Legislature(2013 - 2014)BARNES 124
02/19/2014 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| Alaska Lng Project - Memorandum of Understanding - Heads of Agreement, Department of Natural Resources, and Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
February 19, 2014
3:34 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Lora Reinbold, Vice Chair
Representative Mike Chenault
Representative Bob Herron
Representative Charisse Millett
Representative Dan Saddler
Representative Andy Josephson
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
ALASKA LNG PROJECT - MEMORANDUM OF UNDERSTANDING - HEADS OF
AGREEMENT~ DEPARTMENT OF NATURAL RESOURCES~ AND DEPARTMENT OF
REVENUE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOE BALASH, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Testified and answered questions during the
during the Alaska LNG Project presentation.
ANGELA RODELL, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Testified and answered questions during the
during the Alaska LNG Project presentation.
ACTION NARRATIVE
3:34:13 PM
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:34 p.m. Representatives
Reinbold, Saddler, Josephson, and Olson were present at the call
to order. Representatives Herron, Chenault, and Millett arrived
as the meeting was in progress.
^Alaska LNG Project - Memorandum of Understanding - Heads of
Agreement, Department of Natural Resources, and Department of
Revenue
Alaska LNG Project - Memorandum of Understanding - Heads of
Agreement, Department of Natural Resources, and Department of
Revenue
3:34:26 PM
CHAIR OLSON announced that the only order of business would be a
presentation: Alaska LNG Project - Memorandum of Understanding
Heads of Agreement, Department of Natural Resources, and the
Department of Revenue.
3:35:08 PM
JOE BALASH, COMMISSIONER, Department of Natural Resources (DNR),
provided an overview of three main guidance documents for the
Alaska LNG Project: the Heads of Agreement (HOA), the Memorandum
of Understanding (MOU), and [HB 277] [slide 2]. He stated that
the bill contains three parts: participation, percentage of
participation, and the process for developing contracts for
legislative approval. In order to understand the authorities in
the bill, the department refers back to the HOA and the MOU,
which inform the legislature and the public. In January, both
he and Commissioner Rodell signed the HOA - a document that
describes the "road map" project sponsors will follow and the
contracts that will govern the project as a whole. These
documents describe key principles and understandings between and
among the parties. The MOU describes the manner in which the
state will partner with TransCanada PipeLines Limited
(TransCanada) on the midstream elements of the project and
includes some key commercial terms that are in the state's best
interest. All actions on whether to advance the LNG project are
dependent upon passage of enabling legislation, he said.
3:38:33 PM
COMMISSIONER BALASH discussed the heads of agreement (HOA) for
the Alaska LNG project [slide 3]. The agreement was signed by
the state Department of Natural Resources (DNR) and Department
of Revenue (DOR), the Alaska Gasline Development Corporation
(AGDC), TransCanada Alaska Development Inc. (TransCanada),
ExxonMobil Alaska Production, Inc., ConocoPhillips Alaska, Inc.,
and BP Exploration (Alaska) Inc. The definition of the HOA from
www.investopedia.com read, as follows:
A non-binding document outlining the main issues
relevant to a tentative partnership agreement. Heads
of agreement represents the first step on the path to
a full legally binding agreement or contract, and
serves as a guideline for the roles and
responsibilities of the parties involved in a
potential partnership before any binding documents are
drawn up.
3:40:13 PM
COMMISSIONER BALASH described the organization of the HOA [slide
4]. The HOA is broken into 16 sections and 13 articles. A set
of recitals outline the history behind this agreement.
Additionally, an index provides a series of correspondence from
the producers and the governor over the past few years and the
appendix describes the pro-expansion principles for the project.
COMMISSIONER BALASH turned to key recitals [slide 5]. The key
recitals language [pages 2-4 of the HOA] recognizes changed
circumstances in the Lower 48 natural gas market that led
Governor Parnell to change direction from the Alaska Gasline
Inducement Act (AGIA) framework and direct focus on an Alaska
LNG project targeting Pacific markets. Second, another recital
recognizes that funding from the state under AGIA has supported
key activities related to the Alaska LNG project. Both the
state and TransCanada believe it is appropriate to back away
from the AGIA license and focus on the Alaska LNG project.
Third, the state recognizes that AGDC is pursuing the Alaska
Stand Alone Pipeline ("ASAP") project. Further, the Alaska LNG
project and ASAP intend to cooperate with one another; however,
for now the ASAP remains unfettered, unobstructed, and on
schedule. Fourth, the Alaska LNG parties wish to ramp up the
Pre-FEED phase of the Alaska LNG project, which is estimated to
cost over $400 million using a phased approach.
