Legislature(2015 - 2016)BARNES 124
02/18/2015 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Alaska Lng Update: Bp, Conocophillips, Exxonmobil, Alaska Gasline Development Corporation, Transcanada, Department of Natural Resources, Department of Revenue | |
| 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
February 18, 2015
1:15 p.m.
MEMBERS PRESENT
Representative David Talerico, Co-Chair
Representative Mike Hawker, Vice Chair
Representative Bob Herron
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Andy Josephson
Representative Geran Tarr
MEMBERS ABSENT
Representative Benjamin Nageak, Co-Chair
COMMITTEE CALENDAR
ALASKA LNG UPDATE: BP, CONOCOPHILLIPS, EXXONMOBIL, ALASKA
GASLINE DEVELOPMENT CORPORATION, TRANSCANADA, DEPARTMENT OF
NATURAL RESOURCES, DEPARTMENT OF REVENUE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAVID VAN TUYL, Regional Manager
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Provided an update on the Alaska LNG
Project from his corporation's perspective.
DARREN MEZNARICH, Project Integration Manager
Alaska LNG Project
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Provided an update on the Alaska LNG
Project from his corporation's perspective.
BILL MCMAHON, Senior Commercial Advisor
ExxonMobil Corporation
POSITION STATEMENT: Provided a PowerPoint presentation, "Alaska
LNG Project Update," on behalf of the project team.
VINCENT LEE, Director
Major Projects Development
TransCanada
Calgary, Alberta, Canada
POSITION STATEMENT: Provided an update on the Alaska LNG
Project from his corporation's perspective.
DAN FAUSKE, President
Alaska Gasline Development Corporation (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Provided an update on the Alaska LNG
Project from his corporation's perspective.
MARTY RUTHERFORD, Deputy Commissioner
Office of the Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided information from her department's
perspective in regard to the Alaska LNG Project update.
DONA KEPPERS, Deputy Commissioner
Office of the Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Provided information from her department's
perspective in regard to the Alaska LNG Project update.
RANDALL HOFFBECK, Commissioner Designee
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided an update on the Municipal
Advisory Gas Project Review Board for the Alaska LNG Project.
ACTION NARRATIVE
1:15:31 PM
CO-CHAIR DAVID TALERICO called the House Resources Standing
Committee meeting to order at 1:15 p.m. Representatives Hawker,
Olson, Seaton, Josephson, and Talerico were present at the call
to order. Representatives Johnson, Tarr, and Herron arrived as
the meeting was in progress.
^ALASKA LNG UPDATE: BP, ConocoPhillips, ExxonMobil, Alaska
Gasline Development Corporation, TransCanada, Department of
Natural Resources, Department of Revenue
ALASKA LNG UPDATE: BP, ConocoPhillips, ExxonMobil, Alaska
Gasline Development Corporation, TransCanada, Department of
Natural Resources, Department of Revenue
1:16:29 PM
CO-CHAIR TALERICO announced that the only order of business is a
briefing on the Alaska Liquefied Natural Gas (LNG) Project (AK
LNG) in accordance with Section 77 of Senate Bill 138, Chapter
14 [passed by the 28th Alaska State Legislature and signed into
law in 2014].
1:17:41 PM
DAVID VAN TUYL, Regional Manager, BP Exploration (Alaska) Inc.,
spoke as follows:
I've worked for BP in Alaska for over 30 years now,
and the last half of which has been dedicated to
working to get Alaska's gas to market. Now, I have
the privilege of working in my current roles on the
joint fiscal team and on the management committee of
the Alaska LNG Project effort. Today we have the
right parties aligned on a way to collectively advance
this project. That was true last February and it
remains true today. Make no mistake, we have a lot of
work to do, both on the project team and with all the
supporting efforts that you'll hear more about today.
But we remain on track for a 2016 decision to move
into the next phase of the project - front-end
engineering and design, or what we call FEED. The
companies before you have all dedicated their
resources to meet this challenge. So has the new
administration. And we're now actively engaged on a
variety of fronts to continue to progress the project
and the associated commercial work that is required to
meet that goal. Any one of us, even with our best
efforts working in isolation, can't make this project
a success. But, all of us working together
cooperatively, can. Last year we started on this
journey together and we've taken some very important
and very successful steps together. This body passed
[Senate Bill] 138 by an overwhelming majority, we
entered into an agreement to begin the current Pre-
FEED phase, we filed for a [U.S. Department of Energy
(DOE)] export license application, and we initiated
the [Federal Energy Regulatory Commission (FERC)] pre-
filing process. The project has momentum. We look
forward to continuing this journey together and to
working with you in the coming weeks and months as we
see the future of Alaska LNG continue to unfold.
1:19:55 PM
DARREN MEZNARICH, Project Integration Manager, Alaska LNG
Project, ConocoPhillips Alaska, Inc., spoke as follows:
I've been with the company for 25 years and I live in
Anchorage. I'm very thankful for the opportunity to
be part of this significant project, which is so
important for all the participants, including the
state. I appreciate the comments my colleague has
made and I'd like to build on them. For
ConocoPhillips, we see two steps in front of us before
a FEED decision: commercial and fiscal. First, we
are building a commercial foundation for the project,
in particular completing two key agreements: gas
supply agreement and a governance agreement. Only
after the commercial foundation is in place would we
recommend the administration and the legislature
consider implementing that second step, which is
finalizing the fiscal foundation. Then, with the
commercial and the fiscal foundation in place, and the
completion of the technical Pre-FEED work, we would
expect to have the information necessary for all of us
to make a FEED decision. When we refer to a gas
supply agreement, we're just talking about matching
our share of cash investment with the share of gas or
LNG we'd receive. ConocoPhillips, like everyone else,
expects to be making a cash investment based upon our
gas percentage share to the project. Once we make
that investment we need to be sure that we can deliver
our gas into the project on that same share on a day-
to-day basis. And also that we have the ability to
get that same share of gas or LNG from the back of the
project. So it's a relatively simple concept - our
investment share equals our gas throughput equals our
product off-take out the back. But it requires
working through the details and getting it right.
That second ... agreement I talked about, the
governance agreement, we might call that the venture
agreements. What we mean are the agreements that set
up the business - what is your share of cost, what are
your voting rights, who is in charge of what, how long
do we have to pay the bills, and all those kinds of
details. So, these concepts will be discussed more
when Bill [McMahon] takes us through the slides
shortly. As we sit here today the commercial
agreements are not complete, but we are working hard
to meet the schedule in front of us. I believe we all
want to find a way to make this project a success,
and, again, we're all working well together.
1:22:38 PM
BILL MCMAHON, Senior Commercial Advisor, noted he has more than
32 years of experience with ExxonMobil. He specified that
today's PowerPoint presentation is on behalf of all five parties
before the committee today. He spoke as follows:
My last 22 years have been spent pursuing
commercialization of Alaska gas. And Alaska has been
and continues to be an important part of ExxonMobil's
worldwide investment portfolio. ExxonMobil has been
encouraged by the progress that's been made on the
project so far. Steve Butt was before you on January
30 [2015] and provided you an update and we look
forward to building on that update in additional areas
of the project. This time last year we advised you
about a Heads of Agreement that had been signed
related to the Alaska LNG Project and that was a
positive milestone. It provided a robust roadmap on
how to move forward. As Dave [Van Tuyl] indicated,
Senate Bill 138 was passed. That was consistent with
the Heads of Agreement, provides a great foundation
upon which to build, and we advise you of what
additional work has been done since then. So, the
five parties that are at the table today, as well as
the Department of Natural Resources and the Department
of Revenue, have been actively engaged in the work
that needs to be done to get us to that critical
decision about FEED that we want to make in 2016. And
we'll walk through the different components that will
underpin that during the presentation.
