Legislature(2013 - 2014)BARNES 124
02/26/2014 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: "gasline Issues/options" by Janak Mayer & Nikos Tsafos, Consultants, Enalytica | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
February 26, 2014
3:23 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Lora Reinbold, Vice Chair
Representative Mike Chenault
Representative Bob Herron
Representative Andy Josephson
MEMBERS ABSENT
Representative Charisse Millett
Representative Dan Saddler
Representative Craig Johnson
COMMITTEE CALENDAR
PRESENTATION: "GASLINE ISSUES/OPTIONS" BY JANAK MAYER & NIKOS
TSAFOS~ CONSULTANTS~ ENALYTICA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JANAK MAYER, Partner
Enalytica
Legislative Consultant on Gas Commercialization
Washington, D.C.
POSITION STATEMENT: As consultant to the Alaska State
Legislature, provided a PowerPoint presentation regarding
gasline issues and options.
NIKOS TSAFOS, Partner
Enalytica
Legislative Consultant on Gas Commercialization
Washington, D.C.
POSITION STATEMENT: As consultant to the Alaska State
Legislature, provided a PowerPoint presentation regarding
gasline issues and options.
ACTION NARRATIVE
3:23:27 PM
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:23 p.m. Representatives
Josephson, Reinbold, Chenault, Herron and Olson were present at
the call to order.
^ Presentation: "Gasline Issues/Options" by Janak Mayer & Nikos
Tsafos, Consultants, Enalytica
Presentation: "Gasline Issues/Options" by Janak Mayer & Nikos
Tsafos, Consultants, Enalytica
3:23:52 PM
CHAIR OLSON announced that the only order of business would be a
Presentation: "Gasline Issues/Options" by Janak Mayer & Nikos
Tsafos, Consultants, Enalytica.
3:24:28 PM
JANAK MAYER, Partner, Enalytica, Legislative Consultant on Gas
Commercialization, stated that he has spent the last six years
in Washington D.C. working for PFC Energy. He has co-founded
his own firm with Nikos Tsafos, who will be presenting with him
today. He briefly discussed his background, noting he initially
worked on and led the analytic team at PFC Energy, essentially
conducting economic and international modeling for upstream oil
and gas. This included building models of assets, portfolios,
international companies, independent drilling firms, and private
equity firms. Additionally, he spent considerable time
analyzing oil and gas fiscal terms on project economics so
government can understand the impacts of rule changes on private
sector behavior.
3:25:52 PM
NIKOS TSAFOS, Partner, Enalytica, Legislative Consultant on Gas
Commercialization, said he has worked for the past seven and a
half years as a consultant for PFC Energy. One of his last
responsibilities at PFC Energy was to run the global gas
consulting practice for the firm. Thus he has worked with oil
and gas companies, governments and financial institutions
worldwide on all manner of questions related to natural gas.
Principally his experience as a consultant has been to assist
companies in selling gas, buying gas, and understanding how gas
markets are changing and how those changes may impact their
strategies and plans.
3:26:38 PM
MR. TSAFOS said he would focus his discussion on four things.
First, he'd like to discuss competitiveness and where Alaska
fits into the world of global gas. Second, he'll discuss the
project pathway in terms of the state's current position, where
Alaska is headed, items that will be settled in the next couple
of months, and what issues will be settled after that. Next,
he'll focus on two of the biggest themes legislators are
grappling with currently: alignment and the Memorandum of
Understanding (MOU). In terms of alignment, he offered to
define it, explain how Enalytica thinks about it, and identify
why it is important to the state. Finally, he will discuss the
state's midstream options, in particular, how to structure the
midstream options, and the vision of the MOU and the role
TransCanada Alaska Development Inc. (TransCanada) will have with
respect to MOU.
MR. TSAFOS highlighted competitiveness and pointed out a map of
the world [slide 4]. First, if a person was in Beijing and
wanted to "keep the lights on" in Tokyo, this map represents the
choices for obtaining natural gas. Although Alaska appears to
be one of many choices, by considering the options in more
detail it becomes clear that many challenges exist for each of
the other options. For example, in Western Canada, British
Columbia (BC) has had difficulty in setting a tax system that
works for government and oil companies. Even though BC was at
the forefront three or four years ago, many of the LNG projects
have slowed considerably and partners have left due to
disappointments. He discovered this morning that Apache
Corporation would like to sell its stake in the Kitimat LNG
project. Again, BC looked good initially but things did not
play out.
MR. TSAFOS emphasized that the map is useful to understand
Alaska's place in the world, but it also illustrates the places
that people are most excited about. The current sources of gas
over the next ten years include Western Canada, the Lower 48,
and East Africa. It's easy to become dismayed since Alaska is
one of many and the proposed Alaska LNG is a fairly expensive
project so it raises questions as to whether Alaska can compete
or if Alaska will even "have a shot."
3:30:33 PM
MR. TSAFOS said the best way to respond is show what the map
looked like seven or eight years ago [slide 5]. Again, Alaska's
project is fairly expensive, but he pointed out that it isn't
the cheapest supply that always gets built. For example, in the
late 2000s, Venezuela, Trinidad, Nigeria, EQ Guinea, Qatar,
North Africa, Algeria, Libya, and Egypt were far cheaper than
the Australian project that actually got built. It's important
to also consider other factors, such as government climate and
ability to get gas to market. Ultimately, what matters is
whether the gas can be developed and the negotiated price
satisfies the buyer and the owner. One additional benefit
Alaska has is its project completion window in the early to mid-
2020s that no one else is targeting. Most of the deals are
looking to supply gas in 2017-19. Thus, most of the competition
currently happening is in a window that is too soon for Alaska
to access. Therefore, even though lots of options exist, it
doesn't mean that Alaska doesn't have a place at the table.
