Legislature(2015 - 2016)BARNES 124
01/23/2015 01:00 PM House RESOURCES
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| Update: Office of the Federal Pipeline Coordinator for Alaska Natural Gas Transportation Projects, Larry Persily | |
| 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 RESOURCES STANDING COMMITTEE
January 23, 2015
1:00 p.m.
MEMBERS PRESENT
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Bob Herron
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Andy Josephson
Representative Geran Tarr
MEMBERS ABSENT
Representative Mike Hawker, Vice Chair
COMMITTEE CALENDAR
UPDATE: OFFICE OF THE FEDERAL PIPELINE COORDINATOR FOR ALASKA
NATURAL GAS TRANSPORTATION PROJECTS, LARRY PERSILY
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
LARRY PERSILY, Federal Coordinator
Office of the Federal Coordinator for
Alaska Natural Gas Transportation Projects
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint update regarding
Alaska natural gas transportation projects.
ACTION NARRATIVE
1:00:30 PM
CO-CHAIR BENJAMIN NAGEAK called the House Resources Standing
Committee meeting to order at 1:00 p.m. Representatives Herron,
Johnson, Olson, Josephson, Tarr, Seaton, Talerico, and Nageak
were present at the call to order.
^UPDATE: Office of the Federal Pipeline Coordinator for Alaska
Natural Gas Transportation Projects, Larry Persily
UPDATE: Office of the Federal Pipeline Coordinator for Alaska
Natural Gas Transportation Projects, Larry Persily
1:02:15 PM
CO-CHAIR NAGEAK announced that the only order of business is an
update from Larry Persily of the Office of the Federal
Coordinator for Alaska [Natural Gas Transportation] Projects.
1:02:37 PM
LARRY PERSILY, Federal Coordinator, Office of the Federal
Coordinator for Alaska Natural Gas Transportation Projects,
began with some history, noting that Alaska became a state in
1959, the same year LNG was first moved by tanker on the seas.
The first tanker left the port in Lake Charles, LA, for the
United Kingdom. It was an experiment by the Union Stockyard and
Transit Company of Chicago, IL, and Continental Oil, now known
as Conoco, in which 32,000 gallons of LNG were transported.
Fifty-six years later it is a multi-billion dollar industry with
300-400 LNG tankers that carry much larger loads.
1:06:00 PM
MR. PERSILY displayed slide 2 to address what federal agencies
are doing. He explained that approval by the Federal Energy
Regulatory Commission (FERC) must be obtained to build and
operate an LNG plant in the U.S. The sponsors of the Alaska LNP
Project - BP, ExxonMobil, ConocoPhillips, and TransCanada - have
initiated pre-filing with FERC and FERC has named an
environmental project director to oversee this. Also, FERC has
named two deputy directors, one who will be working on the above
ground and one who will be working on the below ground of the
pipeline. He said FERC requires applicants to turn in resource
reports - environmental baseline data - on what the project will
do to soils, water quality, air quality, wetlands, and socio-
economic issues. The first round of draft resource reports from
the project sponsors is expected to come into FERC next month.
After that FERC will issue its Notice of Intent in the Federal
Register, beginning the process of scoping and an environmental
impact statement (EIS); a third party contract is onboard at
FERC to help with that. Later this year FERC will go statewide
in Alaska to hold scoping sessions where federal officials ask
communities what they want addressed in the EIS. Once comments
come back on those drafts, FERC will move on to the second set
of drafts as work moves towards the EIS.
1:07:39 PM
MR. PERSILY turned to slide 3, pointing out that federal
authorization must also be obtained to export natural gas from
the U.S. It is a two-step process: one is export approval to
free-trade nations, nations that have free-trade agreements with
the U.S.; and the other is export approval to non-free-trade
nations, such as Japan, China, India, Thailand, Taiwan, and
Vietnam. The project received free-trade export approval on
December 21, 2014, and the non-free-trade approval is still
pending. The U.S. Department of Energy went out for public
comment, which closed November [2014]. Of the less than 30
comments received, only one was an objection, which was from the
Sierra Club. The Sierra Club has pretty much filed objections
to all LNG export projects in the U.S. Under the law, he
continued, the presumption is that natural gas exports to non-
free-trade nations are in the public interest and they will be
approved unless there is a finding/proof that it is not in the
public interest. He offered his guess that this one statement
of opposition will be unable to overcome the presumption and the
non-free-trade export approval will be granted for this project
sometime in 2015. It would be a conditional approval pending
completion of the EIS and FERC.