1:24:40 PM
VINCENT LEE, Director, Major Projects Development, TransCanada,
spoke as follows:
I have been with TransCanada for 24 years. I serve as
the commercial lead for TransCanada in the Alaska LNG
Project. In 2014 TransCanada signed the Heads of
Agreement for the Alaska LNG Project with [Alaska
Gasline Development Corporation (AGDC)], the state,
and the three producers. At the same time,
TransCanada and the state agreed on a Memorandum of
Understanding [MOU] that established the material
terms for TransCanada to provide gas treatment and
transportation services to the state for the state's
share of gas in the Alaska LNG Project. Following the
passage of [Senate Bill] 138, TransCanada entered into
a Precedent Agreement and an Equity Option Agreement
with the state. The Precedent Agreement formalizes
the major terms that were agreed in MOU. The Equity
Options Agreement provides the state an option to
acquire up to 40 percent of TransCanada ownership
interest in the gas treatment plant and pipeline
segments of the Alaska LNG Project. As a party to the
joint venture agreement for Alaska LNG Pre-FEED,
TransCanada has seconded highly skilled and
experienced pipeline and important management
employees into the Alaska LNG Project team, including
pipeline manager who leads all technical activities
for the pipeline segments of the project. TransCanada
is negotiating with the state administration to reach
agreement on a long-term firm transportation services
agreement which would replace the Precedent Agreement.
We are working to have the FTSA, the firm
transportation services agreement, finalized and ready
to present to legislature for review and approval
later this year. TransCanada also is working
diligently with the other Alaska LNG participants in
the [indisc] commercial agreements to prepare for the
FEED decisions.
1:26:59 PM
DAN FAUSKE, President, Alaska Gasline Development Corporation
(AGDC), pointed out that AGDC is owned by all citizens of the
state. He said he is unique at this table in that one of AGDC's
subsidiaries is the Alaska Stand Alone Pipeline (ASAP) Project.
Additionally, AGDC represents the state's position on the equity
share for the liquefaction plant - the downstream portion of the
Alaska LNG Project (AK LNG). He reminded members that he has
testified in the past that things are going very well and that
he appreciates the sharing of information, the agreements that
have been signed, the ability for ASAP to attempt to align
itself with the other project, the sharing of data, and doing
actual contract work for AK LNG from an engineering standpoint
to help facilitate that project. He thanked the committee for
having the team provide this presentation.
1:28:44 PM
MR. MCMAHON noted that today's PowerPoint update is an overview
consistent with Senate Bill 138. Drawing attention to slide 2,
he said the Alaska LNG Project's sponsor group is made up of all
the parties that have an interest in moving Alaska LNG forward:
the State of Alaska through the Department of Natural Resources
(DNR) and the Department of Revenue (DOR), the Alaska Gasline
Development Corporation (AGDC), TransCanada, ConocoPhillips, BP,
and ExxonMobil. The sponsor group meets on a regular basis to
discuss the project, to read the progress, and discuss issues of
current interest. The sponsor group is working in particular to
align the parties to allow the parties to move forward in
consort. The approach with the Alaska LNG Project is consistent
with other projects around the world. A gated process is being
used. The sponsors want to get all seven parties moving
together so that when a gate is hit there can be a positive
decision by all parties to move forward through that gate into
the next phase. For simplicity, he said, he may refer to the
Alaska LNG Project as "the project" and when referring to the
sponsors he will be talking about all seven parties who are
interested in moving this project forward.
MR. MCMAHON turned to slide 3 to address the other arrangements
under the project. In addition to the seven parties in the
sponsor group, there is the joint venture group that is made up
of [AGDC, TransCanada, ConocoPhillips, BP, and ExxonMobil].
These are the parties that are actually doing the Pre-FEED work
to move the project forward, such as the engineering and the
environmental permitting. A third group is the Alaska LNG
Project, LLC [currently made up of ConocoPhillips, BP, and
ExxonMobil]. A formal legal entity, the LLC was put together to
allow the start of the DOE export license process. The license
application needed to be filed last year to keep the project on
track and a legal entity was needed to hold land access for the
LNG plant to show to DOE that this is a bonafide project. The
project has been actively securing rights to land in the Nikiski
area, the proposed site for the LNG plant.
1:32:00 PM
REPRESENTATIVE SEATON observed on slide 3 that the State of
Alaska, as an owner of gas, is not included under the [Alaska
LNG Project, LLC]. He inquired about this.
MR. MCMAHON replied that at the time the LLC was formed it was
ExxonMobil, BP, and ConocoPhillips. It is anticipated that the
state will have a representative in this LLC in the future.
REPRESENTATIVE SEATON asked whether the anticipation is that
that will be with 25 percent of the gas and therefore an equal-
share partner with voting rights.
MR. MCMAHON responded correct, it would be consistent with the
state royalty-in-kind (RIK) and tax as gas (TAG) volumes as
outlined in Senate Bill 138 and would total about 25 percent.
This would be subject to the state electing to take royalty-in-
kind and subsequent elections for the state to take tax as gas.
1:33:25 PM
MR. MCMAHON resumed the presentation [slide 4], highlighting the
interests of each entity within the sponsor group. He said the
state administration represents the State of Alaska in the
project's efforts. The Department of Natural Resources (DNR)
administers, among other matters, the state's royalty interest
and pipeline rights-of-way. The Department of Revenue (DOR)
administers the regulation and collection of taxes. Depending
on the state's election to take royalty-in-kind (RIK) and the
election by ExxonMobil, BP, and ConocoPhillips for the state to
take tax as gas (TAG), the state could receive about 25 percent
of the resulting production. As far as the infrastructure
project, DNR and DOR are representing the interests of the
state. The departments are concerned with the security of gas
supply going into the project and the departments are keen to
facilitate the ability to expand the project in the future and
to ensure that third parties have potential access to the
project. Moving to slide 5, he said that for Pre-FEED, AGDC and
TransCanada represent the State of Alaska's infrastructure
interests in the project: AGDC represents the state's ownership
interest in the LNG plant and TransCanada represents the state's
interest in the pipeline and the gas treatment plant (GTP).
1:35:15 PM
REPRESENTATIVE HAWKER addressed Mr. McMahon's statement that
AGDC and TransCanada are representing the State of Alaska's
infrastructure interests in the project. He presumed that
infrastructure means hard things on the ground, such as pipe,
buildings, and facilities. He noted that in the legislation
establishing AGDC, AGDC was given much broader authority than
just holding infrastructure, such as being able to develop and
potentially be a participant in downstream marketing or other
activities. He asked whether a decision has been made to
strictly limit AGDC to being an infrastructure participant.
MR. FAUSKE answered there is great communication with the state
through DNR and DOR. A variety of discussions of this sort are
going on as to what role AGDC can play in the future, so the
best he can say is that those conversations do take place but no
decision has yet been made on that.
1:36:51 PM
REPRESENTATIVE JOSEPHSON observed that slide 4 talks about BP,
ExxonMobil, and ConocoPhillips electing for the state to take
tax as gas. He asked whether the understanding is that that
decision is in the producers' discretion rather than the state's
discretion.