3:32:40 PM
MR. TSAFOS discussed project pathway [slide 6]. He described
how LNG projects typically evolve in response to the general
concern about the specific decisions the legislature and
administration must make. The legislature has concerns on
whether these decisions will be irreversible for the next 30
years. In other words, this discussion identifies what
decisions need to be made now, what gets "bolted down," and what
can change later.
3:33:22 PM
MR. TSAFOS turned to discuss the case study of an Australian
project, Queensland Curtis LNG (QCLNG) and how the project
evolved over a period of time [slide 6]. Specifically, the
slide shows five variables: the size of the project, the
upstream, the liquefaction, the off-take or buyers, and the
external financing for the LNG project at three points in time.
The three time periods include July 2008, during the Front End
Engineering Design (FEED) study, during the final investment
decision (FID) phase, and in January 2014.
MR. TSAFOS explained that first, the QC LNG project is not yet
on line. Second, Alaska would fall to the left of this slide.
Subject to enabling legislation, Alaska's partners would like to
go to pre-FEED, and potentially sanction FEED in 12-18 months,
which would put Alaska in the first column.
MR. TSAFOS, turning to the QC LNG, focused on the QC LNG
project. When the FEED started the partners thought the project
might encompass one 3-4 million metric tons per annum (mmtpa)
train. The upstream was owned by British Gas Group (BG) and
Queensland Gas Company (QGC), which BG part owned. The
liquefaction project was a 70/30 percent-owned project,
respectively, with all the gas sold by BG. When the project was
sanctioned in October 2010, the project had more than doubled in
size. BG became the sole supplier, with the exception of China
National Offshore Oil Corporation (CNOOC) and Tokyo Gas which
took some share of the upstream. The liquefaction ownership
changed with one train 90/10 - BG/Tokyo - and the second train
was built by BG and Tokyo gas. The offtake changed with CNOOC
and Tokyo Gas buying gas, with the balance going to BG. Fast
forward to today. While the project size is the same, the
upstream has changed with CNOOC having a bigger share. The
ownership of the liquefaction has changed, with CNOOC's share
increasing from 10 to 50 percent; plus CNOOC bought an option
for a potential third train, if one is built. Currently, the
offtake is more than the capacity of the project since BG plans
to sell its gas from other parts of the world. The project
obtained external financing from the Japan Bank of International
Cooperative (JBIC) and the U.S. Export and Import Bank.
MR. TSAFOS summarized that the aforementioned slide demonstrates
that it is fairly natural for LNG projects to evolve
considerably in terms of size, resources, ownership of
liquefaction, target markets, and financing. He reminded
members that thee QC LNG project has not yet begun. Thus, this
project provides Alaska with a useful perspective to keep in
mind since many decisions for the Alaska LNG project could
evolve. In fact, he ventured he would be shocked if the
ownership structure is the same when the first cargo leaves 8-10
years from now. He said, "It doesn't usually happen that way.
Things change."
3:37:58 PM
MR. TSAFOS, in response to a question, suggested that without
commenting on the intention of the "big three," some new players
would likely buy some equity in the Alaska LNG project, and that
some buyers will be quite interested in acquiring some portions
of the liquefaction facility. Further, the state may initially
start with a 25 percent share, but as the project gains
momentum, its share may later drop to 20 or 15 percent.
Additionally, the state may decide on different shares of the
value chain, which typically happens when new players come in.
For example, someone may buy a 5 percent share of the project or
a party may buy proportionately from the ownership. He avoided
speculating on the three producers involved, but he anticipated
that some buyers will want to buy some of the state's equity.
He recalled presenting before the Legislative Budget & Audit
Committee information which showed that typically in LNG
projects, half of the LNG buyers own a share of the facility.
For example, when CNOOC came into the QC LNG project, it bought
a 10 percent share in the project at the time for 3.6 mmtpa. At
the time the project increased from 3.6 to 8.6 mmtpa, CNOOC also
increased its share from 10 to 50 percent. Tokyo Gas did the
same thing when it obtained 1.2 mmtpa and also obtained some
upstream and midstream, too. He speculated that this will
likely happen in Alaska.
3:40:10 PM
REPRESENTATIVE JOSEPHSON recalled discussions on revenue
projections in a previous hearing [House Resources Standing
Committee] that if the state held to the MOU, the state could
receive $3.4 billion in revenue if the state held a full equity
share. He acknowledged that the QC LNG changes make him feel
uneasy, although it speaks volumes about the dynamics and how
things can change on a short time table; however, he would like
to know how the state can remain vigilant and retain sufficient
earnings, especially since the state's decisions also impact
local communities and their budgets. For instance, the project
seems much less interesting if the state's share is a billion in
revenue. Again, he asked whether the consultant can teach
Alaska what it takes to be a vigilant partner. He recalled some
legislators have expressed concern that if the state doesn't
obtain enough revenue early on that it might ultimately result
in a need to change the state's taxes and royalty share.
MR. TSAFOS agreed it makes sense that if the state ends up with
a lower equity share that the share of the revenue would change.
