Legislature(2013 - 2014)BARNES 124
02/17/2014 01:00 PM House RESOURCES
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| Overview(s): Sectional Analysis - Memorandum of Understanding, State of Alaska and Transcanada | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 17, 2014
1:33 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Mike Hawker
Representative Kurt Olson
Representative Paul Seaton
Representative Scott Kawasaki
Representative Geran Tarr
MEMBERS ABSENT
Representative Craig Johnson
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
OVERVIEW(S): SECTIONAL ANALYSIS - MEMORANDUM OF UNDERSTANDING~
STATE OF ALASKA AND TRANSCANADA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DONALD BULLOCK JR., Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided an overview and PowerPoint slides
on the Memorandum of Understanding (MOU) between the State of
Alaska and TransCanada Alaska Company, LLC.
ACTION NARRATIVE
1:33:41 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:33 p.m. Representatives Seaton,
Kawasaki, Hawker, Olson, P. Wilson, Saddler, and Feige were
present at the call to order. Representative Tarr arrived as
the meeting was in progress. Representative Josephson was also
in attendance.
^OVERVIEW(S): SECTIONAL ANALYSIS - MEMORANDUM OF UNDERSTANDING,
STATE OF ALASKA AND TRANSCANADA
OVERVIEW(S): SECTIONAL ANALYSIS - MEMORANDUM OF UNDERSTANDING,
STATE OF ALASKA AND TRANSCANADA
1:34:02 PM
CO-CHAIR FEIGE announced that the only order of business is a
sectional analysis presentation from the legislature's attorney,
Don Bullock, regarding the Memorandum of Understanding (MOU)
that the administration and TransCanada Alaska Company, LLC have
entered into for the Alaska Liquefied Natural Gas (LNG) Project.
1:34:19 PM
DONALD BULLOCK JR., Attorney, Legislative Legal and Research
Services, Legislative Affairs Agency, Alaska State Legislature,
introduced himself, noting he began work as an attorney for the
legislature in 2001 and has worked on tax and pipeline issues
since 2006. Prior to 2001, he spent 17 years working for the
Department of Revenue, including work as a revenue hearing
examiner where he figured out what the laws meant and applied
them to the factual situations that came up. During his time as
legislative legal counsel he has been involved in the petroleum
profits tax (PPT), Alaska's Clear and Equitable Share (ACES),
the Alaska Gasline Inducement Act (AGIA), and SB 21.
MR. BULLOCK said the focus of his presentation will be how the
responsibility of the legislature fits in with the Alaska
Gasline Inducement Act (AGIA), which is current law; the January
14, 2014 Heads of Agreement (HOA) between the producers and the
state; and the December 12, 2013, MOU with the AGIA licensee.
The only thing the legislature will be able to vote on is the
enabling legislation [HB 277 and SB 138], he continued, so it is
good to have an understanding of the MOU and the HOA.
Legislators must figure out what the bounds are for the enabling
legislation - the legislature can amend those bills and set up
the boundaries within which the administration can continue
toward developing a major gas project in the state.
1:37:13 PM
MR. BULLOCK outlined the timeline of where the state has been
under AGIA: March 5, 2007, bill introduced; June 8, 2007,
effective date after bill signed into law by governor; July 2,
2007, request for applications under AGIA issued by the state;
November 30, 2007, application from TransCanada Alaska Company,
LLC [and co-applicant Foothills Pipe Lines Ltd.] received by the
state; January 4, 2008, Commissioners of the Departments of
Natural Resources (DNR) and Revenue (DOR) find the application
to be the only one received that complied with the requirements;
May 27, 2008, issuance of "Written Findings and Determination by
the Commissioners of DNR and DOR for Issuance of a License under
the Alaska Gasline Inducement Act (AGIA)"; June 3, 2008, HB 3001
and SB 3001 introduced to approve the license recommended by the
commissioners; and, August 27, 2008, HB 3001 signed into law by
the governor. Mr. Bullock noted that the effective date of HB
3001 failed to pass the legislature, which delayed the issuance
of the contract and which is of significance because an
effective date could be an issue under the enabling legislation
given that there are references to when that enabling
legislation will take effect. Mr. Bullock continued outlining
the timelines: November 25, 2008, act approving the issuance of
the AGIA license took effect; December 5, 2008, AGIA license
issued; between April and July 2010, licensee conducted its
first binding open season; May 3, 2012, announcement of
unsuccessful results of the open season; and July 30, 2012, non-
binding solicitation of interest announced for the period of
August 8, 2012 through September 9, 2012.
1:39:55 PM
MR. BULLOCK pointed out that AGIA is the law and is the law that
gave the bounds for the administration to determine what the
license, which is effectively a contract, should look like.
Under this contract the state will reimburse the expenditures in
anticipation of receiving the commitments being carried out that
are in AS 43.90.130. He explained that during consideration of
AGIA, these commitments were called the "must haves" and they
were controversial and well discussed. He emphasized that AGIA
is not dead yet, it is still in the picture, there are still
commitments to pay ongoing expenses under AGIA in the MOU up to
a certain point. How AGIA is going to end is one of the biggest
issues needing to be considered and addressed.
MR. BULLOCK stressed the importance for members to really
understand the MOU - what it says and how the administration
wishes to carry it forward. The MOU provides for a transition
from the relationship between TransCanada Alaska Company, LLC,
and Foothills Pipe Lines Ltd. The TransCanada corporate group
will continue to participate in the new Alaska natural gas
pipeline project by including another TransCanada affiliate,
TransCanada Alaska Development Inc. (TADI), which is also a
party to the MOU. Under the MOU, the state must negotiate two
transition agreements with TransCanada and the affiliate. The
first is the Alaska LNG Project Equity Option Agreement relating
to how the state will acquire equity ownership in the pipeline
if it so chooses, and which would be through the interest that
is actually held by the TransCanada affiliate. The second is
the Alaska LNG Midstream Services Agreement.
1:44:11 PM
MR. BULLOCK pointed out that the first binding open season under
AGIA was important. Expected during that open season was that
shippers would commit to capacity in that pipeline, enter into
Precedent Agreements, and later enter into Firm Transportation
Services Agreements in which the shippers use or pay for a
certain part of the capacity. The Alaska LNG Midstream Services
Agreement is the state committing to put its gas through that
part of the pipeline that TransCanada's affiliate continues to
own. Thus, it is just like what would happen in an open season
as far as commitment goes. However, he said, he is unsure
whether in this case it would be subject to the Federal Energy
Regulatory Commission (FERC) or whether it would be subject to
the Regulatory Commission of Alaska (RCA). The concept is that
neither would apply; it would be treated like an industrial
pipeline in which a producer gets the gas to the LNG plant and
then ships it to water with outlets to the state along the way.
MR. BULLOCK noted that the governor's enabling legislation and
the MOU address the state's gas and the issue of taking gas
royalty in-kind or in-value. The bill also proposes to allow
the state to accept [tax] from the producers in the form of gas;
therefore, the state could have a significant amount of gas.
Responding to Representative Seaton and Co-Chair Feige, Mr.
Bullock confirmed that the enabling legislation would allow the
state to take its royalty and its tax in either dollars or gas -
royalty in-kind or royalty in-value, tax in-kind or tax in-
value. That option will be part of the negotiation between the
lease holders and DNR. Under AGIA, there was a similar
incentive for somebody that would commit during the first open
season in that it addressed the issue of when the gas would be
taken in kind or in value.
1:46:55 PM
MR. BULLOCK reported that the governor's legislation will change
the taxation on gas and oil, such that it would be separate.
Under the bill, the taxation of gas would be on the gross value
at the point of production at the rate of 10.5 percent.
However, the state's [one-eighth] royalty interest is not
subject to tax, so only seven-eighths of the gas will be subject
to that 10.5 percent. He calculated that 10.5 percent of seven-
eighths is roughly 9.2 percent. For purposes of discussion he
assumed a royalty of 12.5 percent, then calculated that if the
state got all the royalty in gas, assuming one-eighth, and got
all the tax as gas, 9.2 percent, that would add together to
about 21.7 percent of the production. That percentage is
important because it relates to the equity ownership issue that
TransCanada will have in the pipeline. If the state has 21.7
percent, it is going to commit to ship 21.7 percent in that
pipeline. That will be the interest that the state has; the
other interest will be divided by the three major producers.
MR. BULLOCK said the state is not coming in independently, and
he qualified that he does not completely have his "head around"
the option to participate in the equity position of TransCanada.
The project is divided into two major parts, he explained. The
midstream part goes from the entry to the transmission lines
from Prudhoe Bay and Point Thomson to the inlet at the LNG
plant, currently expected to be at Nikiski. The LNG plant is
the part that will take the gas, chill it, liquefy it, and put
it on ships at the marine terminal. The MOU addresses that
midstream portion. One option for the LNG plant would be to
have the Alaska Gasline Development Corporation (AGDC) expand
its powers and invest in state's ownership of that LNG facility,
which may possibly be at the same percentage as the state's gas,
although, he added, he is not sure exactly where this part is at
this point in time. The state is going to have gas and the
TransCanada affiliate will be shipping the gas for the state.