1:09:15 PM
REPRESENTATIVE HERRON inquired as to the Sierra Club's reason
for filing opposition.
MR. PERSILY replied the opposition is two-part. One is that,
generally, fossil fuels are bad where ever they come from and
where ever they are burned. But mostly the Sierra Club's
opposition to Lower 48 export projects is hydraulic fracturing
and shale gas production. The rationale is that if a market is
denied, if shale gas produced by hydraulic fracturing cannot be
exported, then there will be no fracturing. However, he noted,
this is not an issue in Alaska because this is conventional gas.
1:10:15 PM
MR. PERSILY returned to his presentation, reporting that there
are more than two dozen LNG export applications pending at the
Department of Energy and those are in one list. However, the
Department of Energy is treating Alaska separately, so Alaska is
alone on its own list and therefore at the top of its own list.
Under a new procedure adopted by FERC, each of the others must
spend money to get their EIS and FERC approval before the
Department of Energy will act on their application. However,
those procedures do not apply in Alaska's case - the department
will decide on the conditional approval for Alaska before the
EIS is done. This is good because the EIS will not be done
before 2018 and the project sponsors would like that export
authority before then because it is an indication to the market
that Alaska has a serious project.
1:11:13 PM
MR. PERSILY moved to slide 4, informing members that the Office
of the Federal Coordinator for Alaska Natural Gas Transportation
Projects did not receive funding in the 2015 spending bill that
was approved by Congress in December. Therefore the office will
be closing down around March 1, 2015. The office was created 10
years ago in anticipation of a natural gas shortage in the U.S.
Congress said it was a matter of national interest to get Alaska
gas down to the Lower 48. Since then, however, shale gas has
flooded the market. For example, Marcellus Shale, mostly in
Pennsylvania, is alone producing about 16 billion cubic feet
(BCF) of gas per day, which is five times the size of the Alaska
LNG Project. So, the Lower 48 does not need Alaska's gas. If
the Alaska project works, the gas will go to Asia, but that is
not in the statutory authority of the Office of the Federal
Coordinator for Alaska Natural Gas Transportation Projects and
Congress did not expand the authority of the office to work on
an export project. The reports and research done by the office
will be preserved at the Alaska Resources Library Information
Service (ARLIS) at the University of Alaska Anchorage (UAA).
The office has established a searchable digital library of
documents on the gasline going back 40 years and has contracted
with [the library] to maintain that. It is available at the
office's website as well as the library's web site. He opined
that just because the office was not funded does not mean that
the need to share information with the public goes away. The
office is therefore hoping to find another agency within the
federal government to take on the responsibility of ensuring
that the public and other stakeholders are informed about what
is going on.
1:13:47 PM
MR. PERSILY turned to slide 5, specifying that in terms of make-
or-break factors for Alaska, it does not matter that Alaskans
want this project; rather, it is economics. Making or breaking
this project comes down to market demand, which comes down to
global economic growth, energy consumption, converting from coal
to natural gas as the preferred fuel, and having a cost-
competitive project. Right now Japan is the world's largest LNG
consumer, but expectations are that China will surpass Japan by
the end of this decade. China wants to double its natural gas
share of its energy mix, reducing its reliance on coal. China
was self-sufficient in natural gas until about seven or eight
years ago, but now imports about 30 percent of its natural gas
and splits that about 50/50 between pipelines and LNG. However,
while China would prefer to use cleaner burning natural gas, it
depends upon how much more it costs than coal or oil and the
terms of the contracts. Japan will be restarting some of its
nuclear plants which will affect its LNG demand. Besides Japan
and China, many Middle East nations are looking at burning gas
to generate power and to sell their oil rather than burn it.