The question arises as to whether the state will feel
comfortable with the necessary capital outlay in 2017-23 for the
proposed Alaska LNG project before the revenue will come in. Of
course, everyone likes the projected $3.4 billion in revenue,
noting that Enalytica has its own figures, which are in the
ballpark. Again, the question is whether the state is
comfortable with the upfront spending as part owner in order to
generate the revenue later on. Certainly, a number of ways
exist to balance this. For example, the state could adjust its
equity share and obtain upfront cash payment. Another way would
be to leverage the project and use debt at the state level and
at the project level. Furthermore, the question is whether the
legislature and the administration will be comfortable with the
amount of upfront investment necessary to achieve the state's
goal to maximize its annual revenue.
3:44:22 PM
MR. MAYER stated that during this legislative session and
through subsequent negotiations of contractual agreements with
the producers, the state's share will be determined and is
estimated between 20-25 percent. Once that share is determined,
the point of slide 6 is that once "you have that share you have
that share." As the state gets closer and identifies the amount
of the capital commitment, the state's capacity to carry debt,
and how much project financing is possible, that is the point at
which the state can determine whether it is capable of carrying
a 25 percent share or if its share should be reduced. He noted
if other buyers express an interest in "buying in" that the
state doesn't have any obligation to provide them that access.
He predicted that if the state is clear that it wants to
maintain a particular share it will be capable of doing so.
3:45:57 PM
MR. TSAFOS focused next on the Alaska LNG project [slide 7].
Currently, the state is at the Pre-FEED stage, which basically
consists of a study to determine whether the project makes sense
and if so, it will move on to the FEED phase. On the marketing
side, some anxiety exists in terms of whether long-term
commitments and contracts, the Memorandum of Understanding (MOU)
and Heads of Agreement (HOA) will be signed. The state may
approach buyers and sign some preliminary agreements, but it is
unlikely the state will finalize anything over the next 18
months. If the state has 20-25 percent equity it is more likely
the state will focus on marketing options and terms. Further,
in terms of financing, the state will be focused on initial
talks, which have already begun with the state considering its
debt capacity. In terms of project ownership, the state will
focus on defining the initial structure. The administration has
put out the Pre-FEED figures of about $400-$500 million, with
the state's share ranging from 20-25 percent, depending on what
happens with TransCanada Alaska Development Inc. (TransCanada).
The marketing will be zeroed in on during FEED, some of the
deals will be finalized, and the sales and purchase agreements
will provide definitive contracts. During the financing phase,
the state may sign loans and the state may refine its initial
ownership structure, and at that point the investment becomes
more serious and reaches $1.5 to $2 billion.
MR. TSAFOS said that even at that point when the state reaches
its final investment decision, the state has still only spent
$2-2.5 billion, which certainly is significant, but represents a
fraction of the "big number" [$45-$65 billion]. One of the
questions has been whether this [Alaska LNG project] is a good
deal for Alaska. He answered, "Well, we don't know yet. In
fact, you don't have to make a decision about whether you want
to commit the big money until you get to that 2017-2018 stage."
He said, "Right now you just have too many unknowns and the
whole goal of the next two or three years is to narrow down the
unknowns and come up with a plan that is actually a lot more
tangible." Currently, the state doesn't have ownership, but
just has some general ideas about how the project might play
out. During the construction phase, the state can still do more
marketing, obtain additional financing, and bring in more
partners. That represents the point at which the capital
outlays become more serious, the project is on-line and most of
the obligations are met from the cash flow of the project. At
that point the project would be earning money and it can pay its
operational and maintenance expenses, plus any debt the state
may have acquired in the process.
3:49:51 PM
MR. TSAFOS said the effect of slide 7 is to show that the Alaska
LNG project is at the starting point, that probably less than
one percent of the paperwork has been signed; therefore, the
project is at a very preliminary stage.
MR. TSAFOS discussed the state's options for the project pathway
[slide 8]. This slide outlined four options: First, is the
status quo option; and second, under the HOA using royalty in
kind (RIK) with 25 percent equity in the gas treatment plant and
pipeline ("GTP & Pipe"), and 25 percent equity in the LNG.
Beginning with the RIV and the status quo, there would be some
tax implications but no capital obligations without any
ownership in the upstream, the "GTP & Pipe" or LNG. Certainly,
tariffs matter purely from an evaluation perspective since the
state must find a way to tax gas at the North Slope. However,
the HOA does several things. First, it potentially switches
from royalty in value (RIV) to royalty in kind, with the
upstream remaining at zero and the state receiving up to 25
percent from the "GTP & Pipe", and the LNG. Under this scenario
the state would be responsible for some capital commitments for
its share of "GTP & Pipe", and the LNG, plus the state might
take on some debt. The state would be responsible for the
principal and interest on the debt. However, the tariff
suddenly becomes only notional since the state owns 25 percent
of the "GTP & Pipe" and the LNG. In that instance, the state
could argue with itself, but the tariff is non-consequential
since everything would happen internally. Thus, what the
producers do and how they calculate tariffs would be of no
interest to the state. He offered to discuss the third and
fourth options under the MOU later. He indicated the next four
or five slides would cover alignment.
3:52:48 PM
MR. TSAFOS turned to alignment [slide 9]. He acknowledged that
gas analysts can use confusing units and consistently switch
units so it is difficult to understand the language. However,
the easiest way to consider alignment is by discussing oil,
since the legislature and the state are familiar with oil
issues. On slide 9, Enalytica copied the DOR's revenue sources
to illustrate LNG in oil terms. Starting with an oil price in
FY 15 of $105/barrel (bbl), removing the midstream costs for
transportation, TAPS tariff, and other cost, which total
approximately $10/bbl, and deducting lease expenditures of
approximately $46/bbl, the end result is a $49/bbl at the
wellhead. This provides a baseline and the next two slides
consider how that will differ with gas.