Signing of the Precedent Agreement and Firm Transportation
Services Agreement will mean the state is going to be paying a
tariff for a period of 20-25 years, and the state will pay that
tariff whether or not it ships gas because that is how tariffs
work. The initial contract term is identified in the MOU as 25
years, but the MOU says it could go down to 20. This is nothing
new, this is what AGIA or any gas pipeline is looking at because
of the significant costs, particularly in the LNG facility.
There has to be assurance of these long-term contracts to
support the financing of the pipeline. The state committing to
ship its share of the gas in that portion of that pipeline
provides some assurance that the owner of that interest will
recover its cost and will be able to finance it.
1:50:59 PM
MR. BULLOCK turned to the topic of alignment, explaining that
alignment gets everybody on the same track and moving forward at
the same time. The state's "part of the train" will be between
20 and 25 percent of the gas. To that extent, the state is
aligned with the producers because the state will have gas and
will have to ship it and market it, although the details for how
it will be marketed remain to be worked out. One thing,
however, makes the state out of alignment, and that is that the
state is the caboose on the train. If gas is not produced, the
state does not get royalty and there is no production the state
can tax under the production tax. So, the state's alignment is
there as a gas owner except that the state does not start off
with having the right to the gas until it is actually produced
or the tax is paid with it.
MR. BULLOCK advised members that the aforementioned is the
summary of what he considers the most significant parts of the
MOU. He then addressed the enabling legislation, noting that
the MOU is in front of committee members, and members have been
told that if the enabling legislation is not acceptable to the
parties the MOU will go away. If the MOU goes away, there is
the issue of AGIA, and AGIA is the same now as it will be if the
MOU goes away, and that is where the discussion comes out as,
"How does one evolve out of AGIA?" Three statutes describe
ending AGIA: AS 43.90.230, AS 43.90.240, and AS 43.90.440.
There are no allegations that the licensee has violated the
license agreement, so AS 43.90.230 is not much of an issue.
TransCanada is a good party that does well in the business it is
in and it has stuck to the agreement. Alaska Statute 43.90.240
addresses what will happen if the licensed project is found
uneconomic. The MOU contemplates that if certain things listed
in the MOU are done, the commissioners will commit to pursue the
finding that the project is uneconomic, or they will allege that
it is uneconomic, and TransCanada will agree if the conditions
are met. However, he counseled, there is some question as to
whether that was a statutory way to get out of AGIA because AGIA
is the law that protects the state.
1:54:04 PM
MR. BULLOCK elaborated regarding an uneconomic situation,
explaining that the license will end if both the commissioners
and the licensee agree that the project is uneconomic. They may
use whatever criteria they want, such as the project will not
make money or no one wants to use the pipeline. Under AS
43.90.240(e), the state is allowed to get the data and
information gathered by the licensee during the preparation of
the project by paying the net amount of the licensee's expenses
for that data gathering. Drawing attention to page 3 of the
handout in the committee packet entitled, "Authority to end the
AGIA project in AS 43.90," he read aloud AS 43.90.240(e):
If the commissioners and the licensee agree that the
project is uneconomic or an arbitration panel makes a
final determination that the project is uneconomic,
the licensee shall, upon the state's request, transfer
to the state or the state's designee all engineering
designs, contracts, permits, and other data related to
the project that are acquired by the licensee during
the term of the license upon reimbursement by the
state of the net amount of expenditures incurred and
paid by the licensee that are qualified expenditures
for the purposes of AS 43.90.110.
MR. BULLOCK, continuing, pointed out that if the project is
uneconomic under the MOU, nothing in the MOU addresses what will
happen with the information that is gathered. There is probably
a reasonable expectation, he advised, that if the AGIA license
faded away under the uneconomic finding and TransCanada's
affiliate continued as part of the Alaska LNG Project, that the
data would be incorporated, but, he qualified, he does not know.
1:56:49 PM
MR. BULLOCK said an onerous way for the license to end would be
for the state to provide certain types of support to a competing
pipeline. A competing pipeline means a project designed to
accommodate throughput of more than 500 million cubic feet per
day of North Slope gas to market. Last year the legislature
passed HB 4, which focused on a smaller pipeline to bring gas to
Alaskans soon. It was carefully written to avoid that pipeline
becoming a competing pipeline by containing provisions that, so
long as somebody is eligible to receive the inducements under
AGIA, the smaller pipeline currently proposed by AGDC will not
become a competing natural gas pipeline.
MR. BULLOCK noted that if AGIA goes away, there is always the
option of looking at somebody else to carry the state's interest
forward. Under the MOU, it would be a TransCanada affiliate and
the equity interest would be acquired by buying into that
limited partner that is going to hold the percentage in the
project that is equal to the state's gas that it is going to go
through that project. If the legislature wants to continue,
there are other options and AGDC is one option; AGDC was part of
the discussion in developing the Heads of Agreement.
MR. BULLOCK advised members to look at the 20-25 year period of
time that the state will be committing to ship the gas and the
interest that the state will have in that pipeline. The state's
ability to come up with the money to pay the tariff needs to be
looked at because it is a long-term commitment under the Firm
Transportation Services Agreement. There will be hefty issues
with appropriations, but he guessed that program receipts from
the sale of the gas would pay for the tariff. The state's long-
term financial obligation is something to really consider.
1:59:17 PM
REPRESENTATIVE SEATON asked whether the state agreeing to ship
gas for 20-25 years is the same condition as the "producer ship
or pay." He further queried whether the state could divert an
amount of gas if it were willing to pay or would that be a firm
commitment that the state is making but [the producers] are not.
MR. BULLOCK replied the state is going to have to pay something
because there are certain costs that must be paid regardless of
whether gas is flowing through the pipeline. Exhibit C of the
MOU incorporates provisions pertaining to the state's
relationship with the TransCanada affiliate that is going to
operate the pipeline. Drawing attention to Exhibit C, page 2,
[item 6.2], he recommended that members find somebody who can
tell them about tolls, what goes into tolls, and what the costs
will be. It is called a "toll" rather than a "tariff" probably
because it is not subject to regulation at this point, but a
toll is what a shipper would have to pay to ship the gas. He
paraphrased from item 6.2 which states:
Reservation rate, a fixed charge expressed in
$/mmBtu/month, will be designed to capture
Depreciation Recovery, Return on Equity ("ROE"), Cost
of Debt, Income Taxes, fixed Operations and
Maintenance Costs ("O&M"), property taxes and other
non-income related taxes. Reservation rate payments
will be made by Shipper regardless of actual GTP and
Pipelines utilization by Shipper.
MR. BULLOCK continued his answer, pointing out that item 6.2
includes a usage rate in addition to the reservation rate. The
usage rate is a variable charge expressed in dollars per million
British Thermal Units and it is designed to capture the variable
operation and maintenance costs of the gasline. So, if there is
gas, it will be subject to both elements of the toll; if there
is not gas going through at any particular time, there will be
the reservation rate.
2:02:18 PM
REPRESENTATIVE SEATON recalled Mr. Bullock's statement that the
state would be committing to ship the gas through the midstream.
Because ship-or-pay is what was previously being looked at, he
said he would like to know whether the state is making a
commitment to ship its gas. He posed a scenario in which the
state wants one-third of its gas to go to Donlin Creek rather
than all the way down and asked whether, in this case, the state
could just pay the differential toll charge. Or, he further
asked, has the state made a commitment to ship so that the
producers would be the only ones that could supply that other
use in Alaska.
MR. BULLOCK responded he thinks that will be subject to
negotiation between the producers. The limited capacity of the
pipeline could be thought about in terms of Alaska Airlines
flying from Seattle to Anchorage, with a stop in Southeast
Alaska. A seat that is sold to Ketchikan cannot be sold from
Seattle to Anchorage. So, to the extent that not all the gas
goes all the way to the LNG facility and spares the costs, there
might be a disproportionate tariff to the outlet points along
the pipeline. The state can sell its gas to who it wants, the
consideration will be what it is going to cost; for example,
what the tariff is going to be if it comes out at Fairbanks.
2:04:00 PM
REPRESENTATIVE SEATON clarified he wants to be sure that the
state is in exactly the same position as the other parties, that
part of the state's gas could go to other places, and that under
the MOU the state is not committing its proportion of the gas to
go for 20 years through the midstream to the LNG [plant].
MR. BULLOCK answered that the initial contract term is going to
be the term that is required to pay for the facility. There
will be cost estimates and that is how the toll charge will be
figured out. Whatever the tolls are for short shipping will
have to be factored in and considered to pay for the project as
a whole. He brought attention to Exhibit C, page 5, item 6.17,
which sets a minimum of five in-state offtake points for non-LNG
consumption and sets three tariff zones, one zone from the North
Slope to Nenana, one for deliveries to Big Lake, and one for
deliveries to the LNG plant for LNG exports. Calculations will
be made for what it will cost to ship to those three points.