1:15:47 PM
REPRESENTATIVE TARR noted President Obama's recent agreement
with China for reducing greenhouse gases and queried whether it
is a new opportunity. She further asked whether Governor Walker
could have this same conversation with Japanese buyers.
MR. PERSILY responded that China is aware that the volumes of
coal it is burning is killing people, so it wants to reduce its
reliance on coal and turn more to gas. However, China's economy
is slowing so gas prices must be competitive to facilitate a
switch. While there is growing opportunity in China, everyone
else in the world is trying to sell into that same market.
1:17:07 PM
MR. PERSILY returned to his presentation [slide 5], noting that
Thailand will be importing more LNG. Vietnam also wants to
import LNG and burn gas. Indonesia, one of the world's longest
producing LNG exporters, will export about 25 percent fewer LNG
cargos than it did last year because of rising demand at home
due to economic growth and declining production. Egypt is also
unable to send out as many LNG tanker loads. The market is
shifting and new buyers are coming on. There definitely is
market growth and that is what will make or break the Alaska LNG
Project.
MR. PERSILY emphasized that Alaskans must accept that natural
gas is not as profitable as oil. For example, for oil priced at
$50 per barrel, about 20 percent of that value is what it costs
to move the oil by pipeline from Prudhoe Bay to Valdez and then
by tanker to the West Coast. It will cost a lot more than 20
percent to move natural gas product to market. Depending upon
the price for Alaska's LNG, he estimated that about 65-80
percent of the value will be eaten up by the pipeline,
liquefaction, and tankering. Alaskans will make money from the
project, but it will not replicate or replace oil. Too much of
an expectation on profits from this project, too much of a
burden, and it will not be competitive in the market.
MR. PERSILY addressed slide 6, stressing that it is all about
risk and prices. There is no shortage of natural gas in the
U.S. and around the world, he said; therefore price and project
cost will determine what goes ahead and what does not. Buyers
like certainty and dependability, but can only afford to pay so
much of a premium for that. No one builds an LNG project
without binding long-term contracts lined up in advance to cover
the mortgage. The long-term contracts are the collateral, the
guaranteed revenue stream to pay the debt and recover the
equity. He said he is unaware of any LNG project that has ever
lost money long term, although with cost overruns and other
problems some projects are producing a much smaller return than
was expected at their start.
1:20:36 PM
MR. PERSILY, responding to Co-Chair Nageak, confirmed that the
stability and dependability of the government, as well as proven
and dependable reserves, play into the market buying. Because
utilities at the other end must provide gas to customers at peak
season in December, they need to know the ship is going to
arrive on schedule. Alaska's advantage is that its gas reserves
are well known, but while that has value the gas must still be
competitively priced. These are risky ventures. He related
that the president of Sempra LNG, the company developing the
Cameron LNG export project at Hackberry LA, recently stated that
if an LNG project developer cannot handle the financial risk and
the financial guarantee on billions of dollars of debt, then it
should not be in the business.
1:22:17 PM
MR. PERSILY moved to slide 7, stating he was asked to address
the odds that this will work for Alaska. He said he won't guess
at the odds, but he does think it is better odds than it has
been in the past 40 years for many reasons. The companies have
a lot of experience with the Prudhoe Bay reservoir. Prudhoe was
originally predicted to produce 9 billion barrels [of oil], but
is now at 12 billion with the hope of getting to 14 billion.
Much of that is due to re-injecting the gas. After decades of
re-injection, along with water flood and other enhancements, gas
could be pulled off by the 2020s and beyond and not appreciably
damage the oil recovery. The producers will have to prove this
to the Alaska Oil and Gas Conservation Commission (AOGCC) before
they can begin gas off-take. Alaska is at the point where it
makes sense to start turning some of that gas into revenue for
both the producers and the state. Mr. Persily offered his
belief that starting to turn some of the gas into profits would
extend the life of North Slope oil operations. If the gas
aspect becomes profitable, he said, it is another reason to
continue the oil operations since they go hand-in-hand because
gas comes up with the oil. A producer making a $50-billion
commitment to a 40-year-long natural gas project is making a
commensurate commitment to keep that oil field going that long.