MR. VAN TUYL replied the dynamics of the state's choice to take
royalty-in-kind versus in-value and then the subsequent election
by the producers to pay their production tax as gas are both
outlined in Senate Bill 138. The tax as gas election by the
producers is contingent upon the state first making its decision
to take royalty-in-kind. Assuming the state was to make that
election, which it has not yet done, the producers would then
have the opportunity to make an election to pay their production
tax obligation in the form of gas, so it is a producer election
to pay production tax as gas.
REPRESENTATIVE JOSEPHSON noted that if the state exercises
royalty-in-kind but the producers don't exercise the election on
tax as gas, it would undermine the state's ability to market in
an economical way. He asked whether that would be a factor in
the industry's decision.
MR. VAN TUYL responded another element leading up to the state's
decision for the RIK election will be sufficient confidence in
the state's ability to market its gas. There is a specific
requirement for the state to work individually with producers,
it cannot be done collectively because of anti-trust reasons,
and so he imagines that the state would want to be very keen on
understanding that decision and that election before making its
subsequent election. The element of marketing certainty is
something that was identified by the legislature and included in
Senate Bill 138.
MR. MEZNARICH added that the expectation, as laid out in the
Heads of Agreement (HOA) roadmap, is that those decisions would
be made prior to the parties taking their FEED decision. So,
that should all be bundled up in that fiscal foundation.
1:40:10 PM
MR. MCMAHON turned to slide 6 and continued highlighting the
interests of each entity within the sponsor group. He specified
that ExxonMobil, BP, and ConocoPhillips hold rights to produce
natural gas from the Prudhoe Bay Unit and the Point Thomson Unit
and are actively working on how to commercialize those
resources. Each represents its respective companies and
shareholders in any efforts to commercialize the gas, including
ownership in the new Alaska LNG Project facilities.
REPRESENTATIVE HAWKER pointed out that the Prudhoe Bay Unit and
the Point Thomson Unit are anticipated to put the majority of
gas into this project. He inquired as to the approximate
ownership percentages at Prudhoe and at Point Thomson for each
of the three companies.
MR. MCMAHON answered that ExxonMobil has about 62 percent of the
working interest in Point Thomson, BP about 30 percent,
ConocoPhillips about 5 percent, and some minor owners make up
another percent or so.
MR. VAN TUYL explained that Mr. McMahon did not answer about
Prudhoe Bay because BP is the operator of Prudhoe Bay. He said
that both ExxonMobil and ConocoPhillips, in round numbers, have
about 36 percent of the ownership of Prudhoe Bay, BP has about
26 percent, and the balance of about 2 percent is owned by
Chevron.
1:42:32 PM
MR. MCMAHON outlined the Alaska LNG Project Pre-FEED activity
(slide 7), saying the sponsors are keenly interested in this key
part of the project. He said the integrated team includes
personnel from ExxonMobil, the lead party, TransCanada, BP, and
ConocoPhillips. The project is currently in Pre-FEED activity.
Engineering of the project facilities is being advanced.
Project execution plans are being put together because, for a
project of this size, getting all of the materials and personnel
on site at the right time is a big consideration. The overall
cost and schedules are being refined. And, very importantly,
the environmental permitting applications are being put
together. A lot of technical work underpins the applications.
A cooperation agreement is being worked with AGDC to coordinate
field data collection so that if the Alaska LNG Project collects
some data that is of interest to the ASAP Project, there is the
ability to share that and vice versa - ASAP data that is
collected can be shared with AK LNG. There is no reason for
folks to pay twice for field data.
MR. MCMAHON understood the legislature is considering the "parks
right-of-way bill" [HB 139]. He said that could be a key
enabler to help the project progress through the five parks
located between the North Slope and tidewater in Southcentral
Alaska.
MR. MCMAHON described the project facilities [slide 8],
explaining the LNG plant will be on the south end and will
include LNG storage tanks as well as a loading terminal. The
LNG plant will be fed by an 800-mile-long pipeline going from
the North Slope down to Southcentral. A gas treatment plant,
designed to take out products like CO and HS, will be located
22
on the North Slope. About 60 miles of transmission line will
take gas from Point Thomson to the gas treatment plant. Based
on the location of the gas treatment plant, the transmission
line from Prudhoe Bay to the gas treatment plant will be rather
short. Work is going on at Prudhoe Bay and Point Thomson, but
that work is outside the purview of the Alaska LNG Project and
is the responsibility of the owners of those two units.
1:45:43 PM
REPRESENTATIVE SEATON asked how the transmission lines will be
paid for by the project as a unit, given the different
ownerships and amounts of gas.
MR. MCMAHON replied [the project] will put together a commercial
structure that will allow it to align the ownership of the
Thomson transmission line with the gas that's flowing through
that, and the same thing on the Prudhoe transmission line. When
the two streams co-mingle, the ownership of the gas treatment
plant, pipeline, and LNG plant will be aligned with the gas
flowing through them. [The project] has the flexibility to
adjust ownership within the different components to match the
expected throughput.
REPRESENTATIVE SEATON inquired whether the transmission lines
will be on a toll or tariff that is based on the transmission
amounts. He said he is trying to understand how it will be paid
for as a unit, given that different owners will be transmitting
different amounts of gas, and how that will relate back to a
revenue stream corresponding to the expense stream of building
it in the unit.
MR. MCMAHON responded it is anticipated that the project will be
built under "FERC Section 3" [of the Natural Gas Act (NGA)].
Therefore, the rights to move gas on an asset will be tied
directly to the ownership in that asset. To the extent the
state takes the royalty and tax as gas out of Point Thomson, it
is anticipated that the state's share of that transmission line
would match [its] molecules going through and so it would be
back-to-back, that the right for the state to flow the gas will
be tied right to the state's ownership in the pipe, and similar
for ExxonMobil, BP, and ConocoPhillips.
1:47:53 PM
REPRESENTATIVE HAWKER remarked he is unsure the aforementioned
answer by Mr. McMahon quite "rang" with him, but said he may
come back to it later. Noting that the diagram on slide 8 is
abstract, he said what is really be talked about is the whole
pipe project from the gathering lines and gas treatment plant on
the North Slope, the 800 miles of pipeline, and the LNG plant in
Nikiski. He asked whether he is correct in recollecting that
these are the assets that are currently estimated to cost
upwards of $65 billion.
MR. MCMAHON answered yes.
REPRESENTATIVE HAWKER understood a statement was made in another
committee by other people that all the money being spent on this
infrastructure would be deductible under the State of Alaska's
net production tax calculations for determining taxable value of
oil and gas. He inquired whether the costs of these pipes and
structures are going to be deductible in the calculation of a
tax based on the net value.
MR. MCMAHON replied his understanding of Senate Bill 21 [28th
Alaska State Legislature] is that the facilities within the
dotted [red] circle on the diagram are not deductible for the
calculation of production tax.
REPRESENTATIVE HAWKER said that is certainly his understanding.
He requested Mr. McMahon to make it doubly clear that this
project is not deductible in calculation of production taxes.
1:50:03 PM
REPRESENTATIVE SEATON, addressing the diagram on slide 8, said
he is trying to get the cost structure of the transmission line
from Point Thomson. He asked whether ExxonMobil will be liable
for 62 percent of the 75 percent of the costs for the
transmission line because its ownership is 62 percent and then
there would be royalty if royalty-in-kind is taken. He said he
is "trying to align that since this is all in one project in
which there seems to be a more equal share."