3:43:19 PM
COMMISSIONER BALASH highlighted a few key definitions. He said
"enabling legislation" will provide the DNR and DOR certain
authority to advance the project by negotiating contracts with
the parties. The "MOU" refers to a separate agreement between
TransCanada, Commissioner Rodell, and himself. The pre-front-
end engineering and design or "Pre-FEED" phase is the current
phase, consisting of work that will inform the front-end
engineering and design or "FEED" phase. He anticipated this
process will take two to three years to complete and will cost
upwards of $1.5 to $2 billion. This process should generate
sufficient information to make a complete application at the
Federal Energy Regulatory Commission (FERC), noting the FERC has
exclusive jurisdiction on liquefaction terminals and plants.
The "RIK" means royalty in kind and "TAG" means "Tax as Gas"
which will be the DOR's share of revenues of the gas production
that is a key part of this project.
3:44:47 PM
COMMISSIONER BALASH reviewed additional key provisions [slide
7]. Some key principles deserved their own article for
recognition, he said. All of the parties recognize and respect
the authority of this branch of government and if enabling
legislation is passed the parties would negotiate contracts to
proceed in the fashion contemplated. Article 3 describes
broadly some of the key benefits of developing the Alaska LNG
project, including providing gas to Alaskans, jobs for Alaskans,
revenue to the state, and opportunities for additional
development. The substantial infrastructure contemplated has
the potential to facilitate an expansion of unprecedented
exploration activities on the North Slope. Currently, and for
the last 40 years, a discovery that included methane had been
considered insignificant. When considering the success of an
exploration well, companies evaluate the likelihood that
producers will find oil and gas; and for the last 40 years
finding gas was not part of the success case. If infrastructure
is in place, companies will now have an opportunity to monetize
gas so the opportunity for success will increase and give more
positive decisions to put "holes in the ground" on the North
Slope. For all the benefits of 3-D seismic and the latest
innovations, it still all comes down to whether you put that
"hole in the ground" and can test what the seismic data
indicates. He said that additional drilling will lead to
production.
3:47:20 PM
REPRESENTATIVE JOSEPHSON, relative to the second key recital,
asked about the treble damages. He said he is not a contract
lawyer; however, it seems TransCanada said it will waive the
[AGIA] statute and any right and entitlement. He offered his
belief that this is called a novation, which takes a previous
agreement and places a new agreement on top of it. He asked
whether any argument exists that if the enabling statute passes
that there is no legal repercussion.
COMMISSIONER BALASH answered that the department has worked hard
not to expose the state to any further liability or treble
damages under AS 43.90. He offered to have the DOL explain the
rationale to the committee; however, he understood that part of
the reason that the state is not in jeopardy is due to
TransCanada's involvement in the project as contemplated here.
The key element of the project assurances clause in AGIA is that
the state would not grant benefits or inducement to a competing
project. He asked how a project could be a competing project if
the licensee is a part of it. He acknowledged other
considerations come into play. One thing in the MOU itself is
that there is a very clear delineation between the parties, and
that [the state and TransCanada] are stepping away from the
[AGIA] license and leaving it behind.
3:50:52 PM
REPRESENTATIVE MILLETT asked for clarification on the state
"stepping away from the AGIA agreement" but the state is not
terminating it.
COMMISSIONER BALASH answered no; that the state is utilizing the
abandonment provisions in the Alaska Gasline Inducement Act
statutes. He advised that at this point the state doesn't have
the authorities granted in the enabling legislation to become
part of the Alaska LNG project. He stated that the state needs
the enabling legislation to pass and the agreements contemplated
in the HOA to be formed. At that point TransCanada and the
state will "step out of the AGIA license and leave it behind."
REPRESENTATIVE MILLETT asked whether the AGIA license would be
terminated at that point.
COMMISSIONER BALASH agreed that is correct if the enabling
legislation passes. He explained that the state is currently
operating under a "project plan amendment (PPA)- 1 B" that
allows some of the pre-planning activities to occur during the
first and second quarter, but it is expected to terminate rather
than finalize the last of the accounting for the reimbursements
and "buttoning things up."
3:52:39 PM
REPRESENTATIVE MILLETT asked if this project doesn't go through
but ASAP does occur, whether that is considered a termination of
the AGIA agreement.
COMMISSIONER BALASH answered that the MOU lays out what the
state will do if the enabling legislation passes, but not what
will happen if it does not. He said he could not predict what
will happen in May.
REPRESENTATIVE MILLETT speculated that treble damages could be
assessed if the enabling legislation doesn't pass.
COMMISSIONER BALASH answered that he can't speak to AGCD, but
the organization has "gone out of their way to ensure that they
haven't done anything to cross that line and expose the state to
damage." He did not see that happening.
3:53:51 PM
REPRESENTATIVE SADDLER asked to put on the record that this does
not represent a mutual finding that AGIA project is uneconomic,
but it will represent a mutual abandonment conditioned on the
legislature passing the enabling legislation. He asked for
clarification on the process for the uneconomic finding.