3:54:21 PM
MR. TSAFOS related that the table remains the same. Since gas
price is less transparent than oil and pricing varies by
contract and nation, which ranges from $12-$17 for the same
project, the gas price will likely be linked to oil since
pricing in Asia is linked to oil [slide 10]. The Japan Crude
Cocktail (JCC) or the Japan customs cleared price represents
essentially an average of the amount Japan pays for its oil. He
pointed out that JCC has essentially been the same as the Alaska
North Slope (ANS) price. Thus, he suggested members think about
LNG linked to ANS. Generally, gas fetches less on the market
than oil on a thermal equivalency and historically, if the price
of gas goes higher than oil customers stop using gas and turn to
oil so oil has an upper limit on the price of gas [slide 11].
The second line on the slide relates to transportation, which is
higher since gas is more expensive to transport than oil and gas
will not be regulated by Federal Energy Regulatory Commission
(FERC). He related that FERC will regulate the environmental
and the permitting, but will not set the rate. The tariff will
be highly dependent on the capital structure, or the return on
equity, or how much debt-to-equity is used. Basically, this
means the tariff is highly subjective and therefore easy to
argue about.
3:57:13 PM
MR. TSAFOS turned to slide 12, which overlays the LNG. The
structure remains the same, but it is no longer about ANS or
oil, but represents gas. The first line on this slide is $81
and represents the idea of thermal equivalency. Oil may be at
$100/bbl, but due to the thermal equivalency gas earns less so
it is discounted at about 20 percent. He offered his belief
that this wouldn't be unreasonable in terms of what one might
expect if signing a contract today. The next line, the
midstream, is $66 per barrel of oil equivalent (boe). He said
$10-11 of midstream per thousand cubic feet (mcf) means that the
gas comes out on a boe equivalent basis. Thus, gas is orders of
magnitude more expensive to transport, he said. The upstream
isn't necessarily high, in part, since oil production is already
happening on the North Slope; however, after subtracting $66 for
midstream, $6 for upstream, one ends up with basically a $9/boe
on the North Slope. Therefore, the state can argue whether to
tax the $9/boe at 35 percent, 50 percent, or 60 percent, but
multiplying a small number by those higher percentages still
represents a small number. This illustrates the point of this
slide, which is because the midstream is so important and so
expensive, the value at the wellhead is orders of magnitude
smaller and lower than on the oil side of the equation.
3:59:33 PM
MR. TSAFOS turned to slide 13, entitled "INDICATIVE LNG CHAIN:
$89/bbl ANS," noting the only change is dropping the price of
ANS to $89/bbl and the price at the North Slope then equates to
zero value. Therefore, 35 percent multiplied by zero equals
zero, he concluded.
MR. TSAFOS turned to slide 14, entitled "INDICATIVE: LNG CHAIN:
HIGHER COSTS," at 12.2 percent in costs and/or tariffs with
$100/bbl oil still wipes out any production tax value so the
North Slope value is still zero, he said.
MR. TSAFOS turned to slide 15, entitled "IMPLICATIONS FOR STATE
OF ALASKA," to consider the state's position. Certain things
become apparent. First, it's important to obtain a fair market
price for the gas, in fact, as close as possible to oil
equivalency. So much of the value is in the midstream, with the
upstream somewhat secondary to the midstream. The wellhead is
insufficient to drive the state's value.
4:01:10 PM
MR. TSAFOS recalled Representative Josephson previously asking
about the $3.4 billion figure. The bottom right figure on slide
15 lists $300 million in revenue. If the [legislature/state] is
considering taxing that barrel at the end, it is a much lower
value. The reason for this is that similar to the oil
structure, the $66/bbl represents the producer's equity - and
the state has no equity at midstream - in a way, if the state
doesn't own a piece of the upstream, but mostly the midstream,
is that anything that changes on the top line, from $81 to $72,
the value comes from the state since it went from $9 to zero.
The idea of alignment or equity all comes back to this core
concept: There isn't enough value necessarily at the upstream
at these prices. Obviously if oil prices were boosted to $200,
it would represent a huge value on the North Slope. However, he
asked members to think about the numerous arguments the state
has had on the TAPS's tariff that in 2015 is $6/boe and to
consider what the argument [would be if the tariff] was $66/boe.
He emphasized this is where equity comes in and instead of the
state being at the bottom of the table and getting what is left
over after costs are subtracted, the state gets to be part of
these figures. Consequently, the state will obtain a share of
the $66/boe. Therefore, the state would not be a passive
recipient at the end, but can also be a participant throughout
the chain. He concluded that this is how Enalytica thinks of
project alignment as a means to resolve at the conceptual level.
4:04:03 PM
MR. MAYER recapped that Mr. Tsafos has laid out the basic idea
of the world as it's envisioned by the HOA. He reviewed the
midstream options under the HOA [slide 16]. In this scenario,
the state would have RIK, with 25 percent interest in the "GTP &
Pipe" and LNG, and a proportionate obligation to meet 25 percent
of the capital expenditure (CAPEX & OPEX). As Mr. Tsafos says,
in that world, the state has an integrated project. The state
has the gas, owns everything the gas goes through, sells it at
the other end, and the whole question of the tariff becomes
relevant only to instate sales of gas. From the perspective of
where the state derives its value, ultimately the state has an
investment in the infrastructure that takes molecules of gas
from the North Slope and sells them as LNG into Asia. The state
has costs and revenues from the LNG, but the whole question of
the tariff doesn't really matter since it represents the value
allocation across an entire project that the state owns.