Once the gas is flowing, the state has gas and the producers
have gas. Mr. Bullock said he thinks the state is equal from
the standpoint that the state has a quantity of gas to sell. He
recalled that both the August 2013 gas symposium in Anchorage
and the [November 2013] Black & Veatch [report] talked about the
various risks that are involved with the state participation.
The state will have gas and will have to sell the gas. The
Heads of Agreement mentions that the producers will negotiate
with the state to sell the gas on the state's behalf. There is
a risk that the state does not have the flexibility that another
producer might in that the state has to pay some part of the
toll if it does not have gas to ship. If the state has a
contract for that gas, the state may be scrambling, or even
having to buy gas, to make its commitments. The Black & Veatch
report cautions about that when it talks about the various risks
that are involved. Thus, the optimism has to be tempered a
little bit. In all projects, the risks must be identified and
then the extent must be identified to which these risks can be
mitigated and get the rewards.
2:06:52 PM
CO-CHAIR SADDLER inquired whether the context of Mr. Bullock's
points is to provide discussion in a general sense, or to
highlight problem areas, or to provide a walk-through.
MR. BULLOCK replied he is doing both; for example, just now he
was specifically referring to the documents. However, he
continued, he is mostly concentrating on the issues that these
agreements raise because members do not have the opportunity to
amend these agreements. Members will have the opportunity to
look at the enabling legislation and decide whether that
legislation is giving a framework with it in which the state can
negotiate for this pipeline to go forward. For particular
issues that committee members are concerned about after this
overview, members need to talk to the administration about what
the language is, where it is, and how the administration intends
to use it.
2:08:01 PM
MR. BULLOCK, responding to Co-Chair Feige, confirmed he is
talking about additional boundaries that legislators may want in
the future to add to the enabling legislation. For example,
right now the MOU has an affiliate of TransCanada owning the
interest that the state will buy into. This has not gone to a
competitive process and the competitive process might be delay,
but he advised that members should still consider whether this
is the best deal that the state is going to get. If the
enabling legislation is amended to say it is not the affiliate,
which is what the MOU is based on, this would probably go away.
Members need to consider what effect that is going to have on
AGIA and the length of delays in trying to figure out who else
might be interested. Regarding who else might be interested,
Mr. Bullock noted that some things are not known. There was a
failed open season. TransCanada has talked with the producers
all along, but it is not known how the producers and TransCanada
necessarily get along and "whether they are, for example, the
partner that they would choose."
MR. BULLOCK said that the producers are going to have at least
three-quarters interest in the pipeline, and they have their own
pipelines and their own energy experience. Another
consideration is TransCanada's interest in the pipeline project
in British Columbia to Prince Rupert and whether Alaska will get
TransCanada's full attention and how TransCanada will protect
itself when it is involved in a competing project. British
Columbia is pretty much in the same position as Alaska as far as
the timing of each project and what it will take to grab part of
the market. TransCanada is following an aggressive timeline in
development of its Prince Rupert gas transmission project; the
company vice president has said that time is certainly of the
essence because growing demand in Asia, and particularly in
China, means huge new volumes of LNG will be needed.
"TransCanada is a pipeline company, this is what they do, it is
not a problem here, but it is something you might wish to
consider," Mr. Bullock advised. When looking at competing
gasline projects, he continued, Alaska has an advantage over
British Columbia because Alaska's North Slope fields are pretty
much ready to produce gas whereas British Columbia's gas fields
are not developed. A disadvantage is that British Columbia's
pipeline will be 460 miles long while Alaska's will be 800.
When looking at the competition, the cost of getting the gas
from the field to the LNG tanker must be considered.
2:11:16 PM
REPRESENTATIVE KAWASAKI inquired whether amending HB 277 is at
all a possibility.
MR. BULLOCK said that the legislature writes the laws, but there
are repercussions from an amendment. For example, an amendment
to the legislation to require similar terms in the contract that
overlapped with the commitments in AGIA might be considered by
the participants to be too much of a change. However, that type
of amendment is not as harmful as precluding a participant in
the MOU from participating.
REPRESENTATIVE KAWASAKI said he sees the MOU, HOA, and HB 277 as
a "take it or leave it" scenario. He asked whether Mr. Bullock
also sees it this way. He observed that Article 4 of the MOU
provides that any of the parties can say the enabling
legislation is not acceptable and void the MOU.
MR. BULLOCK confirmed that any party can say no; if the enabling
legislation is different than introduced, the parties have the
option of deciding whether they can still work with it and
continue. It is important, he advised, that members somehow get
guidance from the parties to the agreement as to what is open to
change and what is not. One big thing, he counseled, is how the
state's interest is going to be handled, who is going to handle
it, and whether the state should get involved directly or
through somebody else as is currently in the MOU.
2:13:25 PM
REPRESENTATIVE SEATON requested Mr. Bullock to elaborate further
regarding the state being the caboose on the train and what the
state will remain committed to if there is nothing.
MR. BULLOCK replied the agreement has certain cost recovery
provisions for TransCanada, but that he does not completely
understand how they go. Regarding being the caboose, he pointed
out that while a lot is heard about it being Alaska's gas, only
part of it is Alaska's gas. As the sovereign, the state is in
an interesting position. The state owns the resource when it is
in the ground. The state issues leases for somebody else to
take the gas out of the ground. The state is not in the gas
business, just like the farmer with mineral rights in the Lower
48 who does not want to develop the gas under his or her own
land. Therefore, the state needs somebody else to produce the
gas and turn it into money. The producers enter into lease
agreements and the state's compensation for entering into the
lease agreements is that the state gets its share of the gas,
which is the royalty gas and which is constitutionally required
to be paid to the state.
MR. BULLOCK said that as sovereign, the state also needs money
to run government, and production taxes pay for the cost of
government. It is similar to an occupation tax; if an entity is
producing oil and gas, then the entity pays the tax on producing
oil and gas. However, the state does not get anything unless
there is production. Even though the state may have 21.7
percent interest in the gas, the state does not get that until
the gas is coming out of the ground. That is why the three
engines of the train are the three major producers and they have
to all agree for this project to go forward, he explained. The
fourth partner is the limited liability company; it would be the
only interest that does not directly own gas because it will be
shipping the state's gas, not TransCanada's own gas. In that
respect, the state is separated from the producers; that is
where the state's interest diverges. The producers can decide
to sell gas and their decision determines whether the state is
going to get gas or money for the gas. So, the state is aligned
in ownership percentages once the gas is produced, but until it
is produced the gas in the ground is like money in the bank.
2:16:45 PM
CO-CHAIR SADDLER requested an explanation of the structure and
how the structure would work given that TransCanada's subsidiary
would be the general partner in a limited partnership in which
the state would own all the structure and leasing.
MR. BULLOCK responded that a limited liability company has
characteristics that are similar to a corporation in that the
limited liability partners are like shareholders and are not
actively involved in operation of the business. Under the MOU,
the general partner will be an affiliate of TransCanada and the
affiliate will have a minimum interest in the entire project,
which is about 1 percent or less. The percentages of ownership
of this limited partnership are a critical element of the MOU
because there is a limit in how much of this partnership the
state can buy. Under the MOU, TransCanada wants to keep a
minimum of 14 percent interest in the project as a whole.
Available to the state, then, is the difference between that
floor amount of 14 percent and the percentage of the ownership
that reflects the percentage of state gas that is going to go
through this pipeline. If it is 21.7 percent, the maximum state
interest under this agreement would be the difference between
the state's share and the 14 percent, which is [7.7 percent].
Mr. Bullock qualified that he does not know whether the 1
percent attributed to the general partner is part of the 14
percent or whether it reduces the margin that the state will get
above 14 or 15 percent.
2:18:51 PM
MR. BULLOCK, responding further to Co-Chair Saddler, said the 14
percent interest that TransCanada wants to keep is 14 percent of
the Alaska LNG Project as a whole.
CO-CHAIR SADDLER asked what percentage of the entire project
would represent Alaska's quarter.
MR. BULLOCK answered that it could go to the same percentage of
14 percent. To better provide an answer he noted that under the
Pipeline Leasing Act the general requirement is that pipelines
built across state lines must be common carriers. In this case,
if a shipper is Exxon, some of Exxon's gas will go through
Conoco's part and some will go through BP's part - there are no
assigned seats on the airplane. Last year the possibility of a
contract carrier was introduced in the Alaska Gasline
Development Corporation (AGDC) changes in HB 4, which would
allow parties to break out of the common carrier and by entering
into contract would be guaranteed a certain part of the
transportation capacity without being at risk of getting bumped
by some new gas producers. A disadvantage of the common carrier
is that it is open to all shippers. This is a third approach in
that this pipeline is just like a pipeline from a field to the
dock and in this case the dock is 800 miles away. It is being
characterized as an industrial pipeline; it is just part of this
whole structure for a producer to get its own gas to market, the
producer has a definite percentage. The ideal situation for a
producer is to have the same percentage of ownership in a
pipeline as it has in the resource so that the producer has some
comfort in knowing that if it produces its share it is going to
have a way to ship the gas to market and turn it into money.