MR. MCMAHON first pointed out that the royalty percentage at
Point Thomson is different than at Prudhoe Bay, so it would be a
matter of taking the royalty percentage and then taking 13
percent of what's left for production tax to come up with the
total state share. ExxonMobil would be responsible for 62
percent of the cost, less that state gas share. He believed
Representative Seaton was suggesting it would be 75 percent, so
times that it might be 72 percent or 74 percent or whatever the
number works out. He said Representative Seaton is on the right
track as far as calculating what each producer would pay towards
that asset and the remainder would be to the account of the
State of Alaska or the state's representative in the project.
REPRESENTATIVE SEATON inquired whether there will be a toll for
shipping the gas on the pipeline once gas is flowing or whether
there will be no revenue from transmission through the pipeline.
MR. MCMAHON responded that under a FERC Section 3 structure it
will be the decision of each individual owner as to how the
owner wants to structure that.
1:52:23 PM
REPRESENTATIVE SEATON understood, then, that there may or may
not be a tolling on each individual to repay the capital costs,
and so the State of Alaska might have a totally different tariff
structure than would ConocoPhillips, BP, or ExxonMobil. He
asked how the Alaska LNG Project, LLC, will get money to pay for
these things if there is not a tariff structure.
MR. MCMAHON answered the way the LLC will get the money is the
owners will receive cash calls to pay for construction as the
pipeline is being built, and during operations there will be
additional cash calls to pay for the operating expenses. He
confirmed that the State of Alaska could have a particular
arrangement as described by Representative Seaton; for example,
TransCanada, or the owner of the asset, may have a tolling
arrangement to handle that, and that may be different than the
way ExxonMobil, ConocoPhillips, or BP may choose to structure
theirs.
MR. VAN TUYL nodded in agreement.
REPRESENTATIVE SEATON, in regard to downstream of the gas
treatment plant, inquired whether that means each owner is going
to be negotiating what could be a totally different structure on
any revenue coming from the project based on whether it is a
tariff or some other mechanism.
MR. MCMAHON replied correct. As the pipeline is being built the
owners will have cash calls and have to pay for that. Once
operating, there will be cash calls for operating expenses and
it will be up to ExxonMobil to decide how it will charge itself
to use the capacity that it owns.
MR. VAN TUYL nodded in agreement.
1:55:02 PM
REPRESENTATIVE SEATON understood, then, that possibly there
would not be any revenue from this project; that if the State of
Alaska owns, say, 25 percent, the state would be responsible for
25 percent of the costs and the value of the state's end product
would be increased because there wouldn't be any transmission
tolls through the project.
MR. MCMAHON responded that would be the case if that is the way
the State of Alaska structures its commercial arrangements. The
large income source for this project is the sale of natural gas
off the line or LNG off the loading jetty. It would just depend
on how the State of Alaska structures its ownership, who the
state has owning the different pieces, and what commercial
arrangement the state might have with those parties to move
state gas on the state's share of the project.
REPRESENTATIVE SEATON remarked he thinks that it is a little bit
different picture than [the committee] has been looking at as
far as revenue goes, as far as the pipeline or tariffs, and [the
committee] has talked about another pipeline situation. He
suggested that the committee get a fuller explanation of exactly
how that would all work within the state's purview.
1:56:59 PM
MR. MCMAHON resumed his presentation, addressing the Alaska LNG
Project arrangements listed on slide 9. He said other work is
ongoing in addition to the work stewarded by Steve Butt [Senior
Project Manager, Alaska LNG Project]. While the sponsor group
is keenly interested in the project work and Pre-FEED work,
other very important activities are also going on to support the
project and to support the FEED decision. This other work
includes the production of gas into the project, the commercial
agreements that will underpin the project, the fiscal terms for
the project, regulatory work, plus a large effort in external
affairs and government relations for the project. Turning to
slide 10, Mr. McMahon said preparations for commercial natural
gas production into the project are underway at both Prudhoe Bay
and Point Thomson, the anchor fields that will be used for
justifying building the project. After decades of oil
operations at Prudhoe Bay, a transition will go on from oil
operations to simultaneous gas and oil sales. As part of that
the Prudhoe Bay owners will need to install some new facilities.
In the context of this LNG project those additions are not going
to be major, but they are going to be essential to be able to
produce gas out of Prudhoe Bay. At Point Thomson, development
is now underway to get first production out of that field in
advance of May 2016, consistent with the Point Thomson
settlement agreement. This initial development is focused on
producing oil and condensate. To accommodate gas deliveries
from Point Thomson, a significant amount of investment will have
to be done to drill additional wells, put in gas production
facilities, and to flange up to the 60-mile gas transmission
line. The Prudhoe Bay and Point Thomson owners are working with
the Alaska Oil and Gas Conservation Commission (AOGCC) to secure
field gas off-take authorizations that are consistent with the
designs on this project. Early completion of this work will
allow a better understanding of the project volumes that can be
expected and ensure that the project designs are robust. The
gas off-takes from Prudhoe Bay and Point Thomson will help
establish the equities in the project because that ratio between
Prudhoe Bay and Point Thomson impacts the aggregate volumes and
ownerships that will be flowing for the three companies as well
as the State of Alaska. The desire is to get the field gas off-
take authorizations in time to inform the 2016 FEED decision.
2:01:13 PM
REPRESENTATIVE SEATON inquired about deductibility or credits
for the expenditures for this other work listed [on slide 9].
MR. MCMAHON answered Representative Seaton is rightly pointing
out that gas production is outside the dotted [red] circle [on
the slide 8 diagram]. Those expenses will be paid by the Point
Thomson owners and Prudhoe Bay owners respectively. He said his
understanding is that those expenditures, depending on their
exact nature, will be deductible according to the system under
Senate Bill 21, the More Alaska Production Act (MAPA).
REPRESENTATIVE SEATON asked whether these expenses will be just
deductible against profits or will also include credits.
MR. MEZNARICH replied he will get back to the committee with an
answer.
2:02:44 PM
MR. MCMAHON discussed the commercial work being done [slide 11].
He explained that Senate Bill 138 provided for the potential for
lease modifications to address switching between royalty-in-kind
and royalty-in-value as provided in the lease agreements. The
idea would be for the Department of Natural Resources to address
the switching to be more consistent with the way that LNG is
marketed and sold through long-term contracts. Senate Bill 138
also provided the ability to convert certain lease forms into
fixed percentages. Point Thomson has some sliding scale royalty
leases (SSRs), so if the Point Thomson owner and the Department
of Natural Resources can see eye-to-eye on a fixed percentage
that could be used to extinguish the sliding scale royalty
obligation, that authority has been granted under Senate Bill
138. Similarly at Point Thomson, there are net profit share
leases that provide for a variable royalty and that same
opportunity is there to turn that into a fixed percentage if the
parties can reach agreement. These are things that make the
state's exact percentage of gas unknown at this time until it is
decided whether those conversions can be made at Point Thomson.
A key part of the commercial work is the Department of Natural
Resource's consideration of state royalty-in-kind. Under the
current lease agreements the state does have the choice between
royalty-in-kind or royalty-in-value, so the three producers will
be working with the Department of Natural Resources to provide
information to help them in that decision, which is key to the
state's gas matching its ownership in the project.