MR. MAYER said the MOU takes the basic vision and considers it
differently in terms of the "GTP & Pipe". It essentially
recognizes that the state may not have the full financial
resources to carry 25 percent equity across the entire chain.
The MOU considers that the state would want to enter into an
agreement with TransCanada Alaska Development Inc. (TransCanada)
to own all or part of the "GTP & Pipe". TransCanada would take
the state's full 25 percent share, the producers would still own
75 percent, and leave the state with the full share of the
liquefaction project. The MOU provides an option to repay
TransCanada for costs up to 40 percent. The MOU recognizes that
this may be an option never exercised in which case the state
would not have any ownership of the upstream or pipeline, but
would still have 25 percent of the liquefaction facility or the
state might exercise the 40 percent option.
4:08:28 PM
REPRESENTATIVE REINBOLD asked for further clarification on the
repayment.
MR. MAYER responded that if the state moves forward with the
MOU, TransCanada would cover the studies but the state would be
required to repay the costs of the Pre-FEED and FEED engineering
studies.
4:09:09 PM
REPRESENTATIVE REINBOLD asked whether the state would already
have paid "a chunk" of the costs.
MR. MAYER answered that the state would already have paid for
the engineering and design work on a pipeline to the Lower 48 so
that work remains intellectual property. Again, that work is
not lost, although some is more relevant to this project than
others. However, he pointed out that the Alaska LNG project is
an enormous $45-65 billion project with several years of
engineering work necessary prior to the state arriving at a
point in which it can seriously evaluate the project and decide
if the investment is a good one or not. This is not like the
Alaska Gasline Inducement Act (AGIA). Instead, the state would
be a commercial participant just as the producers and
TransCanada would be, with everyone bearing its share and the
risks since the project may ultimately not be viable. If the
MOU path moves forward then TransCanada would essentially pay
the hundreds of millions in costs for the "GTP & Pipe". It
would be holding the state's share of gas "GTP & Pipe". If at
some point the state decides to exercise its option to take 40
percent share, it would reimburse TransCanada 40 percent of the
cost plus interest at an agreed upon rate of 7.1 percent
interest.
4:11:59 PM
MR. MAYER said that possibly the state will not have any direct
equity in the GTP and the pipeline, but it would have 25 percent
in the liquefaction. Or perhaps the state might end up with 10
percent in the "GTP & Pipe". The state would hold this
indirectly by being shareholder of the vehicle that TransCanada
used to own the pipeline and the full 25 percent the state would
retain for itself in the liquefaction project. He framed the
question of whether this is in the state's interest by thinking
about a few structures, although the potential structures could
be numerous.
MR. MAYER suggested midstream options [slide 17]. Thus far,
midstream has referred to the entire "GTP & Pipe" and
Liquefaction project, but this slide limits the MOU to the "GTP
& Pipe" and examines potential structures. The state's
ownership could be structured as "GTP & Pipe" solely owned by
the producers,; owned by the producers and the state together;
or by the producers, the state, and a third party. If the
structure were to include a third party, it could be leveraged
by AGIA and TransCanada or the state could terminate AGIA and
launch a bid for a new third party. The path of the MOU would
consist of a third party being involved and the best option
would be to continue the relationship with TransCanada on a new
footing, a more purely commercial footing rather than the
arrangement that existed under AGIA.
4:14:45 PM
REPRESENTATIVE REINBOLD asked for a timeline for terminating
AGIA.
MR. MAYER responded that this question is initially being
decided this legislative session in terms of the response to the
MOU and the enabling legislation. He explained that the MOU is
fundamentally an agreement that relates some terms for
commercial agreements the state would sign with TransCanada, in
particular, for the firm transportation services agreement. The
next step would be for the state to sit down and negotiate the
details with TransCanada consistent with the MOU. This would
essentially happen in the next year, such that the details would
go from the guidelines of the MOU to firm contractual
commitments consistent with the MOU. However, even once that is
done it doesn't necessarily commit the state to the specific
future directions since the details in the term sheet of the MOU
a series of "off-ramps" are envisioned in which various
termination events are discussed. First, during the Pre-FEED
process, I believe, within 60 days, the state can terminate the
arrangement or a final investment decision. Thus, a number of
off ramps exist with corresponding costs associated with the
decisions, which consist of reimbursing TransCanada, with
interest for the work completed thus far. In many ways the MOU
also provides more flexibility than the current relationship the
state has with TransCanada through AGIA.
4:17:45 PM
REPRESENTATIVE JOSEPHSON asked for clarification on the exposure
of the Alaska LNG's other three participants' exposure "if the
plug gets pulled," the state must reimburse TransCanada $90
million plus 7.1 percent prior to FEED. He wondered what will
happen if the producers decide not to proceed.
MR. MAYER responded that the important thing to bear in mind is
that the fundamental framework is the state's share on the
project as a whole and the MOU envisions that TransCanada would
carry the "GTP & Pipe" portion. He said in that sense it is not
as if TransCanada will make independent decisions on the project
as a whole. Instead, TransCanada would simply be carrying the
Pre-feed and FEED costs. In terms of the costs for those
processes it is up to all of the partners, including the
producers, to determine. When the time comes to make a serious
decision whether to proceed to FEED and eventually, at the final
investment point, all of the project partners will need to agree
to proceed.