COMMISSIONER BALASH answered that the process laid out in AS
43.90.240 allows either party to deem the proposed Alaska LNG
project uneconomic, followed by the choice to either agree or
disagree, which would take the matter to arbitration.
Essentially, the state has agreed to the mutual agreement path,
that the Alberta project licensed under AGIA is uneconomic.
Thus, the state and TransCanada have "agreed to agree."
REPRESENTATIVE SADDLER asked whether an objective standard
defines "uneconomic."
COMMISSIONER BALASH responded that the statute has some
references to what would be considered under arbitration, but it
is not specified in detail; enough ambiguity exists that either
party could argue over it.
3:55:47 PM
REPRESENTATIVE SADDLER reiterated that the term isn't clearly
defined, but either party could make a claim.
COMMISSIONER BALASH agreed that is an option available under the
statute.
CHAIR OLSON remarked that the legislature tried to clarify that
more specifically.
3:56:09 PM
COMMISSIONER BALASH turned to Article 4, to the project work
contemplated by the parties [slide 8]. He explained that the
state is currently entering the Pre-FEED stage, which is
expected to last 18 to 24 months. The information gathered will
include additional environmental data, baseline data, technical
information, and engineering necessary to refine the cost
estimates to allow all parties to evaluate whether the proposed
Alaska LNG project is viable or if sufficient possibility exists
to warrant spending "the really big dollars in FEED." During
this phase, key project services agreements will be developed
with TransCanada and AGDC to carry the state's interest in the
liquefaction plant - looking downstream. The overall
contemplation is that the state would have a portion of the gas
and a proportionate part of the infrastructure in terms of
production tax and royalty interests. So, as the state looks
downstream to the GTP, pipeline, liquefaction terminals, and the
project service agreements with the two entities, it must also
look upstream to the producers.
COMMISSIONER BALASH said the state will seek offtake agreements
and balancing agreements with the producers, which he
characterized as being a big part of the overall package. In
order for the state to be comfortable in taking on the
obligations associated with the midstream service agreements,
it's necessary to know that "we're going to have gas and the
right amount of gas." That's where the offtake and balancing
agreements come in. The state will need to look to the
companies that have the leases, the working interest owners, and
producers to obtain the state's share of the gas. Since the
state has varying royalty rates between Prudhoe Bay and Point
Thomson, it doesn't know which field will come on first or the
amount, it means that the state could be a little high or low.
In the long run, the state will ultimately have a 75-25 split
between Prudhoe Bay and Point Thomson, which is determined by
the commercial balancing agreement. Balancing agreements are
routinely used by industry to smooth out some of the uneven
aspects of production that occur.
3:59:50 PM
REPRESENTATIVE MILLETT, referring to the MOU, said the language
seems to indicate the state becomes part of the licensee, such
that the license will be owned jointly by the state, the users,
and TransCanada.
COMMISSIONER BALASH asked whether she was referring to paragraph
8 in the MOU, which refers to PPA-1 B referenced previously,
which is a continuation until the end of first quarter. In
order for the licensee to operate under the terms of the license
and be qualified or entitled to reimbursement, the parties must
have a work plan and budget approved by the DNR and DOR. Thus,
PPA-1 B was essentially a work plan and budget that covers this
period of time. In response to a question, he answered that the
current licensees are TransCanada and Foothills Pipe Lines Ltd.
4:01:35 PM
COMMISSIONER BALASH emphasized key activity 4 is significant.
The state and each of the producer parties would initiate
preliminary marketing efforts for LNG. He stated that during
Alaska's tortured history when considering North Slope gas for
commercialization, a number of parties sought to sell its LNG to
Pacific markets; however, the parties didn't have the gas to
sell. In this case all three producers and the state would
initiate the marketing efforts so critical to the success of an
LNG project. He characterized the heart of an LNG project as
being the sales and purchase agreements (SPA), which are long-
term agreements between the producers and the buyers, since the
financing and the investment rest on it. Those long-term
contracts signal that this project is "real" and means to do
business with the buyers of LNG in Asian markets.
4:03:33 PM
COMMISSIONER BALASH discussed the state's participation in the
proposed Alaska LNG project [slide 9]. He said, with respect to
the state's participation in the project, the findings and
determinations that he and Commissioner Rodell have made show
the project could yield significant benefits. The state will
participate in the infrastructure as an equity holder of gas,
but will enter into partnerships with TransCanada and AGDC or
AGDC's subsidiary to carry the state's interest in the
infrastructure. The DNR and DOR aren't equipped to be corporate
players or infrastructure players in the traditional sense so
the state must rely on an agent such as AGDC or TransCanada to
do so. Finally, the state has agreed that the state's interest
should be consistent with the state's share of the gas, and when
combined with the state's royalty will total 20 to 25 percent of
the gas. He noted the Governor's bill "pegs things" at a little
more than 22 percent. In essence, so long as the figures are
not too low or too high the state will be ready to move forward.