2:22:01 PM
CO-CHAIR SADDLER asked whether the 14 percent is 14 percent of
the entire pipe or 14 percent of the one-quarter of the pipe.
MR. BULLOCK replied it is 14 percent of the whole Alaska LNG
Project. He said that if all the gas is produced on the North
Slope and the state gets, for example, a 12.5 percent royalty
and 9.2 percent of the seven-eighths that the producers have as
gas, the state will have 21.7 percent. That 21.7 is the
interest of the total project and the state can buy that
fraction of the 21.7 percent that is above 14 percent. Using
rounded numbers, he explained that if the state's share is 22
percent of total gas production, the state's pipeline share
would be 22 percent; if TransCanada keeps 14 percent, then the
state can buy in at 8 percent of the total project. Thinking
aloud, he recalled that Alaska has seen scenarios where the
wellhead value of gas was very small or nothing. For example,
in 1986 oil prices were rock bottom. While he was working at
the Department of Revenue, the department was speculating as to
whether an integrated company could continue to produce oil at
below wellhead value. In some cases an [integrated] company
probably could because that is not the company's only source of
revenue - under the pipeline tariffs, a company is entitled to a
certain rate of return and the tariff is going to provide for
that. If a company is refining, there is some profit to be made
there; the same for if a company is retailing or wholesaling.
Thus, there are different points in which an entity can recover
its cost.
2:24:24 PM
REPRESENTATIVE HAWKER stated he is still trying to get his head
around whether this is the right thing to do. Observing that
TransCanada's 14 percent minimum ownership provision and the 1
percent general partner provision are part of the Alaska LNG
Project Equity Option Term Sheet [MOU, Exhibit B, page 1, items
2 and 3], he concluded that this means those are right up front
in priority. He pointed out that the 14 percent is equity
participation interest in the midstream component and does not
include below the midstream.
MR. BULLOCK agreed the aforementioned is correct and said the
midstream component is from transmission lines from Prudhoe Bay
and Point Thomson down to the LNG plant inlet. Additionally,
there is a possibility that, under a different mechanism, the
state would acquire ownership interest in the LNG plant. The
Heads of Agreement (HOA) contemplates that AGDC or some other
party might have a representation for the state in that project.
2:26:03 PM
REPRESENTATIVE HAWKER stressed that one must be cognizant of the
necessity of preserving the occurrence of that percentage
throughout the value chain. He asked whether Mr. Bullock has
identified anything magic about that 14 percent number.
MR. BULLOCK answered he is unaware of any particular reason for
14 percent. TransCanada is a pipeline company, he continued,
and that 14 percent will be a factor if the gas is flowing. It
is probably the interest that will keep TransCanada interested
and as long as the pipeline is operating TransCanada will get a
share of any money that it might generate.
2:27:13 PM
REPRESENTATIVE HAWKER observed the language in [Exhibit B of the
MOU, Alaska LNG Project Equity Option Term Sheet, item 2]
definitively states "must not" be less than 14 percent. He said
he would like to identify the reason why this is so definitive.
MR. BULLOCK offered his belief that those points which are put
forth so strongly in the MOU are red flags for the enabling
legislation. For example, AGIA required commitments in certain
things. One thing that would be related to a commitment is the
state would be able to buy all of its interest of this
partnership. If the state were to consider other people who may
participate or represent the state in the Alaska LNG Project -
that would be a negotiating factor depending on what the
interest of the state was to acquire a percentage of ownership,
it would be a variable. The way it is presented in [Exhibit B]
is "kind of a flag" that says do not do anything in the enabling
legislation that would reduce that particular point. For
example, if the enabling legislation says the state would work
toward 20 percent ownership, it would cut out the 14 percent.
REPRESENTATIVE HAWKER remarked it is a bit more than a flag.
MR. BULLOCK quipped there are flags and then there are "almost
guns to the head."
2:28:51 PM
REPRESENTATIVE HAWKER surmised the 1 percent general partner
provision in Exhibit B, item 3, is a management provision to
allow one partner that will have preferential voting rights in
the management and affairs of the entity that ends up owning
this piece of the project. The general partner for that 1
percent will make all decisions on behalf of the limited
partnership, with a couple of caveats. The only thing profound
about that is that even though the state may own 40 percent
equity in that portion of the project, all the control and
decision making is being handed to a general partner that is
owned 100 percent by TransCanada.
MR. BULLOCK confirmed the aforementioned is correct and stated
the general partner will have responsibility for actually doing
the work of the limited liability company.
MR. BULLOCK then advised that there is another red flag and that
this flag arises partly because of the delay between when the
AGIA license was issued and when it was known that the open
season had failed. He read Exhibit B, page 3, item 8:
The Parties acknowledge the confidentiality provisions
of the Alaska LNG Project agreements to which the
Limited Partnership may become a party may prohibit or
restrict disclosure of Project information to the
State. The parties agree to use reasonable efforts to
allow for disclosure to the State (including on a
restricted basis) as required under applicable Alaska
law.
MR. BULLOCK continued, saying that because the state does not
have a direct interest in the ownership, as the state is
effectively buying into this limited liability company, there is
certain information that the state would not have access to. He
qualified he does not really understand this option for the
state to enter in. At some point, he said, the state will say
it wants to have the option to buy into the partnership, but he
is unclear as to when the state would actually exercise the
option. It seems to be a two-step process: the first step is
the state gets an option, and the second step is when the option
is actually exercised and the state actually becomes part owner
of that partnership.
2:32:17 PM
CO-CHAIR SADDLER inquired who the partners would be in the
limited liability partnership.
MR. BULLOCK replied he is unsure. He added he is unsure that by
buying into the limited liability partner, the TransCanada
affiliate, whether the state is just combining interest with the
affiliate or the state is becoming a separate limited partner.
While it is possible the MOU may say that, he said he is unsure
whether there would be "limited partner Alaska, limited partner
TransCanada affiliate, general partner TransCanada affiliate."
Responding further, Mr. Bullock clarified he does not know
whether it would be two limited partners and one general partner
or one limited partner and one general partner, of which Alaska
is part of the limited partner.
CO-CHAIR SADDLER asked whether a general partner normally has
the authority to speak for the other partners or whether it is
just specifically this agreement language that gives this power.
MR. BULLOCK responded that limited partners are like investors,
and general partners are like the executive officer who is going
to run the business. "The risks in that type of business
structure are different," he continued, "depending whether you
are general or limited partner."
2:34:10 PM
MR. BULLOCK began a PowerPoint presentation, stating he will be
mentioning things for members to think about as they move
forward. Drawing attention to slide 2, he noted that not in the
MOU is Exxon, the party that was working with TransCanada as the
licensee on the Alaska Pipeline Project, and that Exxon may not
be there because it is more directly involved with the Heads of
Agreement. The new party in the MOU is [TransCanada Alaska]
Development Inc. (TADI) which is participating in the Heads of
Agreement with the producers but was not previously part of the
AGIA project. Moving to slide 4, Mr. Bullock addressed the
question, "Given the MOU, what changes could be made to the
enabling legislation [HB 277, SB 138] without causing the MOU to
fail?" He said red flags that members might see are the
specific 14 percent interest or the specific partner and that
there may be others. He urged members to look at any provision
that raises a red flag [slide 6] and to consider whether
amending the bill to change the criteria under which the
administration negotiates will cause the MOU to go away. Mr.
Bullock emphasized that it is important for the separation of
powers to distinguish what the legislature does from what the
executive does - the legislature legislates, executive executes
[slide 5].
2:36:06 PM
REPRESENTATIVE HAWKER, addressing slide 5, stated that the
legislature gets one vote on the enabling legislation, which
then "shoots this whole thing off into the administration" to
complete it, exercise the option agreement, and go forward. He
queried whether this is truly an option agreement. Nowhere in
the legislation or elsewhere is money being provided to exercise
the option agreement. He understood the administration would
need to come back to the legislature for an appropriations vote
in order to successfully exercise that option agreement, of
which the provisions are the earlier of December 31, 2015 or the
date of the commercial agreements from commencement of Front-End
Engineering and Design (FEED). From a practical standpoint,
that seems to throw a level of risk, doubt, and uncertainty into
giving the administration the commitment to proceed, he opined.
MR. BULLOCK answered by directing attention to the terms defined
in the MOU on page 5. Enabling legislation, he pointed out, is
defined to include the giving of authority to the commissioners
to negotiate and enter into the transition agreements that are
described in the MOU. The transitions agreements are the option
agreement to require equity interest and then to the Precedent
Agreement and Firm Transportation Services Agreement. The
definition of enabling legislation also includes authorizing the
commissioners to negotiate and enter into commercial
arrangements with the Alaska North Slope (ANS) producers for the
Alaska LNG Project. The third part of the definition for
enabling legislation is the appropriation provision referred to
by Representative Hawker. He said he does not know, however,
what the approach will be, whether this part is in [HB 277 and
SB 138], or in a fiscal note to the bills, or some other
approach. Regardless, he continued, there must be a bill that
will fund the state's contingent and direct payment obligations
of the costs under the Precedent Agreement.