4:19:41 PM
REPRESENTATIVE JOSEPHSON said that he will be asked in April to
spend $90 million. He surmised it may be the best investment
the state has made since 1973 when Trans-Alaska Pipeline System
was signed; however, he wondered what ExxonMobil Corporation, BP
Exploration (Alaska) Inc., and ConocoPhillips Alaska, Inc. will
be required to pay. He said he has confidence that the three
producers would not agree to this unless they were confident
that Tokyo Electric would be there for them, or whichever Asian
buyer is in place. He said he'd like to be certain the three
producers are keeping up with the state's exposure.
MR. TSAFOS answered that the last two lines of slide 7 show the
investment. He said that everyone will pay for their share of
this project. The state would have 20-25 percent and the
producers will have 75 percent of the proposed project since
they will spend 75 percent of the project costs. Throughout
this process, the whole idea for the Pre-FEED, FEED, and
construction is that everyone will be paying their share. The
state would be called upon to invest perhaps $90 million and
ExxonMobil Corporation, BP Exploration (Alaska) Inc., and
ConocoPhillips Alaska, Inc., and TransCanada will spend
proportionately. He said, "By the world of the HOA you are on
the hook for 25 percent of whatever is being spent - that you
are a part of - over the next year and a half." The MOU says
that TransCanada will spend it for the state and the state will
reimburse TransCanada so it's a slightly different structure
than AGIA, in which the state was giving money to TransCanada in
order to get something advanced. In this instance, the state
will own a share of the project.
4:22:25 PM
REPRESENTATIVE JOSEPHSON asked if the oil companies "pulled the
plug prior to FEED" whether they would need to explain to their
shareholders that they invested $100 million each for naught.
He asked whether that would be an accurate statement.
MR. TSAFOS answered yes. He said this happens all the time
since at any given time oil companies pursue projects, engage in
exploration, and development on projects that get stuck and
don't advance. He said that spending $100 million would not
likely require much of an explanation. In terms of alignment,
at the end of the day, as Mr. Mayer said, "Everyone has to say,
yes." If someone gets cold feet due to the expense, it means
the project has slowed down or the companies decide to get out.
Companies may just buyout the share of any company that decides
not to invest; however, the idea of alignment is that at the
time period, the state needs to make the big decision and write
the check for billions of dollars, which is exactly the same
time that ExxonMobil Corporation, BP Exploration (Alaska) Inc.,
and ConocoPhillips Alaska, Inc. and perhaps TransCanada's board
of directors will be giving their authorizations. Thus, the
state is spending money in tandem with the partners. He said
one of the insurance policies the state has is that the state is
spending alongside the oil companies, and while it is not a
guarantee that the state will make a smart decision, it is a
guarantee that the state will make a decision, similar to
everyone else since everyone is in it together. He concluded
that that represents the idea of alignment, which is what the
ownership distribution does.
4:24:59 PM
REPRESENTATIVE JOSEPHSON understands that there are about 500
variables, but from the DOR's presentation, one might surmise
that with 30 years of natural gas that the state would spend $10
billion and make $90 billion. He concluded that is one possible
"take home" from the DOR commissioner's presentation. He said
he wondered what he was missing since it looks like a "no
brainer" from that elementary level.
MR. MAYER indicated he'd need to see a specific slide to respond
to the exact question; however, ultimately the project as a
whole is a $45-50 billion project. If the state forgets the
MOU, the state's interest would be about 25 percent, which is a
lot of money to spend upfront for a substantial amount of
annuity ranging from $3-4 billion. There is always uncertainty
about future revenue streams in terms of gas prices so the
decisions will need to be weighed very carefully. The impact of
TransCanada's involvement is to reduce the upfront investment
and correspondingly reduce the subsequent revenue stream
afterwards. He suggested that Representative Josephson may have
been referring to earlier slides that the administration
presented that show quite a big difference in the upfront
spending and relatively little difference at the tail end. He
wasn't sure what he was referring to as being a "no brainer."
4:27:25 PM
REPRESENTATIVE JOSEPHSON said the slides seemed to indicate that
the state would spend $5-6 billion, leverage another few billion
dollars, but by 2023 or 2034 would earn $3 billion a year for 30
years.
MR. TSAFOS indicated that if one abstracts from the specific
numbers, one benefit of alignment is that it gets the state to
think like an oil company. That is part of what oil companies
like about LNG projects - that as long as one can get through
the hump in the beginning, and get the project running, and not
subject to people blowing up pipelines, it is something that
will pay off over a very long time. In a way the base case
scenario - keep costs at this level so the $65 billion doesn't
become $85 billion is the attraction of the LNG business, which
is that it represents a huge investment upfront, but "once it's
done it's a great long term business."
4:29:09 PM
MR. TSAFOS said that is the idea of the long term benefits of
the upfront investment. The state gets more than 25 percent of
the value in certain price environments due to property taxes,
which is a slightly disproportionate share, but in effect, it
sounds like a good deal so long as the state can live with the
50 or 500 variables that can move at any given time and can make
the overall project look better or worse in 10 years.
MR. MAYER added that the variables are not just related to the
upfront cost but the $3.5 billion of revenue is one projection
at one particular gas price and what the revenue will be depends
on the agreements that are negotiated for the sale of LNG as
well as the oil price is at the time. The figure could be
higher or lower and a large number of variables that mean it
could look like a fantastic investment for the state and end up
without the rate of return it thought it might at the onset.