Certainly the legislature has a number of things it needs to
consider, including the state's debt capacity and where "the
number" puts the state relative to the other parties. In other
words, the party with the biggest share in the gas will have the
biggest "say" in the project, he said.
4:06:14 PM
REPRESENTATIVE HERRON referring to key provision 3 asked whether
going to 22.5 or 22.7 percent would be a tipping point. He
asked for further clarification.
COMMISSIONER BALASH responded that as the department examined
the principles the fundamental goal was an alignment of interest
between the state and the other parties, as well as aligning the
state's interest in the gas with its interest in the
infrastructure. He acknowledged that at some point the
percentage is too big or is too small. The department has an
opportunity to realize real revenues for the state in the long
run relative to the risks the state might be undertaking as a
participant in the project. He suggested that going to less
than 20 percent is probably a big problem. He said that going
over 25 percent could also create a problem for other parties
and maybe for the state, too, in terms of what the state can
afford.
4:07:47 PM
COMMISSIONER BALASH said Article 6 relates to the regulatory
framework and key access and expansion principles. He pointed
out that one thing the state wants to ensure is to provide
multiple offtake points to get gas to Alaskans, but also as a
means to get gas into the project. He recalled the activities
underway by Doyon, Limited in the Nenana Basin. If Doyon finds
significant gas it will need to get that gas to market. He
characterized it as being almost as important to get gas into
the pipeline as out of the pipeline. The work AGDC has been
undertaking in the open season will inform the project by
identifying demand points and where to locate offtake points.
However, he offered his belief that the key is the overarching
structure. Each party who has a share of the gas is going to
hold its capacity in the infrastructure in the same basic
percentage and operate its share of the infrastructure on a
proprietary basis. One of the reasons the state has had so many
disputes on the Trans-Alaska Pipeline System (TAPS) has to do
with the manner in which tariffs are structured. He recalled
that TAPS cost was approximately $8 billion, but the question is
how was the $8 billion financed and how does that affect the
tariff ultimately.
4:09:58 PM
COMMISSIONER BALASH said that Governor Egan wanted the state to
own its share of TAPS and he fell short a vote in the Senate.
Thus, the state didn't own its share of TAPS and subsequently
has fought with the owners over those tariffs since the tariff
affects the state's royalty and production tax value. In order
to move past this, the key provisions of the proposed Alaska LNG
are structured so each party will operate its own share and
finance its own share of the infrastructure. Therefore, it will
not impact the state if one party decides on a high equity or to
have a high return on that equity. In the conventional
structure, those decisions would be material, but this approach
would allow the state to seek a "live and let live" arrangement.
The other parties will set up business as the parties see fit
and the state will do likewise. He moved to key provision 4,
and stated that the portion of the project that the state's
agents - AGDC and TransCanada - share would be committed to
provide access to third parties on terms developed with the
state. He concluded that these are the key provisions of
Article 6.
4:12:00 PM
COMMISSIONER BALASH turned to Appendix A [page 21 of the HOA],
which lays out the principles for expansions in the project. He
emphasized that A.1.1 outlines that any party may initiate the
process for an expansion of any component, including the GTP,
the pipeline, or the marine terminal. He acknowledged that
there is a "carve out" for the liquefaction trains, which is
important. He pointed out highlighted texts and assuming there
are no negative impacts on other parties, the expansion can
proceed. In essence, it represents a sole risk as the approach
to expansions. For example, the state is interested in
expansion in the pipeline, and as long as it doesn't impact the
other parties, the expansion will occur and the state will
benefit from additional gas production.
4:13:36 PM
REPRESENTATIVE SADDLER referred to Sections A.2 and A.3, of
Appendix A and asked for the principle for any modification of
the LNG liquefaction plant.
COMMISSIONER BALASH explained that the expansion principles
differentiate between the liquefaction trains and everything
else. Basically, the principle is that any part of the project
except the liquefaction trains can be expanded on the sole risk
basis; however, the trains are the most sensitive part of the
infrastructure and any modification to the original trains must
be agreed to by all parties. Those agreements are described in
A.2. He said that A.3 allows a party to build a new train if a
modification of the original train is impossible or not agreed
upon. The project is being designed around the concept of three
liquefaction trains, with a certain capacity available. In the
event sufficient additional gas is discovered that can commit to
capacity in the pipeline or the GTP and can fill a new
liquefaction train, the facility can be added at the marine
site. Again, this applies the same principles, that if one
party wants to add a liquefaction train, the other parties can
participate but don't have to do so.