2:05:12 PM
REPRESENTATIVE SEATON, regarding state royalty-in-kind and given
that there is both condensate and gas, inquired whether those
are tied together or separate.
MR. MCMAHON replied that is something that will have to be
worked through with the Department of Natural Resources. When
it comes to net profit share, it would seem that working oil and
condensate and gas together may make sense because they all
generate profit. In sliding scale royalties those could be
separated. It will just have to be seen what the administration
wants to do.
2:06:04 PM
REPRESENTATIVE HAWKER asked how [the producers] would
characterize the importance of the state exercising its royalty-
in-kind option as it relates to the ability of [the producers]
to continue to develop the project along the lines that were
conceived and presented the last year.
MR. VAN TUYL responded the importance of royalty-in-kind related
to state participation was outlined in the January 2014 Heads of
Agreement. [The producers] certainly believe that state
participation, and alignment of interests among all the parties,
including the State of Alaska, is critical for the project to be
successful. [The producers] see the royalty-in-kind decision as
being a key element of that. Clearly, there is a lot of work to
be done and much of it incumbent upon [the producers] as lease
holders to support that decision by the state. It's not a
foregone conclusion, there is work that needs to be done. Many
of those elements are outlined in Senate Bill 138, Section 28,
as to what is required to lead up to that decision. Those
conversations are actually being had right now with the
administration to support that. It is absolutely a critical
element of the whole construct as [the producers] see it today.
MR. MEZNARICH seconded the comments made by Mr. Van Tuyl, saying
that from the perspective of ConocoPhillips the royalty-in-kind
and tax as gas - state participation - are key terms in the
Heads of Agreement and they are reflected in Senate Bill 138.
ConocoPhillips sees those as critical to enable a successful
project.
2:08:26 PM
MR. MCMAHON resumed the presentation [slide 11], addressing the
commercial foundation agreements among the state, AGDC,
TransCanada, ExxonMobil, BP, and ConocoPhillips that will be
needed to underpin the project in the FEED decision. Governance
will need to be established for the long-term venture for FEED
and beyond. Agreements will need to be put into place for gas
to be supplied to the project, which will be of keen interest to
the State of Alaska because if there is a situation with
royalty-in-kind and tax as gas the state will need to understand
how it receives gas from Prudhoe Bay and Point Thomson and bring
it into the project. Also, agreements will be needed around how
gas is taken off the pipeline and LNG is lifted from the LNG
plant to make those sales that provide revenue to this project.
Because the supply of gas for in-state needs is keenly
important, agreements will be needed in that area. Making sure
this project is expandable to accommodate future gas is an area
where agreements are expected as well. This commercial work is
going on right now to get ready for the FEED decision.
REPRESENTATIVE HERRON, regarding the aforementioned agreements,
inquired whether one must happen before the other or whether
they are all "number one's" at this time.
MR. MCMAHON answered they are all "number one's" - each one of
them needs to be progressed because the parties have agreed that
they are important to move forward with the project. So, there
is a massive parallel effort going on now to advance those.
MR. MEZNARICH added that ConocoPhillips sees these commercial
agreements as foundational. The fiscal issues are being worked
in parallel, but ConocoPhillips believes that "this page" must
be right before coming back to the administration and the
legislature to ask the legislature and ultimately the public to
support a fiscal package.
2:11:19 PM
MR. MCMAHON returned to the presentation [slide 11], explaining
the state would move its gas through the gas treatment plant and
the pipeline under a long-term firm transportation services
agreement (FTSA) between itself and TransCanada. He noted that
this is another commercial agreement that will enable the
decision to enter FEED in 2016.
REPRESENTATIVE SEATON surmised there will be separate long-term
firm transportation services agreements with each of the gas
owners and that they may be under different terms.
MR. MCMAHON confirmed there will be individual arrangements by
each of the owners.
MR. LEE added that TransCanada is currently working with the
state on a long-term firm transportation services agreement
between TransCanada and the State of Alaska. As part of the
FTSA, there will be a tariff for shipping state gas and
processing state gas through the gas treatment plant. So, if
the state and TransCanada agree to the FTSA, TransCanada will be
the transporter for the state gas. In return, TransCanada will
receive a tariff from the state.
2:13:16 PM
MR. MCMAHON resumed the presentation, turning to slide 12 to
discuss the fiscal work being done. Given the unprecedented
scale, complexity, and cost of the Alaska LNG Project, along
with the need to compete in the global energy markets, he
advised that a competitive, predictable, and durable fiscal
environment will be required. Establishing these terms is a key
enabler for the project and the project's LNG buyers, lenders,
and investors. In 2014 good progress was made towards this
goal, including the Heads of Agreement and Senate Bill 138; that
sets up for the work around the lease modifications as well as
the royalty-in-kind. A key consideration for ExxonMobil, BP,
ConocoPhillips, the administration, and the legislature is what
the best option is to provide these predictable and durable
terms for this project. Also being worked on with the
administration, and ultimately with the legislature, are ideas
related to property tax and payments that would occur during
construction. The work products that will be coming out of the
Municipal Advisory Gas Project Review Board (MAG group) are
going to be very important to ultimately finding lasting
solutions to property tax. Legislative review and approval will
be necessary for property taxes to support the FEED decision.
Mr. McMahon defined what is meant by predictable and durable
fiscal terms, explaining that predictability is about the
state's take, royalty and taxes, being calculated in a way that
is as consistent and as unambiguous as possible. Durability is
that these terms should last for a period of time commensurate
with the risks that are being taken. Risks are being taken by
the investors in the project, by the lenders to the project, and
by the buyers of the LNG from the project. These terms need to
be balanced. The revenue share for the state, ExxonMobil, BP,
and ConocoPhillips needs to be clearly defined in a way that
improves the probability that a commercially viable project can
be achieved. The Alaska LNG Project is a world-scale project.
All the investors, including the state, need to understand the
investment structure and the commercial terms before proceeding.
These terms must also recognize the risk, and balance the needs,
of the state, ExxonMobil, BP, and ConocoPhillips.
2:17:01 PM
REPRESENTATIVE HAWKER pointed out that [Senate Bill] 138
essentially established a fiscal regime for the State of Alaska.
He asked whether [the producers] are still comfortable with the
fiscal regime as established in Senate Bill 138.
MR. MCMAHON replied Senate Bill 138 was an excellent piece of
legislation that is being built upon today. It established
production tax as a 13 percent gross tax, authorized the state's
participation in the project, and established a process to
develop project-enabling agreements like the aforementioned.
Looking at property taxes is a next natural step in building
upon Senate Bill 138 and providing a way to pay those taxes that
is predictable and durable. Project-enabling agreements around
predictability and durability are another thing to build on that
foundation. [The producers] feel good about Senate Bill 138 and
what it has provided for the project.
REPRESENTATIVE HAWKER acknowledged Senate Bill 138 left open the
matter of determining predictability and durability on property
tax, which is why the Municipal Advisory Gas Project Review
Board is currently working to come up with a proposal that comes
back to the legislature. The elephant in the room is the
production tax, the 13 percent gross tax on gas at point of
production. He said he didn't hear a very clear answer from Mr.
McMahon that, "yes, you were still okay with that provision."
He asked whether [the producers] are going to come back asking
for any further production tax changes in order to meet [the
producers'] definition of predictable and durable.
MR. MCMAHON, from ExxonMobil's standpoint, responded no.
MR. VAN TUYL answered no, it is not BP's intent either.