4:31:05 PM
MR. MAYER said the state doesn't know what the costs will be,
but the Pre-FEED work will cost $400-$500 million and if the
state has a 25 percent share of that the state's portion would
be $80-$100 million, in particular if it is a full 20-25 percent
investor throughout the project [slide 16]. If the state goes
with the MOU, and the "GTP & Pipe" will be done by TransCanada,
the state is really saying it will bear $40-$50 million for the
LNG [liquefaction] and TransCanada will bear another $40-50
million for the GTP and the pipeline. In 2015, if the state
would like to exercise its option and call back 40 percent of
TransCanada's cost, the state would repay TransCanada 40 percent
of the $40-50 million in expenses plus 7.1 percent interest.
4:33:03 PM
MR. MAYER said that gives a more concrete sense of how the
stage-gated process works and who is spending what money. He
said the overall decision to spend money is one in which the
project as a whole will make based on what's been done to date
and deciding whether it's worth continuing with the process.
How might one think through whether the proposed MOU meets the
state's criteria might mean thinking about the critical things
the state needs that determine the state's interest. He said
Enalytica has talked about alignment, the tariffs of elements in
the midstream, if the state is building an upstream taxing
entity and how quickly disputes could arise and wipe out value
to the state. Thus, clearly minimizing those disputes about
where value is allocated, and being indifferent about where
value is allocated or having the same interests will be
important to the state. The state has a somewhat different set
of interests than the producers when considering that the
resource base is bigger than Prudhoe Bay and Point Thomson. The
large resources are estimated to be 35 trillion feet of gas, but
an estimated 200 plus trillion feet of gas is waiting to be
found. Thus, from the state's perspective, it is not about
monetizing existing proven North Slope gas, but is about
building infrastructure that will enable future
commercialization of all of the rest of the enormous resource
base. Therefore, it is important to ensure from the outset that
the structure is oriented toward future expansion. Clearly,
this is of vital interest to the state. Obviously, ensuring
that in-state customers can receive gas from the project and
that the tariff on the pipeline and GTP is as low as possible to
deliver gas at the lowest price is clearly important.
Additionally, it is vital to have parties involved with serious
execution ability. Finally, if possible it's important to
maintain some degree of momentum. He said that in terms of
previous work, and in talking to colleagues in Washington D.C.
and elsewhere, that it's important that people not think about
an Alaska gas project as something that never happens and
instead to have worldwide interest that something is about to
happen in Alaska. Thus it seems important to understand the
cost and benefit in terms of continuity and momentum and in
terms of time value of money the perception of the investment
community that this process is one that continues to move
forward. It's also important to think about how to weight cost
and benefit if the project is delayed.
4:37:21 PM
MR. MAYER suggested keeping in mind that framework to consider
possible options [slide 18]. He asked what that would look like
if it was a producer only pipeline and how it would meet some of
these interests. He answered that a producer only "GTP & Pipe"
seems to have a number of weaknesses. First, in terms of
alignment, it comes back to the potential for disputes over
allocation of value since the state would need to know the
tariff. This means a significant potential for disputes exists
in terms of value allocated, the tariff rate, how it is set and
the optimal level. It isn't clear, in terms of third-party
expansion, a 100 percent producer "GTP & Pipe" since clearly it
would represent a big investment to monetize that resource.
These are not companies that make money by moving other people's
gas through their infrastructure, but are companies that make
money by selling their resource and it is not clear that a
producer-only pipeline would have a compelling interest in
pursuing expansion. There may be times when expansion is in
their interests, but it's not necessarily guaranteed. In terms
of in-state deliveries, the question of alignment and the
uncertainty over tariff becomes an uncertainty for in state
deliveries of gas. The three producers all have a strong proven
ability to execute enormous projects like this. On the other
hand, midstream, not in terms of the unregulated world of
liquefaction terminals, but the sort of regulatory monopoly view
of pipeline and pipeline infrastructure is becoming less and
less a core focus of the majors.
MR. MAYER said that in terms of continuity and momentum the
questions that must be weighed are Alaska's ways of exiting the
state's commitments under AGIA and the cost of those
commitments, in terms of arbitration and litigation, or the cost
to end that relationship without finding an additional means to
continue with TransCanada.
4:40:13 PM
MR. MAYER turned to the heads of agreement [slide 19]. He said
the HOA fixes a lot of problems for the producer of the "GTP &
Pipe" since it creates a strong alignment between the producers
and the State of Alaska. And the question of the tariff becomes
irrelevant except for in-state deliveries of gas to Alaska
residents, but in terms of the bulk of the gas being sold, it is
one big integrated investment that is about taking gas from the
North Slope and selling it to Asia and where value is allocated
across that chain ceases to be important. In terms of third-
party expansion, as a shareholder and key partner, the state has
a clear interest in future expansion with the producers.
However, if other parties aren't interested in expansion, it
means the state will go it alone in a future expansion. He
asked what the arrangements will be, noting the state could
agree on the basic principles, as stated in the HOA, but in
terms of finding new companies who want to take up capacity and
having the ability to execute on building the new capacity the
state is left going alone. He said there is a key difference
between "GTP & Pipe" and the liquefaction. While there are
certainly issues involved in expanding liquefaction facilities
and who gets the benefits, in general, a series of liquefaction
trains exist and if one wants to expand the overall project, a
new liquefaction train is built and each train can have separate
ownership. Thus, expansion, in that sense can be relatively
modular. The owners of the new train can be completely
different than owners of the previous train and that can all be
worked out. However, ultimately, in the foreseeable future
there will only be one pipe and everyone must agree how the gas
will flow through the pipeline. Therefore, the question of the
existing ownership and how that works becomes very important.