4:16:20 PM
REPRESENTATIVE SADDLER understood the GTP plant is either "all
on or all off." He related his understanding that if someone
finds gas and wants to send gas that requires liquefaction
services, the party can do so at cost or several parties can
collectively do so. He also understood one party could pay to
build an additional liquefaction train. He asked whether the
parties can sell liquefaction capacity to others.
COMMISSIONER BALASH answered in essence; yes. He said, "He who
owns the infrastructure owns the capacity." He acknowledged
that the state would need to be sensitive to the other parties
in terms of the operating agreements and ensure the agreements
do not cause harm or problems. If the party wanted to take the
risk of building an entire liquefaction train, even without
enough gas for the train, and was willing to speculate and sell
the capacity later on to someone else, it represents a business
proposition.
REPRESENTATIVE SADDLER assumed that it could happen in several
ways.
4:18:02 PM
REPRESENTATIVE JOSEPHSON related a scenario in which the state
owned 25 percent for royalty and production tax of the
molecules. He surmised the state could market it to third
parties who were not parties of the initial agreement.
COMMISSIONER BALASH answered that is correct.
REPRESENTATIVE JOSEPHSON wondered if the state's 25 percent
expands to 30 percent making 105 percent, or alternatively, does
the state surrender 5 percent of its capacity to an independent.
COMMISSIONER BALASH acknowledged his questioning is a very
interesting line of questions. It has to do with is how the
capital cost and operating costs will be reallocated among the
parties. He stressed this is something that is going to require
very careful crafting of the operating agreements in the next
phase of development, which is the type of detail that will need
to be worked out. He agreed that the project does not become a
105 percent project, but would necessitate a reallocation or
recalculation of the equity interest.
4:20:02 PM
REPRESENTATIVE JOSEPHSON said when he thinks of compression he
thinks of it as putting more molecules in the same space in the
pipeline.
COMMISSIONER BALASH answered that is correct.
4:20:33 PM
COMMISSIONER BALASH continued with Article 7, which is related
to enabling legislation and the timeline [slide 12]. He said
this describes the enabling legislation, which requires other
parties to take a "leap of faith." While the language appears
in the HOA itself, the other parties did not review the bill
until it was introduced. However, the actual drafting and
language fell on the DOR, the DNR, and the Department of Law.
He hoped the legislature would pass the enabling legislation by
April 2014 and that over the next 12-18 months the
administration and other parties would develop all of the
contracts necessary to advance the Alaska LNG project to the
[front-end-engineering design] FEED phase. He also said the
department will keep the legislature informed as these contracts
are developed. In terms of the timeline, in 2015 the
legislature will consider the project enabling contracts and if
approved, all parties will be ready to move to FEED phase late
in 2015 or early in 2016.
4:22:48 PM
COMMISSIONER BALASH discussed royalties and production taxes in
Article 8 [slide 13]. He indicated that the combination of
those two interests represents the "state's gas share." He
noted that the royalty share for Prudhoe Bay is generally set at
12.5 percent while a few leases have sliding scale royalty and
net profits share royalty provisions. Point Thomson royalty has
generally been a little higher. Thus, by blending the rates
together the state royalty interest is slightly higher than 13
percent overall. Under the Alaska LNG project, the state is
asking for a gross determination for production taxes, which in
combination would total somewhere between 20-25 percent. In
order to facilitate this, the state must manage the gas, take
responsibility for the gas, and ultimately market the gas.
Under state leases, the state can take its gas royalty in kind
(RIK) or in value (RIV). He said he was surprised to learn that
the statutes direct the state to take its royalty in kind unless
the state determines it is in the best interests of the state
to. Thus, the starting point will be to use RIK.
4:24:49 PM
COMMISSIONER BALASH pointed out that in 2013, Black & Veatch
identified potential risks and opportunities related to RIK.
Many of the state's risks would be ameliorated or mitigated if
it has an interest in the infrastructure, but B&V identified the
state marketing its gas as the biggest risk due to the state's
inexperience in marketing liquefied natural gas (LNG). The
state would need to establish an organization to market its gas,
but would likely suffer a discount in doing so. The producer
parties have committed per the HOA [8.3.3], which read, in part,
as follows: "... negotiate separately with the State in good
faith to enter into an agreement with the state regarding the
purchase or other disposition of a portion of the LNG ...." He
offered his belief that a significant number of anti-trust
lawyers crafted the language since this area of law as a
delicate area of law in the U.S. and in Asia. He cautioned that
the state must be very careful not to collude or "trip over" the
complex laws. This means that the state should be able to
leverage the marketing expertise and the specific terms that the
producer parties use to sell Alaska's LNG. He said the
department believes this approach will protect the state in
terms of the RIK investment identified by the 2013 Black and
Veatch study.