2:39:02 PM
REPRESENTATIVE HAWKER remarked it seems like a gap in the
documentation that the committee currently has, including the
bill and the MOU.
MR. BULLOCK replied this relates to another part of the MOU that
is confusing - page 7, Article 4.1, Term and Termination, which
states that the "MOU shall commence on the effective date hereof
and shall terminate upon the earliest of" the seven actions
listed below it. Action (a) is execution and delivery of all of
the transition agreements, in which case, he said, everything
just goes along. However, he continued, if it terminates for
actions (b) through (g), money will be changing hands from the
state to TransCanada as guided under Article 4.2. Currently,
AGIA is still in effect, there is an agreement that the state
will continue to pay reimbursement costs after December 31,
2013. So, he advised, this ongoing potential cost liability is
a red flag to think about - not only from the standpoint as to
whether the MOU is going to go because the enabling legislation
passes or not, but also from the standpoint that if the MOU
fails, what happens to AGIA because AGIA has not been
terminated. The Alaska Gasline Inducement Act will only be
terminated under the terms of the MOU if the MOU is in effect
and this liability for development cost reimbursement survives
the MOU specifically [Article 4.3].
2:41:07 PM
REPRESENTATIVE HAWKER recalled that in a previous conversation
between the committee and Mr. Pawlowski [Deputy Commissioner,
DOR], it was determined that there is nothing truly definitive
about the state exiting AGIA, that it is a soft provision the
committee was invited to keep in mind as it goes forward in
developing the enabling legislation. [The MOU, page 3, recitals
11-12] state that the commissioners will initiate the process of
making a determination, but it does not talk at all about
concluding that process or in fact making it happen. This
causes him trouble, he said, because it seems to be very open-
ended, there is no mandatory exit from AGIA.
MR. BULLOCK explained that AS 43.90.240 is the agreement that
says AGIA will end if the project is found to be uneconomic.
That statute is set up such that if TransCanada, as the
licensee, and the state agree that it is uneconomic, both
parties will walk away. There is no specific guidance for the
state or for TransCanada to decide it is uneconomic. It is a
business decision for TransCanada, and reasons that would
probably be good enough could include that there is just not
enough money, or it is not going happen, or it is going down the
wrong path. But, if the state and TransCanada disagree in this
regard, it goes to an arbitration panel. Certain facts must be
found for the panel to conclude that it is uneconomic. Those
are more black and white, and clearer, because in that case it
is a third party making the call as to whether the project is
uneconomic. In the MOU, these provisions partly do what the
uneconomic/abandonment provision does. They say that the
commissioners make a decision after the enabling legislation
becomes effective and the commercial agreements are executed
committing the ANS producers to initiate the pre-FEED phase of
the Alaska LNG Project. The commissioners will initiate the
process of making a determination for purposes of AS
43.90.240(a), which is the allegation that the project is
uneconomic. There are always different ways to write things, he
noted. Not counting the licensee not living up to its terms,
the recitals do not refer to the other way of getting out and
that is competing pipeline, which is not mentioned in this
agreement. "There is no agreement that if the MOU fails that
TransCanada would not seek to recover treble damages by alleging
that the Alaska support for the LNG project is support for a
competing pipeline," Mr. Bullock said. "That is an issue that
will continue." It could be that this is a very amenable and
friendly agreement that says "rather than litigate we will
welcome you to a part of this next project," but he does not
know. While TransCanada has worked in this state probably since
before AGIA, it is an issue as to why TransCanada's involvement
is characterized in the terms of these recitals.
2:46:09 PM
REPRESENTATIVE P. WILSON understood Mr. Bullock to be saying
there is nothing in the MOU that says what will happen if the
state walks away.
MR. BULLOCK posed a scenario in which there is no MOU and it is
the AGIA project that is being looked at right now. First, he
said, it is unclear what the AGIA project is, which is something
that he discussed in his [February 15, 2013, memorandum to
Representative Hawker] during the consideration of HB 4. The
project pitched to the legislature in the AGIA application and
approved by the legislature - so it is the AGIA license project
- would have gone to the Alaska/British Columbia border and on
through Canada. Is that still a good business option? Without
finding that that project is uneconomic, the findings and the
project plan amendments have said it does not look like that
project is going anywhere, but this other project is going to be
done. Doing this other project and forgetting about the
uneconomic part of the original one is fine in some ways. But
AGIA is a law and the AGIA law delineates specific ways to end
the AGIA license. Sometimes a contract can be entered into
where both parties find that the contract is not working for
them and ask if the other party would be open to changing it.
In a general contract environment those kinds of changes can be
made. However, in the case of a government agency in
procurement there are certain changes the agency cannot make;
for example, can a change be made after entering into a contract
that would have been more favorable, that if at the time the
procurement was done there would have been five other people
that were interested? At some point the change is too great.
Continuing, Mr. Bullock explained that in the concept of AGIA,
particular bounds for the AGIA licensee were set - the
commitments in AS 43.90.130 - the safety of the state to say
that it is not going to continue to fund a project that is not
showing value. Regardless of the contract the legislature can
always review the appropriations and evaluate the project. The
responsibility for defining the project as uneconomic is placed
with the commissioners. Under AGIA, the duty of the
commissioners is to consider the economics of the project along
the way. Recital 11 is consistent with AGIA because it says to
keep looking at it and if at some point it is seen as
uneconomic, not going to go, it raises the issue. Then, after
that, it is an issue of how it will be handled. In this case,
it says that the licensee is committed and that if all the
things that have to happen before the commissioners can commit
to allege the project is uneconomic are in place, that
TransCanada will agree that it is uneconomic as well. It is
kind of based on the AGIA provision, but it is silent on whether
the state will buy the information paid for by TransCanada by
paying TransCanada its net cost. However, it probably covers
most of the spirit of the abandonment provision.
2:50:41 PM
REPRESENTATIVE P. WILSON surmised the state would have to pay a
lot of money and it is unknown whether the state would get the
data.
MR. BULLOCK replied, "Right - that is another whole game."
Continuing, he reminded members that the state is only paying
for those qualified expenditures that were pinned down in the
inducement provisions of AS 43.90.110. Up to open season, the
licensee can get up to 50 percent reimbursement of those
qualified expenditures. After open season, TransCanada can get
90 percent reimbursement of the qualified expenditures, but now
TransCanada is going to have other costs that are not qualified
expenditures. Thus, "it is not all the qualified expenditures;
it is just the money that TransCanada has put out."
CO-CHAIR SADDLER understood that TransCanada's unreimbursed
qualified expenditures are at about $130 million.
MR. BULLOCK answered he has heard that figure but offered his
belief there has not been a report on the status of the project
since January 2013.
CO-CHAIR SADDLER requested that a firm number be provided to the
committee.
2:52:29 PM
CO-CHAIR SADDLER inquired whether Mr. Bullock's legal opinion is
that the Alaska LNG Project is not a proper legal descendant of
the AGIA process and does not extinguish AGIA.
MR. BULLOCK responded he is saying that because of the way AGIA
is written, and because AGIA is still active since there is
still a licensee that the state is still reimbursing for
qualified expenditures, the issue is raised of the extent to
which the state is promoting this parallel pipeline. A certain
amount of protection is probably there because an affiliate of
the licensee is part of this new project. When everybody is in
agreement, he continued, things go along fine, but not so when
something breaks.
CO-CHAIR SADDLER understood that the MOU provides a way for both
the State of Alaska and TransCanada to slide on past AGIA and
not let go of the trapeze handle that is AGIA until a firm grasp
is had on the next trapeze handle that is the enabling agreement
and so forth.
MR. BULLOCK agreed the aforementioned metaphor is a reasonable
reading of the situation. He said TransCanada as the licensee
continues to have an interest in the pipeline project. He
reminded members that AGIA was not to build a pipeline, but to
work toward a pipeline. So, the issue of who would actually own
part of that project would continue. This MOU, in a way, covers
that because it allows TransCanada to continue to be involved
and it actually clarifies more than did AGIA as to what
ownership interest TransCanada would have in the ultimate
project.
2:54:38 PM
CO-CHAIR SADDLER asked whether Mr. Bullock, as the committee's
attorney, is advising the committee to clarify the
extinguishment of AGIA, or to proceed with the MOU and get past
the whole AGIA question, or to be cautious and cognizant of all
the elements at play as the committee makes a decision.
MR. BULLOCK replied he is advising to be cautious. He urged the
committee to remember executive power versus legislative power.
The legislature cannot find that the project was uneconomic, the
legislature cannot find that the licensed assurances have been
violated; those are executive branch functions. Recital 11 is
consistent with the executive branch function because it
requires the commissioners to move forward on the uneconomic
aspect after all these other conditions have been met.