1:24:07 PM
MR. PERSILY commenced to slide 8 to address staying on schedule.
Noting he is not speaking for the new administration, he
reviewed the schedule for the Alaska LNG Project that was laid
out last year by Governor Parnell's gasline team and the
producers when Senate Bill 138 was considered. He reported that
since then the companies have publically stated that they plan
to start turning in their draft environmental reports to FERC
perhaps next month. The companies will do more field work in
summer 2015 and the decision on whether to go to front-end
engineering and design (FEED) will be made in 2016. The
commitment for full engineering design is about $1-$1.5 billion.
In the pre-file with FERC, the companies laid out a schedule
where they would like to see the draft EIS in summer 2017, which
assumes they submit their full application and final resource
reports summer 2016. A final EIS would be in 2018 and, if
everything stays on schedule, a final investment decision (FID)
would be made in early 2019. During discussions of Senate Bill
138, the project sponsors - the partners and the state - said
that to stay on schedule for going into engineering design in
2016, property tax legislation would be needed in the regular
2015 legislative session. This would be enabling legislation to
set up a payment in lieu of tax rather than fighting over the
assessed value of the pipeline and LNG plant. Then, sometime in
special session, second half of 2015, legislators would be
presented with a negotiated deal on commercial and fiscal terms
of project operations, per the Heads of Agreement between the
partners and the state. Also during discussions of Senate Bill
138, TransCanada, the state's partner in the pipeline and gas
treatment plant, said it would need signed shipping agreements
with the state before the end of 2015 in order to stay on
schedule to go to full engineering design in 2016.
1:27:01 PM
REPRESENTATIVE HERRON inquired as to what would be an indicator
of any sort of slippage in the schedule.
MR. PERSILY answered it would be a public pronouncement, such as
the project partners saying they had planned to go to full FEED
in 2016 but now they are hesitant to commit a billion dollars
because there are some unresolved issues. The companies would
like to stay on schedule and are working with federal agencies
to stay on schedule, and federal agencies are gearing up to
handle the work. He surmised the current administration is
aware of the schedule laid out last year and is working on it.
REPRESENTATIVE HERRON, noting that Mr. Persily had earlier
stated that the draft resource reports would be forthcoming in
about a month, asked whether it would indicate slippage if the
reports were to come in five weeks.
MR. PERSILY replied that he would assume a week would not make a
difference. But it would be bad if the project sponsors were to
notify FERC that it would be Halloween instead of February.
1:28:52 PM
REPRESENTATIVE TARR recalled that the requirements in Senate
Bill 138 were such that FEED would potentially necessitate a
special session as well as documents 90 days in advance.
MR. PERSILY responded that his recollection from last year is
that to stay on schedule the project partners said a special
session would be necessary during the second half of 2015 to
approve commercial fiscal terms so there was comfort in going to
the billion dollar FEED. He also recalled there was an attempt
in committee regarding a deadline for documents.
REPRESENTATIVE TARR offered to investigate the details.
1:30:01 PM
MR. PERSILY addressed slide 9, stating that in regard to
competition the world will be buying more LNG and many export
projects will be built over the next 20 years. Geographically,
Alaska's closest competitor is Canada with 18 proposed Canadian
projects. He opined, however, that most of those projects will
never be built.
REPRESENTATIVE OLSON understood there are First Nation issues on
virtually all of the projects in British Columbia.
MR. PERSILY replied that Canada has problems and none of the 18
projects have gone to final investment decision. He explained
that the First Nation wants its voices to be heard in the
coastal areas where the plants are to be built, near Kitimat and
Prince Rupert, and along the route of the pipeline in the area
where gas will be produced. He pointed out that under Canadian
law, projects have a duty to consult and work with First Nation.