4:27:42 PM
REPRESENTATIVE HERRON asked whether the "the delicate balance"
means the state is saying it won't be short changed, that the
rate will be nearly identical to the partners' rates.
COMMISSIONER BALASH answered that he is correct that this is the
intent going forward. He said the state held initial
conversations with each of the parties to investigate this. As
part of the Pre-FEED process, the state will develop more
specific agreements the legislature will review in 2015.
4:28:31 PM
REPRESENTATIVE HERRON asked whether the state can negotiate
separately with the three individual parties so it has the
unique position of having access to specific knowledge.
COMMISSIONER BALASH answered that he will spend a significant
amount of time with anti-trust counsel to ensure that the
department doesn't expose the state to anti-trust jeopardy. He
agreed that the state will be able to identify opportunities
with each of the three companies. Additionally, the state will
also have opportunities to independently market its LNG.
Certainly, the state may find good reason to independently
market some volume of its LNG product, he said.
4:29:35 PM
REPRESENTATIVE HERRON asked whether the opportunity is unique to
the state or if it can negotiate with another partner
independent of the state.
COMMISSIONER BALASH responded that the state needed this
specific provision in terms of the RIK approach. He said that
how parties market respective volumes of LNG is left to each of
them. He related he is familiar with joint marketing, which is
where all project sponsors come together and form a new
marketing company to market the total output. Those
organizations have to be "hived off" or separated from the
parent entity. That type of approach is not universally used,
but it has been used by these companies in other projects.
4:30:57 PM
REPRESENTATIVE SADDLER asked for clarification of the
disposition of a portion of the LNG under Article 8.3.3.
COMMISSIONER BALASH explained an outright purchase would consist
of purchase at the outlet of the LNG plant. Another disposition
would be "anything else." For example, the state might sign on
as a co-party in an individual sale agreement with one of the
entities. In essence, the state would be marketing side by side
with the other parties. He related that from conversations with
each of the three companies, that the department heard three
different approaches to solve the marketing issue. He stated
that directionally, the solutions were similar but the
differences were in the details. He offered his belief that the
legislature has much to look forward to in learning about
portfolios of contracts, the management of portfolios, and the
differences each company takes on marketing.
4:32:30 PM
CHAIR OLSON asked whether the state will market gas on a BTU
basis or a volume basis.
COMMISSIONER BALASH answered that every SPA is a unique deal.
Thus the broad metric for the sale of LNG is measured in tons
per annum.
CHAIR OLSON interjected a question on how the LNG would be
taxed.
COMMISSIONER BALASH answered that the contract itself will
likely contain heat contract requirements so the gas that is
produced at North Slope and converted to LNG will have range of
heat that will help market the LNG. The state will take a gross
volume approach for tax purposes so the state will get a gross
volume rather than something that will vary volumetrically
depending on the heat.
CHAIR OLSON asked whether it will be similar to the way it has
been handled out of Nikiski to Japan for the past 42 years.
COMMISSIONER BALASH answered that he is not familiar with
production taxing aspects, although he is more familiar with the
royalty aspects. He said the state uses a simple method and
takes a percentage of the calculation on the Japan Crude
Cocktail price (JCC).
4:34:20 PM
REPRESENTATIVE SADDLER understood the tax will be based on gross
volume and the contracts will be based on heat value or BTU
value. He asked whether the balancing agreement would be used
in instances in which the tax is based on certain BTU value, but
over time the BTU varies from the contract.
COMMISSIONER BALASH answered that this could potentially be an
aspect of a balancing agreement; however, the state seeks to
ultimately solve the volume issue through the balancing
agreements by using a series of debits and credits to ensure
that "everyone gets their due." Thus, no one over produces or
under produces from their respective share, he said. He
acknowledged that the balancing agreements can have a variety of
mechanisms, features, and commercial solutions to deal with an
imbalance. He offered his belief that the state will want to
pay close attention to the offtake agreement specifying the heat
content of the gas.
4:36:11 PM
REPRESENTATIVE JOSEPHSON said he thinks of RIK as being a tank
of natural gas in the sky, in terms of the state's accounting.
He related "scuttlebutt" exists regarding the constitutional
prohibition provision that does not allow legislatures to impact
future legislatures from changing the gross production tax rate.
He understood the constitutional provision would not apply if
the state take uses RIK, but it would apply if the state were to
take its royalty as cash. He asked why RIK would be different.
He expressed concern that if this legislature [passed HB 277] it
might inadvertently "tie the hands" of subsequent legislatures.