CO-CHAIR SADDLER inquired whether, during Mr. Bullock's time
with the legislature, a more complicated deal has ever been
presented to the legislature.
MR. BULLOCK responded no, usually it would not for the reason
that laws can be complicated, but within the laws the
legislature has set boundaries within which the executive
operates. For example, the state has a procurement code that
tells state agencies what they must do. What makes this a big
deal is that the legislative branch has overlapping functions
with the executive branch. The approval of the AGIA license
passed without a two-thirds vote to have an immediate effective
date, so there was not universal acceptance of the AGIA
approach. The issue came up then as to whether the governor
could have done it anyway. There is a possibility that that
could have happened because the legislature, by saying what all
the rules are, and the administration, by operating within all
the rules, had carried out its executive function. It is
contemplated that the contracts will come back to the
legislature for approval, plus the legislature has to
appropriate money anyway and therefore the legislature always
has that hook on a project.
2:57:45 PM
CO-CHAIR SADDLER asked whether Mr. Bullock has been involved
before with agreements that are this complicated, cascading, and
contingent.
MR. BULLOCK answered he has not been involved in agreements like
this, but he has helped clarify some of the laws as they have
gone through the legislative process.
CO-CHAIR SADDLER noted that the flow chart the committee has
requested will show all the different contingencies, moving
pieces, decision flows, and implications of those decisions.
The chart will help members as well as the public to understand
such a complicated transaction.
MR. BULLOCK pointed out that there also needs to be "a seat belt
and airbag analysis" [slide 10]. Everything may look great
right now if the enabling legislation passes and the MOU and the
option agreement just click along, but [there should be analysis
of] how the state is covered should they not. This uneconomic
issue under AS 43.90.240 is going to continue, so there must be
a plan for that.
2:59:12 PM
REPRESENTATIVE SEATON expressed his concern about giving
permission to the executive to negotiate terms, including terms
outside those that were specified. Noting that the enabling
legislation, as written, would separate the oil and gas tax
formats, he inquired whether the bill would give legislative
approval to the executive to negotiate terms of the oil tax.
MR. BULLOCK replied there are two aspects of that issue. There
have been many discussions about setting tax rates by contract
so that the state cannot change them over a period of time.
However, the law is pretty clear that [the legislature] cannot
do that, not only in the state's constitution, but the state's
own experience between floods and earthquakes. The state has
had to have the flexibility to impose the $10 disaster tax when
the state needed the money. Agreements are going to be
discussions in quiet rooms behind locked doors. There may be
factors that affect what the tax rate is going to be, but the
administration or the executive branch cannot set tax rates;
that is the legislative branch. The administration has
flexibility to establish how royalty is going to be established
and collected because that is a contract and those contracts
must be within AS 38.05.180, the oil and gas leasing statute.
It depends on how the legislature gives the authority to the
administration. Under AGIA there were the must-haves in AS
43.90.130 that required an applicant to commit to those things.
If the applicant did not commit to those things the
administration did not have the power to say the applicant did
most of the things so the state would go with it. The tax rates
are going to be just like they are under the governor's
legislation, which is proposing a new tax rate and different
method of tax on gas. Members do not know how it got there - it
may be that 10.5 percent was a compromise between the state
getting that percentage of the gas production on the North
Slope, or maybe at 11 percent the project might not have been
able to go forward, or maybe 9 percent was giving too much away.
It is hard to say because what goes into the governor's bill is
negotiation and thought from [the executive's] standpoint as to
what is in the best interest of the state. But, particularly in
tax, it is the legislature that decides which rate, what method
of taxation, and what is taxed, that is in the best interest of
the state. So, tax rates are not negotiated, but the
legislature may get a bill that proposes a change in tax rates.
For example, in SB 21 last year the proposed rates and proposed
change in structure were based on the information that was
presented to the legislature; that [information] was the
administration's basis for selecting that method and those tax
rates.
3:03:18 PM
REPRESENTATIVE SEATON clarified he is asking for Mr. Bullock's
legal opinion as to whether the legislature, under the enabling
legislation, would be giving the authority to the executive to
negotiate additional terms and would those additional terms, by
giving that authority, be to set in contract a tax for oil.
MR. BULLOCK answered the contract cannot set the tax rate or the
tax system. But, the way it can be done is by calling it
enabling legislation and setting up that this is agreement that
requires certain changes to be made. The enabling legislation
includes more than just giving the commissioners the authority
to negotiate these commercial agreements. It addresses re-
defining the point of production for gas and provides for taxing
gas on the gross value at the point of production rather than
the production tax value. When considering this bill that
states a tax rate, legislators must determine whether that is
the appropriate tax rate and look at why it is being offered.
Last year, legislators were shown that the tax rate was to make
Alaska more competitive. This year, legislators are going to be
shown that the MOU and Heads of Agreement require a different
method of taxation and the opportunity to pay the tax with gas.
3:05:12 PM
CO-CHAIR FEIGE understood Mr. Bullock to be saying that, in the
enabling legislation, legislators can either give the authority
[to the executive] to renegotiate oil royalties or not, and that
that authority should probably be just for gas royalties.
MR. BULLOCK said the proposed enabling legislation only
addresses gas, but noted there is an overlap between gas and oil
that would continue in the governor's legislation and which will
be seen when the legislation is before the committee. He said
his first thought was about lease expenditures when he heard the
proposal that the gas would be taxed on gross value, because
lease expenditure reduces the gross value at the point of
production down to the level that the state would be taxing, so
that would be the deduction. Because the state would be taxing
on gross, the lease expenditures would go somewhere and he
believes they would be taken against the gross value at the
point of production for oil to determine the production tax
value. The cost for processing gas is generally not as great as
oil; however, at the LNG facility those costs are very high.
3:06:43 PM
REPRESENTATIVE SEATON concluded, then, that all production costs
on gas would get accounted for in oil, reducing value for oil
taxation, that that is the interchange between gas and oil.
MR. BULLOCK agreed, saying the whole theory of the petroleum
profits tax (PPT), Alaska's Clear and Equitable Share (ACES),
and SB 21 is that there are so many common facilities and common
costs in a field that it is very difficult to divide them
between gas and oil. Legislators looked at the combination of
gas and oil in the progressive part of ACES and how the more gas
produced dilutes that average and brings the tax down, which is
known as the decoupling issue. However, it is not anywhere near
the impact of mixing oil and gas values when just taking some of
the lease expenditures and using them against the oil tax. It
is an incentive for producers with oil and gas deposits to
produce gas, which would help this project along.
3:08:10 PM
MR. BULLOCK, responding to Representative Olson, noted the date
of [July 31, 2014] is a trigger date. If the enabling
legislation is not actually in effect as of that date, i.e. if
the effective date fails, the legislation must be signed 90 days
before that date, otherwise the parties will look at it and
decide whether it has triggered the abandonment of the MOU.
MR. BULLOCK, responding to Representative Hawker, agreed the
date has a provision that allows it to be extended with the
joint approval of the parties. That date is one of the
flexibilities, he said, and there is also flexibility on the
parties' interpretation of whether the enabling legislation is
satisfactory.
REPRESENTATIVE TARR posed a scenario in which enabling
legislation goes through, but sometime later the process is
disrupted and does not continue. She asked whether there is a
grey area in those transition agreements for getting out of the
AGIA license and whether the legislature could be given a
financial liability because of actions by the executive branch.
MR. BULLOCK responded there are liabilities in this agreement if
things do not happen as expected. Drawing attention to the
seven contingencies in Article 4.1 of the MOU, he said only one
[4.1(a)] does not put the state at risk of having to make
payments. Article 4.2(a) recognizes that certain things are
continuing to happen under AGIA as it mentions "net of AGIA
reimbursement...." Enabling legislation gives the authority to
the administration to make it work, but it will have to be
within the bounds of the legislation passed by the legislature.
3:12:00 PM
CO-CHAIR SADDLER understood that TransCanada would receive a 7.1
percent return on its development expense [Article 4.2(a)]. He
inquired how much development expenses are likely to be and
whether 7.1 percent is reasonable.
MR. BULLOCK deferred to the administration for an answer, saying
he is not sure about the 7.1 percent but that it probably is a
negotiated percentage based on cost plus. He noted that "AFUDC"
stands for Allowance for Funds Used During Construction.
CO-CHAIR SADDLER understood Mr. Bullock to have earlier said
that the enabling legislation would allow qualified lease
expenditures for gas production to be deducted from oil income
for tax purposes.
MR. BULLOCK confirmed that is the way lease expenditures are
handled in the enabling legislation, but it could change. It
comes back to the issue of whether those costs can really be
separated.
CO-CHAIR SADDLER understood that would be after the initial
contract period.