Even though it is not an 800-mile pipeline, between 300 and 500
miles of pipe is needed because the pipeline goes over two
mountain ranges. There are environmental issues for some of the
projects that include salmon habitat near Prince Rupert. A
portion of the 18 projects are serious contenders. Recently an
Asian investor announced plans to build an LNG plant at Stewart,
British Columbia, but has not applied for an environmental
assessment or export license, and has said it will be ready in
2025. He noted that other projects are led by Shell, ExxonMobil
Corporation as a Canadian subsidiary, Imperial Oil, Petronas,
and Kitimat LNG which had been a 50-50 partnership of Chevron
and Apache, but Apache is selling out half of its ownership to
an Australian firm called Woodside Petroleum. He remarked that
Canada's issues include pipelines, First Nation, environmental
issues, and taxes. Industry succeeded in working with the
province to reduce a new LNG income tax that will be imposed in
British Columbia, but after speaking with federal officials
would like to see faster depreciation on its assets in looking
for ways to get a competitive edge in the market place.
1:34:04 PM
MR. PERSILY moved to slide 10, to address competition from shale
gas from the Gulf Coast, Pennsylvania, Texas, and throughout the
U.S. He said this gas must go somewhere and some will start
going overseas. Four projects under construction have received
approvals and are moving ahead: Freeport, Texas; Sabine Pass,
Louisiana; the Sempra Energy Project in Hackberry, Louisiana,
called Cameron LNG; and a small project at Chesapeake Bay called
Cove Point. The commonality is that all four were import
terminals not often used. These locations have storage tanks,
berths, and facilities and piping that make it less expensive,
but still a multi-billion-dollar project to add liquefaction.
Sabine Pass says it is on schedule to start first shipments the
end of 2015. Another commonality is that the four projects are
not producer-led projects but are tolling models wherein the
plant operator charges a fee for liquefaction and loading the
ship. It is not their gas, they are not taking market risk, and
it does not matter to them whether the gas owner is making money
because they get paid for the capacity and liquefaction plant
that the shipper is reserving. Cheniere Energy is trying to
build another plant at Corpus Christy, Texas, and wants a fee of
$3.50 per million British Thermal Units (MMBtu) to use its
plant; the tanker and the market is up to the shipper. The fee
includes the gas plus 15 percent more for the gas that will be
burned up in the process; it will be run like a toll booth. He
predicted that if the price after transportation costs is close
to the price in Europe, much of that gas will go to the Atlantic
Basin, and some will go to Asia through the Panama Canal which
is being widened and deepened. If, after transportation costs,
the figure is close to the same price as in Europe, some of the
gas will probably stay in the Atlantic Basin. He explained that
separate from LNG, the U.S. has a lot of natural gas but is
short on pipelines. This becomes clear in pricing. For
example, in January at the Marcellus Hub, Pennsylvania, the
price of natural gas was $2.08 per thousand cubic feet (MCF),
which is a good price compared to what is paid in Cook Inlet or
elsewhere. At Henry Hub, the main trading point in Louisiana,
the price is about $3.00. In New York gas is almost $9 and
Boston Hub is $10. There is not enough pipeline capacity to
move the surplus of gas to customers.
1:37:28 PM
CO-CHAIR NAGEAK asked why, if right for the Atlantic Coast, it
would not be just as right for the European market from the
North Slope instead of the Panama Canal.
MR. PERSILY answered that it is a long distance from Nikiski to
Europe and an advantage of Alaska LNG is the short distance from
Nikiski to the Asian market than from British Columbia. It is
one-third the travel time from Alaska to Nikiski than from the
U.S. Gulf Coast through the Panama Canal to Japan. An LNG
tanker from Nikiski can deliver gas faster and at one-third the
cost to Japan rather than sending the same molecules from
Louisiana to Japan. This is a serious advantage that Alaska has
rather than sending it to Europe.
1:39:09 PM
REPRESENTATIVE OLSON pointed out that the Nikiski plant has a
42-year track record as far as no missed deliveries, no lost
loads, and no accidents. He recalled that Nikiski was the first
supplier of "Tokyo Electric" with natural gas. At first Nikiski
supplied 100 percent the Tokyo Electric's gas, but when [the
Nikiski plant] ended it was down to about 5 or 3 percent.