COMMISSIONER BALASH replied that he is touching on a point that
is critical to the success of this project, which is how any
parties - including DOR and the DNR in their fiduciary roles -
can enter into the types of contracts necessary for an Alaska
LNG project to go forward. However, the state has as much an
interest in the durability in the terms as the other parties,
since the state will take out long-term financing, long-term
capacity, and long-term sales of LNG. It will also want to
count on things occurring as expected. He emphasized the
importance of being able to survive the constitutional questions
in a democratic form of government. He acknowledged that RIK is
not the magic key, but the crossover between multiple agreements
will provide an avenue of opportunities for the parties to solve
the durability problem and challenge. He referred to the tank
described earlier, and visualized it being filled and delivered
5 times a day for 25 years. It's important that happens so the
state can meet its obligations to the buyers. He surmised that
if a future legislature were to change taxes the agreements will
need to contemplate this in advance, to predict how the
agreements would change. In order to get to "yes" on the
initial agreements, everyone will need to be comfortable with
how the specific mechanisms will work.
4:40:44 PM
COMMISSIONER BALASH related a scenario in which the state's
[royalty and production] is 20 percent, but 15 years from now
the rates change from 20 to 30 percent. In that scenario, the
state would have 50 percent more volume on hand and
consequently, the state would need to find capacity for its gas.
However, the parties whose taxes are being raised have the
capacity so it is likely the parties would charge the state the
same as the increase. He concluded that how this all fits
together will be explored over the next two years.
4:41:33 PM
REPRESENTATIVE SADDLER asked whether he was saying there is a
constitutional obligation to preserve the right of future
legislatures to change taxes. He understood the commissioner
envisioned a network of agreements that would dampen out the
effect of any future changes to end up "not nullifying" but
minimizing it to the point that all the parties will ultimately
still be in agreement.
COMMISSIONER BALASH responded that rather than describe it as
"nullifying" he would describe it as understanding consequences.
He said the state incurs consequences when it changes its taxes
and in this instance the consequences will be specific and may
affect other agreements the state may care about. He indicated
that exactly how many places "we'll have to work with" in the
overall complex network of contracts is something the state will
be exploring.
4:43:01 PM
ANGELA RODELL, Commissioner, Department of Revenue (DOR),
explained the contracts will be specific and targeted contracts
that are in place. These provisions don't apply to all the oil
and gas production across the entire state and there are
opportunities for the state and future legislatures to take
various actions, just as the legislature does now, and to
recognize any distinction between the oil and gas production
occurring in different areas. For example, this is how it
happens with respect to Cook Inlet and the North Slope
production. She reminded members that while these contracts
have consequences, the legislature can examine a variety of tax
plans in the future as they see fit.
4:43:56 PM
COMMISSIONER BALASH referred to Articles 9 and 10 [slide 14].
He indicated some other project enabling terms are found in
Articles 9 and 10. The department believes that a payment in
lieu of tax (PILT) system will serve the state and
municipalities very well. The department has committed to work
in consultation with local governments to develop a system of
PILT that will go into effect on operation of the pipeline.
Preceding that, there will be impact payments provided to the
affected communities as well. He said that is an undertaking
that will begin if this enabling legislation passes. The
department did not envision the need to engage with communities
until the project is viable.
4:45:37 PM
REPRESENTATIVE SADDLER understood the statewide municipal or
local property taxes are paid in cash. He asked for
clarification on PILT.
COMMISSIONER RODELL answered that rather than having a mill rate
that resets every year based on valuation changes and potential
debates on valuations, the parties would have an agreement on
the payment of property tax not based on a mil rate calculated
against a valuation, but as a flat payment. The parties will
come to an agreement as to how the payment will be calculated
and what is taken into account. It would identify what type of
impact payments would occur prior to improvements to valuation
and property, but there is tremendous impact on infrastructure
and communities due to the work that has happened. It's a
negotiation, she said.
4:47:05 PM
REPRESENTATIVE SADDLER asked whether the department currently
has this power or if it will be granted by the enabling
legislation.
COMMISSIONER RODELL answered neither. The department doesn't
currently have the power to negotiate that and doesn't
contemplate it in the enabling legislation. Rather, the
department would like to work with municipalities and other
local governments and come back with a comprehensive property
tax proposal in 2015.
4:47:47 PM
CHAIR OLSON asked whether the initial structure will be set for
the life of the project.
COMMISSIONER RODELL answered that she was unsure since the
department will want to take into account the various stages of
the project, including but not limited to what the impacts are
when revenues begin flowing, when the valuations will take
effect, and when people can expect to receive property taxes off
that project. The project will generate revenue and become a
source of payment for the property taxes. At this point the
department doesn't know the answers, but it wants to develop a
framework. She envisioned the administration coming to the
legislature every single year until gas flows, adjusting and
amending the contract structure.
4:48:58 PM
COMMISSIONER BALASH, in response to a question on whether the
Trans-Alaska Pipeline System is balanced every five to 10 years
by the Federal Energy Regulatory Commission (FERC) and the
Regulatory Commission of Alaska (RCA), suggested it might refer
to the tariff setting.