MR. MEZNARICH replied he has no knowledge of that being the
intent of ConocoPhillips. He said ConocoPhillips sees the Heads
of Agreement and Senate Bill 138 as a roadmap to a successful
project and so ConocoPhillips believes the components of that
can lead to a successful project and a decision to take FEED.
Senate Bill 138 was consistent with the Heads of Agreement.
REPRESENTATIVE HAWKER noted the state's income tax provisions
are currently worldwide-apportioned state income taxes. He
inquired whether the state income tax provisions are still
acceptable to [the producers] and the ability to move forward
with this project.
MR. VAN TUYL replied he doesn't believe Senate Bill 138 included
a specific treatment of state corporate income tax. Talks with
the administration will include discussion of the entirety of
the fiscal arrangements between the state and the producers.
Those discussions are ongoing and whatever fruit is born in
those discussions will come back to the legislature. He said he
does not know that there is a specific desire to change it, but
as the discussions are ongoing it will be seen where they end up
and the legislature will have a key role in determining what is
ultimately agreeable.
MR. MEZNARICH responded that the perspective of ConocoPhillips
is consistent with BP's. He said the key to ConocoPhillips is
to have the predictability and durability that understand what
this is going to be like for the next several decades and know
what is being gotten into when everyone makes the FEED decision
together. A solution must be found that works for everyone.
This is going to be a huge decision, he said, but he believes it
can be done, and ConocoPhillips is focused on doing that.
2:21:43 PM
REPRESENTATIVE TARR said the alignment structure only works with
the 13 percent production tax in place because that's what gets
the state with its royalty portion to the ownership share that
the state needs to have. She said she was expecting a stronger
answer in this regard from all of the producers because if the
producers want to make any changes to that it would disrupt the
state's alignment interest and would be inconsistent with the
agreement in Senate Bill 138.
MR. MCMAHON answered the reason hesitancy is being heard is that
any commercial negotiator knows a deal is not a deal until it's
a deal. As [the producers] work with the administration there
could be additional puts and takes in the overall formulation
and so [the producers] are being careful not to tie the hands of
those at the negotiating table. [The producers] certainly
recognize that changing the production tax from 13 percent has a
cascade effect on state participation in the project and tax as
gas and state gas share. Other things are being worked on right
now, so [the producers] are hesitant to close off an avenue of
discussion while trying to come up with a package that works for
all of the folks at the table. The way many negotiations go is
that things are nailed down and [then move on to the next] in
trying to corner the uncertainty. Sometimes that doesn't work
and a little bit of backtracking is required, which is why
certainty is not being heard - [the producers] know that the
deal is not complete yet.
2:23:38 PM
REPRESENTATIVE SEATON understood that all of the expenses
relevant to gas at Point Thomson and at Prudhoe Bay are going to
be written off against oil profit tax. He asked whether that is
[the producers'] understanding of the way this is going to work.
MR. MCMAHON replied yes, under Senate Bill 21, MAPA, the
expenses that are associated with the oil and gas operation are
deductible under the calculation of production tax.
REPRESENTATIVE SEATON posited that if gas taxes are not going to
occur for 10 years or however long the contract takes place
because it is going to be gas in-kind, then what is being said
is that all of the gas expenses are going to be written off
against oil profit tax currently and through that full
development stage. He said the committee needs to see and
discuss an analysis of what those expenses at Point Thomson and
Prudhoe Bay are going to mean for the oil profit tax for the
next 10 years. An analysis will ensure it is known what the
impact is on the state between now and when gas flows.
2:26:38 PM
MR. MCMAHON continued the presentation, moving to slide 13 to
discuss the regulatory work being done. He reported that the
export authorization [application] filed last year with the U.S.
Department of Energy (DOE) has resulted in a free trade
agreement (FTA) authorization, thereby allowing [the Alaska LNG
Project, LLC] to export Alaska gas to countries that have signed
the free trade agreement. An application for non-FTA export
authorization is on track and the process at DOE is continuing
to be followed. A major regulatory effort is underway with the
Federal Energy Regulatory Commission (FERC) for the National
Environmental Protection Act (NEPA) process. It is currently in
the pre-file phase where information is being exchanged with the
regulator to help ensure that the highest quality application is
submitted. The NEPA process results in the environmental impact
statement (EIS) needed at the end to issue the authorizations to
construct the project. A key part of that is the set of 12
resource reports being prepared for the project. The first
draft of those was submitted this month; over 9,000 pages are
now on the FERC web site. This first pass at these applications
will be used to collect information from stakeholders to have a
better assessment of what the impacts of the project are and the
potential mitigations. A second draft of the resource reports
will then be put in with FERC with the idea of putting in a
final submission for that process entering the formal filing
process. Progress is being made in this area. This is a very
open and public process - FERC and its contract will continue
holding public meetings to solicit feedback. This will be a
great opportunity for the people and the leaders of Alaska to
provide input on the project.
2:29:15 PM
REPRESENTATIVE JOSEPHSON recalled Mr. McMahon earlier stating
that the gas treatment plant would not be deductible under
Senate Bill 21. He inquired whether Mr. McMahon thinks the
participants in the Alaska LNG Project and the present
administration have an understanding of at what point gas
exploration is deductible vis-a-vis is not deductible, for
example the gas treatment plant. He further inquired whether
Mr. McMahon thinks the statutes and regulations already answer
those questions.
MR. MCMAHON offered his belief that the statute and regulations
are clear in that area. The activities within the dotted red
circle [slide 8] are not lease activities, they are project
activities to commercialize Alaska gas. The expenses that have
been talked about as far as Senate Bill 21, MAPA, are lease
expenditures for the ongoing oil and gas operations at the
fields. Those expenses are part of the calculation of the tax
liability for the producers. It is the way that the state has
chosen to collect production tax, he said, so he believes the
regulations and statutes are clear.
2:30:59 PM
MR. MCMAHON turned back to the presentation [slide 14], stating
that the final area of interest for the sponsor group is
external affairs and government relations. He said this team
facilitates public dialogue about the Alaska LNG Project with
federal, state, municipal, and tribal governments, including
agencies and legislative bodies. This is an effort to reach all
the stakeholders and there will be initiatives to target
different stakeholder groups. A project of this magnitude and
complexity cannot succeed without broad support.
REPRESENTATIVE OLSON inquired whether one or all five [of the
sponsor group members] are going to the stakeholder meetings.
MR. MCMAHON responded the seven parties in the sponsor group are
working together when talking to the public. The effort is to
speak with one voice as the project and a myriad of teams and
consultants are working this area.
REPRESENTATIVE TARR commented that in looking at the list of
sponsor group members, it would appear that if a vote was taken
the state would have three votes among the seven members of the
group. She pointed out that when the sponsor group has been
talked about previously, the state was talked about as one in
addition to the others in that relatively equal relationship in
the sponsor group. She said she wants to ensure it is on the
record that the role of the state has not changed.
MR. MCMAHON thanked Representative Tarr for that clarification,
adding that "depending on which venue we're in, different parts
of the sponsor group have a vote and have a say and we try to
display this as broad as possible because ... the state has many
different roles in this project and so we try to display that."
He said Representative Tarr is right when talking about venture
party activities where the state is paying 25 percent of the
cost - the state, the state entities, have a 25 percent say so.