MR. PERSILY confirmed that it gets back to the dependability
issue. Asia is aware Alaska has been a reliable supplier since
the plant in Nikiski began operations in 1969. Due to the
volume that the Alaska LNG Project would be producing, there
must be more customers than just Japan. Dependability, short
travel distance, and proven reserves are all advantages for
Alaska. The question is whether the Alaska LNG Project can
overcome the economics that it is just more expensive to build
in Alaska than anywhere else.
1:40:16 PM
REPRESENTATIVE JOSEPHSON referred to a period of time when
shipments from the Nikiski plant stopped and asked whether any
contracts were breached.
MR. PERSILY replied that the contracts were tied not only to
supply but also to the U.S. Department of Energy export license
which has expired, so there was no breach of contract.
"ConocoPhillips" applied and received a two-year license for
last year and this year, so shipments have resumed and there has
been no loss of face or faith.
REPRESENTATIVE OLSON maintained that what killed it was the
Regulatory Commission of Alaska (RCA) when it cut out the long-
term contracts and the plant could no longer supply LNG under
10- or 15-year contracts. He believed RCA possibly dropped the
maximum contract length down to 5 years and the appeal was lost
when the plant could not contract on a long-term basis.
1:41:46 PM
MR. PERSILY moved to slide 11 to discuss Alaska's other
competitors. Russia's Yamal LNG is under development but under
duress. It takes borrowed money to build and the project is
under duress due to Western sanctions over the problems created
in Ukraine by Russia. He explained that with Western financing
unavailable, the Russian government is helping with $2.5 billion
from the "Wellbeing Fund" and is building the port, airport, and
ice breakers. Having to pay its own way tells him it is
probably not an economical project, he remarked, but in Russia
things are sometimes built that are political and not
necessarily economic. China has offered financing at a high
rate of cost. Sponsors, led by a Russian company, have talked
about a 2018 startup, but industry speculation is that the date
will slip. He reported that gas fields with more than a hundred
trillion cubic feet have been discovered offshore of Mozambique
and Tanzania in East Africa. This is three times the amount
believed to be at Prudhoe Bay and Point Thomson, but this goes
to the issues of stability, credibility, and certainty. He
emphasized that both the Rule of Law and the infrastructures are
lacking in undeveloped nations so timelines could slip because
they are not ready to undertake these projects. While there
would be low cost production, he advised, the fiscal certainty,
tax laws, and infrastructure are not there yet.
1:44:23 PM
MR. PERSILY commenced to slide 12 and explained that in the last
few years, suppliers and producers around the world have been
attracted to LNG due to the much higher prices for the same
molecules when they can be liquefied, loaded in a tanker, and
sold in Asia. A lot of that is because LNG in Asia has
traditionally been sold linked to oil prices; LNG is the
alternative fuel when running a generating plant. Oil prices
used to be high, so LNG linked to $120 oil was expensive
therefore profitable and attractive to producers. This was at
the same time that Japan shut down all of its nuclear plants
after the 2011 Fukushima Daiichi nuclear disaster and last
winter prices spiked to $17, $18, and $20 per MMBtu. Currently,
spot market in Asia is less than half that amount: $9.50-$10
per MMBtu. He reported that new projects came on line in 2014.
Papua New Guinea opened its first LNG export plant, Algeria
added more production, and more projects are coming on line in
Australia including a new project that shipped its first cargo
in December. There was demand and high prices as happens in
commodities. The world responded with too much new supply all
at once and prices dipped. The LNG market has changed so much
in the last few years that buyers are signing shorter term
contracts until the market settles. Recently a South Korean LNG
buyer signed a five-year contract with Chevron to buy output
from the Gorgon LNG project in Australia.