MR. BULLOCK replied that the current tax provisions in the
governor's enabling legislation have an effective date of
January 1, 2015. In the bill the present tax rate is referred
to as the tax in effect on and after January 1, 2014 and before
January 1, 2022. The bill adds a section that will tax oil at
35 percent of the production tax value and will tax the gross at
10.5 percent. A new provision in the bill, AS 43.55.014, would
allow a taxpayer to elect to pay its tax in the form of gas
instead of dollars. To be able to make that election the
taxpayer has to be a taxpayer that had its leases renegotiated
under the authority of the bill. If the legislation passes with
those changes, then starting January 1, 2015, negotiations with
the producers who want to pay their tax with gas will commence
and the state will learn how much gas percentage it is going to
get from the total production on the North Slope, as well as
what gas it will get as royalty in kind rather than value. Once
this gas percentage is known, the ownership options discussed in
the MOU can be considered and the state will have a better idea
about the actual percentage of the project that the limited
liability company would own that the state could buy into. It
is a chain of events. One thing leads to another and they all
have to happen in a certain order.
3:15:50 PM
MR. BULLOCK turned to his presentation to address state
ownership in the midstream part of the Alaska LNG Project [slide
17]. He said there seems to be two options - an option to pick
up the option to buy in and then a point at which the state
actually requires the equity interest. However, he said, he is
unsure how that works and what the timing is. Regarding state
ownership, he paraphrased from slide 18 which states:
Under the MOU an affiliate of TransCanada would hold
that portion of the midstream project equal to the
percentage of North Slope gas the state may receive as
royalty in kind and production tax on gas paid as gas.
May be 20-25 percent depending on amount of royalty
gas in kind and production tax paid as gas.
MR. BULLOCK, addressing slides 19-21, urged committee members to
be aware of the economic impacts of an agreement to pay for the
gas transportation cost over [the 20-25 year] period of time.
3:16:44 PM
REPRESENTATIVE HAWKER offered his understanding that a sole-risk
expansion would be another way that the state could acquire
ownership in the project.
MR. BULLOCK responded the expansion comes up once the state has
this percentage of ownership. The state can open its interest
to other producers in the state and if that requires expansion
of the pipeline, then how it will be paid and how it will be
done is another subject.
REPRESENTATIVE HAWKER said he is looking for affirmation that
instead of acquiring a greater interest in the partnership with
the TransCanada entity, the State of Alaska could actually own a
direct equity interest in the midstream part of the project by
taking a sole-risk expansion.
MR. BULLOCK confirmed this is addressed in Exhibit C of the MOU,
[Alaska LNG Midstream Services Term Sheet], page 7, item 7. In
further response, he said he is unsure how it works and that the
people who wrote the agreement would be able to give a
definitive answer.
3:19:12 PM
REPRESENTATIVE P. WILSON surmised a sole-risk expansion would
cost the state more because there would need to be compression,
resulting in [the state] not getting as much for its gas.
MR. BULLOCK answered that expansion by adding compression
capabilities can actually reduce the cost. However, expansion
by looping, which is the building of another pipeline next to
the current pipeline, can have costs that get quite high. Under
AGIA, a person is required to commit to rolled-in rates in which
the existing shippers help pay for the cost of expansion within
certain bounds; however, that commitment is not really
enforceable because it is up to the regulatory agencies.
Generally, he continued, any cost of adding capacity is passed
on to whoever will be shipping their gas through.
3:20:37 PM
CO-CHAIR FEIGE pointed out that a main feature of the Heads of
Agreement is that the cost of any expansion will be borne by the
party doing the expansion and the original equity owners will
not see an increase in their cost unless they elect to buy into
the expansion. Thus, the future expenses of the equity owners
are protected.
MR. BULLOCK replied that is a good observation and said the
common situation between HB 4, which allowed for contract
carriers, and this situation, which is an industrial approach to
getting gas, is that the people with gas know they will be able
to ship it. A North Slope producer is not precluded from buying
gas from a new producer and shipping that gas, which would be
another way that new gas could get into the project. The state
would have the option of adjusting its capacity to accept new
gas in the part of the midstream project that it owns. Also,
AGDC could participate in the LNG plant [slide 21] as another
way of state ownership. Gas not sold instate would go through
the LNG plant, so the state would become part of all of it.
3:22:34 PM
REPRESENTATIVE SEATON posed a scenario in which the state, to
promote economic development, sells gas to various development
projects around the state, thereby reducing the throughput to
the LNG plant. He asked whether this scenario would require a
subtraction or addition of tariff to the price of the gas for
the state's capacity on the pipeline.
MR. BULLOCK responded that would all be part of it. For
example, the proposed terms in the MOU allow for three different
tariffs depending on where the gas is going to be delivered,
which would affect the cost.
REPRESENTATIVE SEATON surmised that if the state did not have
the additional 25 percent of the gas to go down the pipeline
because the Alaska Oil and Gas Conservation Commission (AOGCC)
did not increase the available gas off the North Slope, the
state would have to decide whether it wants to stimulate that
economic development and tack on the additional capacity that
would then not be used going down to the LNG plant.
MR. BULLOCK replied this is where the state is the caboose.
Whether the state gets anything at all depends on whether the
three producers are producing. He recalled there was discussion
in the terms of Point Thomson as to whether the state would take
its royalty of the gas at the time it came out of Point Thomson
and went to pressurize Prudhoe Bay and that the tax would not be
due until it came off the cap in Prudhoe Bay, but added that he
does not think anything came of the discussion. Generally, the
state does not get gas and does not get tax unless there is oil
or gas produced. This is why the state is the caboose, not the
engine. The state cannot say to start producing the one-eighth
of the gas because it wants its royalty now.
3:26:16 PM
MR. BULLOCK returned to his presentation, saying that the state
does not know why the first open season failed [slides 26-29].
For example, did the producers think TransCanada's project was a
good one but the taxes were not worth it, or that the market was
not pretty enough, or that the producers, being the ones with
the gas, wanted to pick who to go into business with? The
producers may not know the details of building a gasline through
permafrost like TransCanada does, he continued, but they are not
part of the process of who is going to represent the state in
this project.
CO-CHAIR FEIGE inquired whether there were specific statutory
requirements in AGIA mandating that that open season information
remain confidential.
MR. BULLOCK answered AGIA had a number of confidentiality
provisions that were necessary because an entity does not want
to publish why the open season failed and possibly jeopardize
the next open season. Communication would be helpful. The
license was issued in 2008, open season ended on July 30, 2010,
and appropriations were being made for reimbursement
expenditures for that period without [the legislature] being
able to know whether the state was getting the bang it expected
for the buck. A reason HB 4 was attractive is that there is
more open communication and more open reporting requirements
along the way. He advised that information is going to be a
problem - these are billion dollar business decisions that
people want to hold close to their vests, which is
understandable. But at some point legislators need to know
enough information when trying to determine how much money to
appropriate, what the state's money is going for, and what can
be expected from it.
3:29:15 PM
MR. BULLOCK, turning back to his presentation, said the licensed
AGIA project was, in his opinion, the Alberta project [slides
26-29]. But, he said, TransCanada always said that it would
solicit information to Valdez at the same time, Valdez being the
focus for the LNG facility. So, there was discussion about LNG
facilities. While it was a different format than the Alaska LNG
Project, the pros and cons must have come up in conversation and
those would be good things to know. Also important is the big
difference between the AGIA project and the Alaska LNG Project -
the AGIA project was mostly a pipeline. In the past, the
producers have been reluctant to participate in a project that
they could not own a part of; that, plus other terms like common
carriage, made a stand-alone pipeline project less attractive.
The negatives of the AGIA project go away with the Alaska LNG
Project where the producers are part owners. He pointed out
that he is talking about the producers because they are the ones
that are going to decide whether or not gas comes out of the
ground, although the AOGCC will say when and how much. The
producers will have the Alaska LNG Project all the way to the
LNG facility and into the tanker.
3:31:37 PM
CO-CHAIR SADDLER brought attention to slide 28 and queried
whether the question regarding what happened is about whether
interest was or was not expressed.
MR. BULLOCK answered yes. A question is whether changes were
identified that would have made the AGIA project viable; for
example, maybe the project was too small. Responding further,
he noted there was a formal open season in 2010 and a
solicitation of interest in 2012. The state does not know, for
example, whether conditional commitments were made, such as the
agreements would be signed if the tax rates on gas were reduced.
Or perhaps it was a dislike of the way the project was formed.
The information required for an LNG project was as complete as
for an overland project, but there was never full information
for an LNG project like there was for the overland project.
CO-CHAIR SADDLER, regarding the question asked on slide 28 about
whether changes were identified that would make the AGIA project
viable, inquired which route is specifically being referred to
as the AGIA project.
MR. BULLOCK replied both. He noted the interest is that the
overlap was solicitations to Valdez and the Alaska LNG Project.
3:33:51 PM
CO-CHAIR SADDLER suggested that the question could be better
expressed by asking whether changes were identified that would
make "an" AGIA project viable.
MR. BULLOCK agreed, but added that because the open seasons and
the solicitation of interest were related to the AGIA project
the discussion would have been to the AGIA project. But, at
that same time, the Valdez LNG option would have been discussed.
