mr. Cantor replied that the billing structure was in place
for the past 25 years. He detailed that every civil lawyer
billed per hour and the amount was built into the budget.
Vice-Chair Saddler questioned the stated costs and the
billing system. Mr. Canto deferred to Mr. Schultz.
Mr. Schultz elaborated that the funding for gasline work
typically included larger direct appropriations to DOL or
via a RSA between DNR. He reported that in November, 2015
the legislature directly appropriated $10.1 million to DOL,
a $3 million RSA between DOL and DNR, and a $700 thousand
direct appropriation during the regular session for gasline
work. He revealed that the bulk of the 13.8 million in FY
16 was through direct appropriation from special session.
The vast majority was of the FY 17 request was for outside
counsel except the $700 thousand appropriation for the
attorneys on the gasline team. The $17 million requested in
FY 17 was an appropriation to DNR that DOL received through
RSA's. He noted that an additional RSA from DOR to DOL in
the amount of $500 thousand was requested in the budget.
Co-Chair Neuman asked how much money was transferred
between DOL from DNR through RSA's. Mr. Schultz answered
that during the regular session in FY 16 the amount was $3
million. He recounted the direct appropriation to DOL of
$10 million during the special session in 2015.
Vice-Chair Saddler requested the amount the department
spent internally on gasline work over the years. Mr.
Schultz replied that he did not have the information
available. He responded that whether DOL received funding
via a direct appropriation or through an RSA, the money was
utilized for outside counsel to provide expertise to DNR,
DOR, and AGDC to advance gasline work. The exception was
the internal DOL appropriation of $700 thousand. In
previous years larger appropriations funded a mix of
internal expenses and outside counsel.
3:18:31 PM
Vice-Chair Saddler was frustrated with the answer. He
request the cumulative amount of internal expenses prior to
FY 15. Mr. Cantor offered to provide further information.
Co-Chair Neuman interjected that the presentation was the
problem and that a detailed budget was necessary for a
budget presentation before the House Finance Committee.
Vice-Chair Saddler requested more clarity on past
expenditures to understand the current DOL budget.
Representative Gara asked whether the department would save
money if it did more work in-house or whether the expertise
to perform the work internally lacking. Mr. Schultz
answered that assistant attorney generals (AAG) were much
cheaper than outside counsel and the department utilized
AAGs as much as possible. He shared that he was one of the
more experienced oil and gas attorneys in the state but his
expertise was in royalties and tax disputes which was not
similar to negotiating world class LNG projects and the
work associated with the endeavor. He stressed that outside
counsel was critical to protect the state's interest and
was worth the cost of their invaluable expertise. He
informed the committee that AAGs worked on the AKLNG
project and were present at all of the meetings, reviewed
and edited the agreements, dealt with outside counsel on
state statue issues, and participated actively in the
project. He believed that ideally the state would have a
blend between AAGs and outside counsel. Representative Gara
clarified his question. He asked whether DOL had the
ability to perform more of the work in-house with
additional staff and would that result in savings or was
the department utilizing the internal staff as much as
possible. Mr. Schultz agreed with the later statement and
believed the department was using internal staff where
appropriate and outside counsel where appropriate.
Representative Pruitt referred to the $10 million direct
request. He wondered why the FY 17 funding was appropriated
through DNR. Mr. Schultz replied that he was not a budget
expert and did not know the reason why the difference
existed. He reiterated that regardless of the appropriation
method the purpose of the money was used for outside
counsel. Representative Pruitt stated that the RSA system
was not transparent. He knew that the project was not
advancing in the "same capacity." He wondered what type of
agreements DOL would be engaged in with the $12 million
budget request and whether the amount was truly necessary.
Mr. Schultz answered that the expenditure depended on the
progression of the negotiations. He offered that if the
negotiations slowed the full amount was not necessary.
Representative Pruitt asserted that he wanted a definitive
amount regarding the funding request for FY 17.
3:28:00 PM
Mr. Schultz replied that he could not predict the pace of
the negotiations. He assured Representative Pruitt that if
the money was not necessary it would not be expended.
Mr. Cantor added that for the FY 16 budget DOL was lapsing
approximately $2 million to $4 million due to the slower
pace of negotiations.
Co-Chair Neuman spoke to the current fiscal crisis and
budget cuts for services. He repeated his request for more
comprehensive budget information divided into pre-FEED,
FEED, and post-FEED stages of the project for the next
meeting before the committee.
Representative Gattis wondered about alternative options if
the project were to go into a "stall mode." She asked what
would happen and how much money could be held back.
Co-Chair Neuman felt Representative Gattis's point was
valid for all of the agencies involved in AKLNG.
3:31:47 PM
Representative Munoz requested information regarding how
the project's partners were progressing on the agreements
and whether the partners were moving forward at the same
pace. Mr. Cantor agreed to supply the information.
Co-Chair Thompson reviewed the agenda for the following day
noting the time change to 2:00 p.m.
ADJOURNMENT
3:32:42 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Revenue HFIN AKLNG Budget 2-23-16 final.pdf |
HFIN 2/23/2016 1:30:00 PM |
|
| DNR HFin Committee AKLNG Budget 2-23-16.pdf |
HFIN 2/23/2016 1:30:00 PM |
|
| AKLNG HFIN Lummus Contract QA.pdf |
HFIN 2/23/2016 1:30:00 PM |
|
| LAW_HFIN_FullCom_AKLNG_Project_2-23-16.pdf |
HFIN 2/23/2016 1:30:00 PM |