MR. PERSILY, moving to slide 13, remarked that the price of oil
dictates how much money Alaskans have available and for decades
Alaskans have followed the daily oil price. He said LNG is
different in that today's price for LNG doesn't really matter
and it is not up to Alaskans to determine what it is going to be
in 2020 and beyond. If the pricing and contract terms will be
sufficient to cover the cost of the [Alaska LNG Project] and the
risk to investors, then that will determine the project, not
today's price. He maintained that while spot prices are low
today, that has not killed this project. If low prices continue
for 50 years and the companies design a project that can't be
cost competitive, then that would hurt. Most analysts expect
that the demand will continue to increase and they see
opportunities for new supply to come in in the 2020s. But, they
do not see enough commitments to new projects for the 2020s and
beyond to meet the projected demand. "This decade taken care
of," he said, "no problem about it."
1:48:39 PM
CO-CHAIR NAGEAK asked whether the extreme cold along the East
Coast for the past few years has had any effect on the market.
MR. PERSILY responded that one reason natural gas is so cheap in
the U.S., other than over-production, is that the last two
winters have been mild. Generally, natural gas producers fill
up storage during the summer and fall and use it during the
winter when prices go up due to more demand. It has been a mild
winter with a lot of natural gas in storage in the U.S., and
prices are low.
1:49:52 PM
MR. PERSILY referred to slide 14 and addressed the issue of
confidentiality on the Alaska LNG Project. He recalled that
last session legislators discussed the issue of state investment
in a gasline raising a conflict, as the state is both regulator
and owner. The state is in a business partnership, a multi-
national, multi-billion dollar partnership, a business venture,
and confidentiality is going to be an inherent conflict and
inherent debate point; it cannot be avoided. Because the state
is in a business partnership, the issue of confidentiality/
disclosure must be resolved to the satisfaction of all of the
partners. Any business venture is only as good as all the
partners agree to it. While he understands the politics -
Alaskans want to know what risk they are taking, chances of
success, what will be gotten out of this and what might be given
up. However, Alaskans need to understand that no LNG project
anywhere is going to allow disclosure of the design, technology,
contract terms, rates of return, or financing. That is not
going to be told to the competitors. So, he said, he sees the
confidentiality as more of a political issue in Alaska.
Alaskans want to know how the state will finance the project and
what sort of risk the public is taking, which, is political as
opposed to the commercial aspect. Mr. Persily stated he has
looked and cannot find anything comparable in a democracy where
government invests in a project like this; it is new territory.
He pointed out that this is different from Norway as the
government of Norway owns 67 percent of the stock in Statoil, a
private company, but there are no government officials on the
Statoil board of directors. The government of Norway puts
leases out to bid and advises bidders that the government will
hold 20 percent and will pay 20 percent of exploration,
development, and operations and maintenance, and it will receive
20 percent of the profits. He further pointed out that the
government-owned company that manages the project has no
government officials on its board of directors.
1:54:23 PM
MR. PERSILY, responding to Representative Herron, explained
there is no federal loan guarantee on the Alaska LNG Project.
The tax credits for enhanced oil recovery at the gas treatment
plant on the North Slope, and the federal tax savings from
accelerated depreciation were all in the 2004 legislation and
only apply to a domestic project.
REPRESENTATIVE HERRON asked whether there are "true" efforts in
Washington to streamline this permitting process.
MR. PERSILY responded that there is an Alaska inter-agency
working group for energy projects in Alaska created by a
presidential executive order in 2011, led by the secretary's
office at the Department of Interior. Its [intention] is that
federal agencies have the same set of facts and the same
calendar moving forward. Whether the Alaska LNG Project goes
forward will depend on project economics and politics, not
stream crossings, a Yukon River bridge, or directional drilling;
the companies are very adept at that. There will be contentious
points when federal regulators say "do it this way even if it
costs more as it is not in the nature of companies to say 'yes'
the first time."
REPRESENTATIVE HERRON stated that in Artic politics he has found
that it creates a bureaucracy to manage the bureaucracy.
MR. PERSILY expressed his frustration that it takes a
presidential executive order to tell agencies to work together.