2:33:50 PM
MR. MCMAHON resumed the presentation, moving to the last slide,
slide 15, "Deliverables to Support 2016 FEED Decision." He said
each of the six work areas [AKLNG Project, Gas Production,
Commercial, Fiscal, Regulatory, and External Affairs/Government
Relations] will be delivering hard deliverables that will help
support the FEED decision next year. The project team will have
all of its Pre-FEED project deliverables coming out for gas
production. Prudhoe Bay and Point Thomson will have their
development plans and it will be understood what the off-take is
from the Alaska Oil and Gas Conservation Commission (AOGCC).
Key agreements will be in place. The fiscal terms will be
understood in regard to property tax, royalty-in-kind, and
predictable and durable terms. The DOE export licenses will be
had and there will be progress on the FERC NEPA process. Broad
support for the project is being envisioned. These are things
that each of the sponsors will be looking for as they make that
decision about entering that next phase of this project - FEED.
MR. MCMAHON concluded his presentation with comments about the
timeline. He said efforts are continuing to target this key
decision of FEED in the second quarter of 2016. Each party is
resourcing the efforts accordingly. As required in Senate Bill
138, there must be a public review prior to any formal
legislative review and there will be certain agreements signed
by the state that will require legislative approval. Given the
magnitude of this project and the decision that is going to have
to be made on FEED, a decision that will entail more than a
billion dollars of spending for the next phase, it is essential
to take the time to satisfactorily complete all these
deliverables so that every party at that critical time will be
able to vote yes for moving the Alaska LNG Project forward.
2:36:26 PM
REPRESENTATIVE OLSON noted TransCanada may possibly have three
world class megaprojects all coming on line at roughly the same
time. He asked Mr. Lee whether this will put a real stress on
the labor market or the availability of skill.
MR. LEE answered the two other major projects that TransCanada
is working on right now have a different timeframe than the
Alaska LNG Project. TransCanada does not believe that internal
resourcing is an issue for handling the Alaska LNG Project,
given that this project is a few years further down the road as
compared to the other projects that TransCanada is handling
right now.
2:37:24 PM
REPRESENTATIVE JOSEPHSON said he received comfort from a recent
seminar with the legislature's consultants that the alignment
gave equal shares of ownership, the state's in conjunction with
TransCanada's, and that there would be less litigation over
things like tariffs and tolls. He said he would appreciate it
if the committee could follow up on some of the questions that
Representative Seaton had on those issues because they are less
clear to him now than they were before.
CO-CHAIR TALERICO offered his belief that [the producers] are
going to provide the committee with information on the questions
that were had earlier.
MR. MCMAHON replied yes.
CO-CHAIR TALERICO understood that the transmission lines, gas
treatment plant, pipeline, and LNG storage and loading facility
are not part of the credit system.
MR. MCMAHON nodded in agreement.
CO-CHAIR TALERICO further understood [the producers] have no
intention of making changes to the 13 percent [production] tax.
MR. MCMAHON responded correct.
2:39:23 PM
REPRESENTATIVE SEATON inquired whether a firm transportation
services agreement (FTSA) between TransCanada and the state
would mean that TransCanada is the operator of the pipeline or
that there would be four independent operators of the pipeline
based on the percentages of ownership of the gas.
MR. LEE answered that since the pipeline is one physical asset,
it is logical to have one operator. However, no decision has
yet been made by the sponsors as to who is going to operate it.
REPRESENTATIVE SEATON said he is trying to understand how the
FTSA between TransCanada and the state works when it is one
physical asset that has multiple shippers that may have other
arrangements other than similar firm transportation shipping.
MR. LEE replied there are two aspects when talking about
operations. One is the commercial operation and the other is
the technical or field operation. The physical operation of the
pipelines is what he was referring to earlier - it only makes
sense to have one physical operator. In terms of commercial
operations, the commercial structure that is being contemplated
is each project participant would look after its own portion of
the pipeline in this particular case. So, for TransCanada,
there would be a commercial arrangement with the State of Alaska
for TransCanada to be the commercial operator for the state
portion of the pipeline.
2:42:09 PM
REPRESENTATIVE HAWKER asked whether the project is still on
schedule to meet the anticipated FEED decision of second quarter
2016.
MR. MCMAHON responded [the sponsor group] is still moving
forward on that timeframe, but, as has been said, it is critical
to have high quality deliverables out of each of the work areas.
Where things sit today, it is a challenge but [the sponsor
group] is moving forward with the plans that have been set.
MR. VAN TUYL echoed Mr. McMahon's comments, saying second
quarter [2016] is the target being worked towards. He pointed
out that, as discussed, there are elements beyond the project's
control, such as the Municipal Advisory Gas Project Review
Board, which is a critical element of the project in
understanding how property taxes might be levied and coming up
with a mechanism that is supportable by those communities as
well as the state and the project. That process is running its
own course and is making good progress, but the project has no
control over how quickly people will reach agreement.
REPRESENTATIVE HAWKER acknowledged that the "management science
on megaprojects" clearly demonstrates that schedule-driven
projects have a much greater possibility of failure than those
that are outcome driven. He said he understands the point that
quality decisions are needed and to not be totally schedule
driven. Yet, he opined, if there is no striving for perfection,
then the project is probably not going to land on excellence.
He related he is hearing that for the major benchmarks the
target is still 2016, but that the minor benchmarks are much
more fluid in their completion than the major benchmarks. The
legislature was anticipating receiving the majority of the
contracts for its approval in August 2015. However, he said,
his sense is that legislators should probably not presume they
are going to get those in August but that [the project sponsors]
will be working to get them to legislators in a timely fashion
so the FEED decision can still be met. He asked whether that is
a fair statement.
MR. MCMAHON nodded yes.
2:46:39 PM
REPRESENTATIVE TARR, in regard to a pipeline operator, recalled
that committee conversations last year were centered on
TransCanada's strength as both a pipeline operator and a
pipeline builder, but the committee didn't really tease out the
physical operation versus the commercial side. She asked about
the status of that conversation and whether other alternatives
are under consideration if TransCanada is not the operator.
MR. LEE answered the current structure in the Pre-FEED is
TransCanada has secondees in the project team; for example, the
pipeline manager is a TransCanada secondee who has many years of
experience and a leverage of the TransCanada internal resources
to perform his job with design and development (D&D) in the
Alaska LNG Project. Through that channel the project teams
receive the benefit of TransCanada's expertise and experience,
and that is one model that TransCanada can add value to the
project. Perhaps it will be similar to the Pre-FEED arrangement
or there might be a different model. However, there is no such
discussion at this point in time. Things will have to progress
further down the road before the operating model can be firmed
up and who is going to operate the facilities.
2:48:51 PM
CO-CHAIR TALERICO recognized members in the audience: Kenai
Peninsula Mayor Mike Navarre and DNR Commissioner Designee Mark
Myers.
The committee took an at-ease from 2:49 p.m. to 2:52 p.m.
2:52:27 PM
MARTY RUTHERFORD, Deputy Commissioner, Office of the
Commissioner, Department of Natural Resources (DNR), stated she
is the Walker Administration's lead person for the Alaska LNG
Project. She said she rejoined DNR on December 1, [2014], and
began receiving non-confidential briefings from the Alaska LNG
Project team. Shortly thereafter, she was allowed to sign the
seven-party confidential agreement (CA) and, along with Ms.
Keppers and others, she began getting more in-depth briefings
that included the confidential information. Upon rejoining DNR,
she was impressed with the quality of the [project] team, which
was retained [from the previous administration]. While she and
the other new people were coming up to speed, the [project]
staff and contractors continued to do their work on their
respective teams.