Why the AGIA project was not viable would have been because the
LNG was a better option. In further response, he clarified that
2010-2012 is the timeline being referred to in his question
about whether any changes were identified. Regarding what
changes were identified, he said he is meaning what would have
to change for someone to sign up to ship gas.
CO-CHAIR SADDLER surmised Mr. Bullock is saying that he is
unsure whether a viable deal was presented and negotiated but
not committed to.
MR. BULLOCK replied that if it was not committed to, then it was
not a deal. He said he thinks it was more of the terms and
conditions during that discussion of what it takes to make a gas
project in Alaska work. Because there were not commitments
during the open season, something was missing and it would be
nice to know what that was.
MR. BULLOCK urged committee members to remember that the most
control they have over this process is being members of the
legislature that will write the laws and appropriate money to
make anything happen.
3:36:01 PM
REPRESENTATIVE P. WILSON requested Mr. Bullock's opinion on
whether the HOA and the MOU provide the state with assurances
that any other pipeline the state is doing does not kick in the
clause that would make the state pay triple damages.
MR. BULLOCK responded he thinks the state has to be careful as
specific things under AS 43.90.440 are the trigger. The AGIA
inducements were to provide the services of an AGIA coordinator
to help move things along. The royalty and tax incentives in
AGIA were to induce producers to make a commitment during the
first binding open season, and the benefits of when and how to
take gas as royalty in kind or royalty in value. The tax
incentive to a producer committing during the first open season
was that the producer would be exempt from increases in the tax
rate. That was one of the ways the constitution allows for
exemptions; it does not allow for contracting it away. Another
inducement was the grant of state money, the reimbursement of
costs. A further assurance to the licensee was that the state
would not also give to a competing natural gas project, a
project of more than 500 million cubic feet a day. A concept
behind the 500 million cubic feet was that it was the amount of
gas identified that the state would need, but that amount was
also related to the amount of gas that the AGIA project would
need to be viable. Regarding the Alaska LNG Project, he said
there are many good lawyers in the Department of Law, the
governor's bill is well written, and he trusts those lawyers to
make sure the state is not approaching that point, particularly
since the MOU does not address the risk of providing incentives
to a competing pipeline. He qualified that the statute must be
looked at and he does not know everything that is going on in
the background. The agreements can be looked at, the products
of discussions can be seen, he said, but he does not know "what
is behind these or how they got there."
3:40:06 PM
REPRESENTATIVE P. WILSON commented that the pages of information
provided by Mr. Bullock do not state exactly what she wants to
hear.
MR. BULLOCK stressed he is not going to say the state's
likelihood of success in any litigation. The legislature and
its lawyers will defend legislative contracts, but it is the
Department of Law that represents the state's interest. He
pointed out that the information he provided the committee
refers members to, [and includes], his [February 15, 2013]
memorandum to Representative Hawker that is part of the HB 4
record, which discusses the assurances in AS 43.90.440 and what
has to be in place. For example, TransCanada would not be
eligible for treble damages if it is out of compliance with the
terms of the AGIA license or if it is not in compliance with
applicable state and federal law. Another set of conditions
that would have to be met is that the state has provided
benefits to a particular competing project. But it also has
exclusions - lowering the tax for everybody would not be a
benefit to a competing pipeline and renegotiating a lease
agreement under existing law would be okay. The state would
only have exposure if it has provided particular incentives to
somebody that would threaten the project that was contemplated
under AGIA.
3:42:01 PM
CO-CHAIR SADDLER inquired whether TransCanada is in compliance
with AGIA.
MR. BULLOCK replied he thinks it is safe to say TransCanada is
in compliance with AGIA. Through TransCanada's partnership or
working arrangement with Exxon, it still files quarterly status
reports with the Federal Energy Regulatory Commission (FERC).
The Alberta project is still alive and in the background and in
the future that may be the more economical option because things
change. For example, in 2008, shale gas was not an issue and it
looked like Alaska's market was going to be in the Midwest.
Within a couple of years, the Midwest is where most of the shale
gas became available and gas prices went up enough that it was
worthwhile. Hydraulic fracturing (fracking) of shale is more
expensive than producing from Alaska's fields which have
sufficient pressure to not need fracking. Alaska's advantage in
the LNG market is that its cost of production could be more
competitive against a fracking operation.
3:43:33 PM
CO-CHAIR SADDLER inquired about Mr. Bullock's earlier statement
that the enabling legislation would change the location of the
point of production.
MR. BULLOCK confirmed that is one of the amendments in the bill.
There are additional costs with taking custody of the state's
gas, he explained. For example, if the state takes its gas
where it enters into the transmission lines from Prudhoe Bay or
Point Thomson, that gas will then need to go to what may be a
combined gas processing and gas treatment facility. Gas
processing takes the liquids out, so the gas generally going
into the pipeline is methane, a single carbon and four
hydrogens. Gas treatment has to make the gas of pipeline
quality. There will be other things besides hydrocarbons in the
gas, such as sulfur or carbon dioxide. The farther up the line
the state gets its gas, the more costs associated with actually
transporting that gas. The point of production is important for
tax purposes, because that is going to be the point where the
gross value is determined.
3:44:54 PM
CO-CHAIR SADDLER understood the state currently takes possession
at the point of production at the wellhead. He asked what
location is proposed in the enabling legislation.
MR. BULLOCK addressed page 48 of HB 277, noting current law
states that for gas that is not subjected to or recovered by
mechanical separation or run through a gas processing plant,
"the first point where the gas is accurately metered". So,
traditionally, he explained, the gas is measured as it comes off
the lease. The bill changes that language to:
the furthest upstream of the first point where the gas
is accurately metered, the inlet of any pipeline
transporting the gas to a gas treatment plant, or the
inlet of any gas pipeline system transporting gas to a
market.
Thus, he elaborated, instead of one particular point, the
enabling legislation would establish a new point of production
relative to the gas treatment plant. The bill also redefines
gas treatment plant and gas processing plant. This provision
does not apply to the state's royalty, he pointed out, or to
where the state takes possession of the gas, which is something
else to look at. This provision addresses for tax purposes
where the value is going to be determined at the point of
production.
3:46:59 PM
REPRESENTATIVE SEATON, [referring to the enabling legislation],
understood that in the future these terms would apply not just
to the North Slope but to all of Alaska, including the Cook
Inlet sedimentary basin.
MR. BULLOCK replied that the bill as currently written provides
that, on and after January 1, 2022, oil will be taxed at the
rate it is now; the rate applicable to oil and gas will only
apply to oil. Gas tax will be on gross value and will be 10.5
percent. People not having a lease modified, or people with a
lease modified but not electing to pay the tax as gas, will
continue to pay the tax in dollars and it will be at 10.5
percent of the gross value at the point of production. While
this may be changed after the first version of the bill, it is
something to look at.
REPRESENTATIVE SEATON concurred it is something the committee
needs to look at because it is quite a change from current
treatment of gas in Cook Inlet.
MR. BULLOCK, in regard to the amount of gas the state could
receive, pointed out that the state only gets royalty off of
state land. So, those are the only leases that can be
renegotiated and the only leases that could pay the production
tax as gas. Production off of land claims, oil and gas
reserves, and federal oil and gas reserves is subject to tax but
not to royalty.
3:48:58 PM
CO-CHAIR SADDLER inquired whether the MOU provides enough
information to able to calculate whether there is going to be
residual value. He said he is concerned that legislators know
before making commitments in legislation whether there is going
to be residual value for the state and that it will not all be
eaten up in transportation, processing, and other costs.
MR. BULLOCK answered that the February 14, 2014 presentation by
the legislature's consultants is probably the most significant
of what has been heard. He said it all comes down to what the
gas can be sold for, who is going to buy it, and what has to be
done to get it to the buyer. For example, the state's barley
project created a great product without a market. The state
must be careful to do everything it can, as soon as it can, to
identify its markets and try to get itself in a position to
deliver. These are long-term contracts. Gas prices are in
flux. As seen by the graphs [on February 14, 2014], the older
contracts were tied to oil value, the newer contracts,
especially from some of the LNG exporters in the Gulf of Mexico,
will be tied to the Henry Hub. It is a competitive market.
Each of the many LNG suppliers have different costs and a
buyer's approach may be to look at the cost of production and
base what the buyer is willing to pay on that rather than tying
it to oil.
3:51:07 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:51 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES Outline by Don Bullock 2.17.14.pdf |
HRES 2/17/2014 1:00:00 PM |
|
| HRES 2.17.14AGIA Timeline.pdf |
HRES 2/17/2014 1:00:00 PM |
|
| HRES 2.17.14MOU Summary.pdf |
HRES 2/17/2014 1:00:00 PM |
|
| HRES 2.17.14 HB4 Legal Memo RE AGIA.pdf |
HRES 2/17/2014 1:00:00 PM |
HB 4 |
| HRES 2.17.14 - Revised Document Authority to end AGIA project.pdf |
HRES 2/17/2014 1:00:00 PM |
|
| HRES 2.17.14 Bullock MOU Powerpoint.pdf |
HRES 2/17/2014 1:00:00 PM |