1:57:13 PM
REPRESENTATIVE SEATON remarked that this case is dealing with
trade secrets and commercial agreements. He asked Mr. Persily
to separate into categories the political decisions, including
what could be the expected returns versus business design
criteria elements. He further asked which are confidential and
which are in the purview of decisions being made and people
knowing what the project means.
MR. PERSILY cautiously answered that anything dealing with the
commercial operations of private ventures has to be held
confidential, whether it is an LNG investment or a new grocery
store being built in a very competitive environment. He noted
that there are political issues that Alaskans want to understand
so they can give their legislators and governor the permission
slip that Alaskans are in agreement. Alaskans, Governor Bill
Walker, and the legislature want the LNG line built, he
surmised. The conundrum that legislators and Governor Walker
face in separating the political debate from the commercial and
business debate is providing Alaskans confidence in the decision
without disclosing information that will hurt its competitive
position in the world.
REPRESENTATIVE SEATON questioned how Alaska's competitive
position in the world changes in knowing what is the voting
structure of that partnership for going forward.
MR. PERSILY replied that the private partners in this project
have not put out a list of what should or should not be
disclosed, they need to trust that their partners will not
disclose proprietary information or damaging information. He
said he does not know that the companies particularly care about
Alaskans discussing that issue, so he does not know that that is
a problem. He agreed it is more of a political issue to the
extent that it doesn't infringe upon confidential business
operations. He said he is not privy to what is confidential and
what is not, what is a problem and what isn't and opined it is
something toward the common goal of getting this built that the
legislature and the governor must work out.
2:02:33 PM
REPRESENTATIVE TARR noted that Alaska's credit rating was
changed from "positive to negative" by one group and another
group put Alaska on the "watch list". She inquired how this
will affect financing for this project.
MR. PERSILY presented a scenario in which the project goes ahead
and the state retains a 25 percent investment stake in the LNG
plant, which is the way it is put together now; TransCanada
would be the stand-in for the state on its 25 percent ownership
of the pipeline and the treatment plant on the North Slope. So,
he continued, if the state is a 25 percent investor in the LNG
plant/marine terminal at, say, $5-6 billion, the state is going
to have to put in some down payment because no one loans 100
percent on a project. Other than raising money on the debt
market, the state would have to come up with $1-2 billion of
cash for its equity, its down payment. As construction starts
in 2019 and the bills come in, a question would be where the
state is going to get the cash separate from borrowing the
money. As far as borrowing the money, if the state has long-
term contracts with credit-worthy buyers at the other end, that
would be the collateral to take to the bank, and not necessarily
the full faith and credit of the state which gets to the state's
bond rating.
2:05:06 PM
REPRESENTATIVE JOSEPHSON asked when the purchase option on the
TransCanada equity share is due and its cost.
MR. PERSILY responded that his recollection is the state has an
option in the 2014 agreement with TransCanada to buy up to 40
percent of TransCanada's share of the pipeline and treatment
plant, and that the deadline for that is December 31, 2015.
Using round hypothetical numbers, he said if 25 percent of that
portion of the project is $6 billion and the state wants to buy
40 percent, then $2.4 billion would become the state's
responsibility for equity and financing.
REPRESENTATIVE JOSEPHSON commented that relative to the consent
agreements, his constituents want something narrowly tailored so
it covers the proprietary economic material and not the more
political material. He opined that the murky part of this is
the deliberative process work product question. He said that
time is a factor in that he would not be allowed to review the
executive branch's emails written today, yet in five years he
may be allowed. The public thinks, he surmised, that there is a
source of candor somewhere in those documents that Alaskans are
not always privy to.
MR. PERSILY responded that the state is a partner in a private
business adventure, which is very unusual and unique, and will
cause heartburn for people. He said that balance must be found
wherein the public is comfortable with the credibility of
elected officials in making good decisions and not jeopardizing
the project, yet private partners are involved. He described it
as just a "business venture" wherein balance must be found.
2:09:21 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:09 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HSE RES 1.23.15 Larry Persily presentation.pdf |
HRES 1/23/2015 1:00:00 PM |
Federal Coordinator for AK Natural Gas Transportation Projects |