The fundamental question becomes whether the state wants to be a
pipeline company or are there benefits to having a professional
pipeline involved, in particular, when it comes to expansion, to
be an anchor partner carrying the future expansion. He said
that execution is fine for existing projects since the three
producers have very strong capabilities in that regard, but in a
future expansion it could be the State of Alaska alone or with a
new partner, and the state may not want to be in that position.
The questions around the continuity and momentum are the same in
terms of what's involved in terminating the AGIA relationship.
4:44:04 PM
MR. MAYER turned to considering third party involvement [slide
20]. He said if one takes the path of the MOU, and it makes
sense to leverage the work that has been done under AGIA and to
transition it to a more commercial relationship. He asked what
that would look like. He answered that it would mean
maintaining the strong alignment between the producers and the
state. It that instance, the state wouldn't worry about the
tariffs on the liquefaction project or moving value to different
places. The one important part becomes when a third party owns
the GTP and the pipeline, is that if a tariff is involved the
question becomes, "How reasonable is the tariff?" It then
becomes a fixed component with essentially a guaranteed rate of
return that could essentially increase some of the risk for the
state. In particular it becomes important to evaluate how
competitive the tariff is and who else could do this and if the
state could get a better deal. In terms of the details of the
term sheet in the MOU, the 12 percent return on equity and 5
percent return on debt - although those figures could move - but
most importantly the agreement means a 75/25 split at lease in
the second year of the initial capacity of the pipeline. Thus,
it means getting to a level of around 7 percent of the weighted
cost of capital used in determining the tariff. Then suddenly
considering the North American regulated pipelines and U.S. FERC
regulated pipelines, it appears to be competitive and well
within the norm. The 75/25 split in debt-to-equity implies a
high level of leverage and overall the tariff is much more
sensitive to that than to things like the overall cost of
equity. Thus, it becomes clear that this is well within the
norm and is quite competitive and the question becomes if the
state had a new bidding process, whether it could produce
something better or lower and the answered is that ultimately we
don't know.
4:46:53 PM
REPRESENTATIVE HERRON asked whether TransCanada is the strongest
partner Alaska can find since TransCanada would want to
encourage expansion. He asked him to score TransCanada in terms
of the producers' expansion bias.
MR. MAYER responded by asking members to look at slide 21, other
potential parties. It isn't about who the partner is but about
the timeframe. He said a number of pipeline companies are
capable companies, perhaps five, but all have execution
capability and an interest in expansion. The fundamental
difference, ensuring the project as a whole, going with the MOU,
is more a question of how long the process takes and what else
happens in the meantime since there will be a series of other
agreements being signed. One question is whether there is value
in having an experienced pipeline player with a strong interest
in expansion at the table since all of the other project
agreements are being signed and going through a bidding process.
He said it could affect how long that bidding process lasts and
whether it affects the timelines for the rest of the project if
core commercial agreements are being signed without an
experienced pipeline player coming in until later. He said that
could be a cost in terms of negotiation terms by not having that
interest represented as solidly as it could be.
4:49:52 PM
MR. MAYER, with respect to in-state deliveries, said that the
state can use its equity-entitled capacity to carry gas to
market at lower cost. The only question becomes whether the
tariff is the lowest achievable and if the state could have a
lower one through the competitive process. Ultimately the state
may not know, or if the state goes through the competitive
process, the state may find it doesn't have as good a deal as it
has on the table now since many "unknowables" exist. Clearly,
execution capability exists to undertake this large, complex
project. The arrangement of interests provides an appealing
orientation since the pipeline company brings strong pro-
expansion interests to the project, but the three producers
bring strong cost-controls because they do not make money from a
guaranteed tariff, they make their money by selling their gas.
Thus the producers will be very concerned with the overall cost
of pipeline project. In terms of continuity and momentum [slide
21], the state would maintain and accelerate all the work that
has been done to date and the interests that have arisen around
it [slide 21].
4:51:40 PM
MR. MAYER compared this to launching a bid and the fundamental
question becomes the tariff rate, which could be higher or could
be lower. Additionally, the cost terms of investor interest and
time value of the money could occur and low investor interest
could slow down the project. In the event the project is
delayed a year or more it will affect the project cost in terms
of present value of the future investment to the state.
Further, uncertainty about the possibility of litigation and
loss of work done to date can occur. Fundamentally, the
legislature will need to weigh the cost of these things versus
the probability that one could get a better deal, with all of
the "unknowables" involved in that process.
MR. MAYER summarized key questions the state needs to consider
carefully [slide 23]. First, the state needs to consider
compensation the state might have to pay to terminate Alaska
Gasline Inducement Act through other means and what intellectual
property the Alaska LNG will retain. Second, the state also
needs to consider if the HOA process will slow down the state
and the producers if uncertainty, arbitration, or litigation in
terms of the "GTP & Pipe" occurs.
4:53:06 PM
MR. MAYER said the state must also consider the odds that a new
selection process will deliver better terms than those available
today. That, in turn, somewhat depends on how representative
the AGIA process is of the industry's interest in an Alaskan
pipeline and how many bidders the state could potentially
achieve with an open process. Finally, the state must consider
whether a new tariff offsets absence from the negotiating table,
reduced momentum, and the cost to dissolve AGIA. He concluded
that these are the things Enalytica believes the state should
consider when viewing the Memorandum of Understanding.
4:54:47 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
4:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| enalytica Presentation to HL&C 02-26-2014.pdf |
HL&C 2/26/2014 3:15:00 PM |
Presentation to HL&C 2-26-14 |