CHAIR OLSON offered his belief that it is based the agreement on
the valuation of the pipeline and the recalculation of the state
taxes.
COMMISSIONER BALASH answered that some of those valuation
determinations factor into the full and fair value that is
assessed but he was unsure how those interrelate.
COMMISSIONER RODELL said she was unsure but will look into it.
COMMISSIONER BALASH, in response to a question, recalled the
rate-making trial that the Federal Energy Regulatory Commission
and Regulatory Commission of Alaska (RCA) jointly conducted as
lasting several months.
4:50:51 PM
COMMISSIONER BALASH, in response to a comment, agreed since
significant money is involved disputes arise. He remarked that
the state ships its oil on the producer's pipeline. He offered
his belief that one benefit of the Alaska LNG project is that
the state will be shipping gas on its own share of the
infrastructure. Previous types of disputes, protracted trials,
and adjudications will hopefully be a thing of the past.
CHAIR OLSON remarked that he'd be really impressed if that
happens. He said, "In fact, quite frankly I'm impressed that
we've gone as far as we have on this one...."
REPRESENTATIVE HERRON remarked that literally this means "real"
money for local projects and the product that the state will
sell.
4:52:05 PM
COMMISSIONER BALASH discussed the key provisions in Articles 9
and 10 [slide 14]. He touched on the need for PILTS, that the
need for the project enabling contracts which will allow each of
the parties to take the kinds of investments necessary for this
to come together and move forward. An expression of general
support from the state will be needed in this agreement in order
to develop the necessary infrastructure and permitting, as well
as the need for a healthy long-term oil business in Alaska to
support the proposed Alaska LNG project. With respect to the
overall economics, the economics of gas relies on oil to carry
the costs of operating Prudhoe Bay and Point Thomson so the oil
business must be healthy or the gas revenue will need to support
the costs and the state could "start to get into trouble."
4:53:59 PM
COMMISSIONER BALASH turned to the topic of Alaska hire and
content [slide 15.] He said the administration has identified
some important things for the men and women who will be working
on this project. He said that Article 11 [page 16 of the HOA]
provides guidance on the hiring of Alaska residents, contracting
with Alaska businesses, and participation of the Department of
Labor & Workforce Development in providing training for
occupations needed to support the project, and a commitment by
the project sponsors to negotiate in good faith project labor
agreements for the project. He pointed out key points,
including the estimated total project cost at $45-65 billion.
He stated that at peak construction the state will enjoy 15,000
jobs in Alaska. Once the project is in operation it will result
in 1,000 long term jobs, noting that the Kenai community will
benefit from many jobs due to the operation of the LNG plant and
associated marine terminal and vessels.
4:55:58 PM
REPRESENTATIVE JOSEPHSON commented on the bullet commit to
negotiate good faith project agreements. He related his
understanding that the language "commit to negotiate in good
faith" is not strong enough. He recalled that an amendment made
it into AGIA, signed by members of both parties in the House.
He offered his belief that this language is not in HB 277. He
asked whether this is correct, and if so, if there is something
that can be done to enhance the language.
COMMISSIONER BALASH thought he might have a couple of pieces of
the history wrong and offered to meet to discuss this more fully
at a later time.
COMMISSIONER BALASH said that the effort in the original AGIA
statute and HOA is to try to recognize project labor agreements
could be helpful tools to avoid work stoppages. However, if the
state obligated the project sponsors to sign a PLA, there
wouldn't be much room to negotiate. In other words, they would
have to agree to whatever terms were laid out. Thus, the
concept of negotiating in good faith is to make sure the
opportunity happens and is fully explored by the relevant
parties. He cautioned not to "put our thumbs on the scale" to
determine the outcome of the negotiations. He said that the
state is trying to keep things on an even fashion. He offered
his belief that when the legislature discusses the bill, many
provision are not contained in the bill since the enabling
legislation creates a general law. Therefore, the state hopes
to avoid putting significant detail in the underlying statutes.
The HOA is a guidance document the parties can rely on to
negotiate, which is available to the legislature to use as a
measuring stick.
5:00:34 PM
REPRESENTATIVE JOSEPHSON commented. He said, "In order to make
the biggest tent you can make, there are going to be colleagues
who even at this early stage are going to be looking for that.
Thanks."
CHAIR OLSON remarked that he recalled the amendment being
discussed but he did not recall "21 signatures" on that
particular amendment.
5:01:50 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
5:01 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| TC MOU and AKLNG HOA in Context 2-19-2014.pdf |
HL&C 2/19/2014 3:15:00 PM |
LNG Project - MOU and HOA Presentation 02-19-2014 to HL&C |