MS. RUTHERFORD said the state continues the priorities that were
set under the Heads of Agreement (HOA) and under Senate Bill
138, and by the previous administration in its discussions with
the committee. These have to do with protecting the state's
interest and downside risk associated with this project and to
continue to investigate and to assess and address through the
commercial negotiations the full spectrum of both the State of
Alaska's opportunities with this project and the benefits and
the costs as well as the risks associated with that. Pursuant
to the HOA and Senate Bill 138, all the parties are progressing
the principles and moving forward aggressively. The task is
huge, but the goal is to allow the parties to make that FEED
decision in early second quarter 2016. Given the amount of
cooperation she has seen and the willingness by all the parties
to find means of addressing the various challenges that each
party faces, she said she thinks it's something that can be
accomplished. She added that she is looking forward to the next
12 months and getting to that point where a positive FEED
decision can be made.
2:56:38 PM
DONA KEPPERS, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), said she came to [the Department of
Revenue] in 2008 as an audit master and stepped in as the deputy
commissioner during the transition to the new administration, so
she is not new to the Alaska LNG Project. In the previous
administration she participated in the project in different
capacities of detailed work dealing with governance and the tax
issues. With the change into her new role she is participating
across all of the work being done by the state's gas teams,
allowing her to see at a global level how the detailed work fits
into the larger picture. With the change in administration a
very aggressive step was taken as far as briefings for the new
members of the administration and new members of the team. The
[new members] have been in lockstep up to this point, and DNR,
AGDC, and the sponsor group will continue to keep all the
deliverables moving forward. This is a very exciting project,
she added, and she cannot imagine any place else she would want
to be in order to join with the state, the legislature, and all
of the parties in going to the next step.
MS. KEPPERS said the Department of Revenue is currently focusing
in two major areas. Phase 2 of the financing alternatives is
about to start and will be worked on over the summer in order to
deliver a report to the legislature in the fall. The other
piece of large work deals with the Municipal Advisory Gas
Project Review Board (MAG group), which began meeting monthly in
November and will be meeting this Friday. These meetings have
escalated and people are engaged. The commissioner leading that
charge [Randall Hoffbeck] started in December and [DOR] is
looking forward to being able to land a mechanism and work
through this. The relationship with the municipalities is very
important and their input is valued for getting to the right
place to move this piece of the business forward.
2:59:39 PM
RANDALL HOFFBECK, Commissioner Designee, Department of Revenue
(DOR), related that the MAG group tried to put together a report
at the end of the last administration. However, unrelated to
the last administration, things kind of blew up at the end and
the report became almost a wish list rather than a specific plan
to move forward. The MAG group was re-engaged in January [2015]
and the group reconfirmed the idea that it is comfortable with
the payment in lieu of taxes (PILT) structure moving forward.
Because the PILT in general is too big of a concept for the MAG
group to work with, the group requested DOR to put some
parameters around it. So, on Friday [2/20/15], DOR is meeting
with the MAG group with some structure around a PILT. That
structure has been informally floated to most of the major
players associated with the MAG group, and was floated with the
sponsor group yesterday. Although the devil is in the details,
the concept appears to be something that people are going to be
willing to work with. If a consensus is reached on Friday, it
will be loaded into the sponsor group for consideration. The
MAG group's authority is to provide the advice and input, but
because the MAG group is not the decision maker it must go to
the AK LNG group to look at.
COMMISSIONER HOFFBECK advised committee members to keep in mind
that this is not just a municipal issue. The state is a large
stakeholder in the property tax as well, he said, and it could
be 40 percent or more. For example, a very rough number for a
$60 billion project at 2 mils is $1.2 billion a year in property
tax and the state could have as much as 40 percent of that.
Therefore, the state has an interest in making sure that this
PILT works for everybody. He said he is happy with the progress
that has been made. The commitment from the municipalities has
been tremendous and he is hopeful that some structure will be
landed upon on Friday that can be loaded into the process.
3:02:19 PM
REPRESENTATIVE TARR understood the MAG group has an interim
report with a number of recommendations and that, pending new
appointees to the board, a final report is to come out. She
asked whether that process will be by-passed and the focus will
be just on the details of the PILT structure.
COMMISSIONER HOFFBECK confirmed the PILT structure is going to
be the focus and that it can certainly be incorporated into a
final report, which is still owed to the legislature. The idea
would be to actually report on the results.
3:03:02 PM
REPRESENTATIVE HAWKER said the MAG group is composed of very
good people, but each person has a very provincial interest of
looking after his/her own community. The last time he watched
the group, he related, he was worried things would not get very
far very fast given all the differing opinions. Noting it now
sounds like substantial progress is being made, he inquired
whether it is progress that is making everyone at the MAG group
happy or whether there will be a lot of dissent once there is a
proposal before [the legislature].
COMMISSIONER HOFFBECK believed there will be some dissent. He
said he has floated the idea past the mayor of the Kenai
Peninsula Borough, the representative from the North Slope
Borough, the mayor of the Denali Borough, and the mayor of the
Fairbanks North Star Borough. Reiterating that the devil is in
the details, he said they all, in concept, thought it was a good
direction that was being taken. One thing that needs to be
understood going forward is that the sponsor group cannot carry
the burden of the allocation of the revenues from the property
tax. If the decision is made by the state that there is too
much money going to a specific borough or municipality, that is
not an issue that the sponsor group takes on; theirs is total
revenue into the system. There may be another more difficult
discussion with the MAG group going forward as far as how that
is dispersed, but that should not hold up the progress on the
gasline, he specified.
3:05:12 PM
REPRESENTATIVE TARR recalled a provision in Senate Bill 138 to
provide a percentage to rural communities outside of the road
system that are ineligible for some of this PILT arrangement.
She asked whether that is being worked on now.
COMMISSIONER HOFFBECK replied he has not worked on that yet.
3:05:50 PM
CO-CHAIR TALERICO thanked Mr. Fauske for his good presentation
in the other body about two weeks ago. He inquired whether Mr.
Fauske has any comments for today.
MR. FAUSKE remarked that transitions, or any change, are hard
because things are done differently or there is mystery in what
is going to be done. However, he said, he can only speak in a
very positive manner as to how things are progressing and moving
forward. The list of [work] items is a significant list, but
everyone is dedicated to getting that list completed. He
concurred with Representative Hawker about trying to achieve the
benchmarks that are set in a gated approach and that they need
to be realistic. The effort going forward is spectacular. As a
former financial officer for the North Slope Borough, he said he
understands the property tax issue and has offered his
assistance to Commissioner Hoffbeck. He said he has talked to
people many times about the importance of local revenue but also
not to be deal breakers on the idea in that everyone benefits
from this but everyone needs to be reasonable in terms of how to
put a project together. He said his sense from the producers is
that the mechanisms need to be improved upon but that this is a
solvable problem. His message is that this will be solved and
the next issue moved on to.
3:08:18 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:08 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2 17 15 Sec 77 SB 138 Report_Revised for HRES.pdf |
HRES 2/18/2015 1:00:00 PM |
SB 138 |
| AKLNG SOA 3rd Party Commitments 1-30-2015.pdf |
HRES 2/18/2015 1:00:00 PM |
|
| AKLNG HRES Testimony 02-18-2015.pdf |
HRES 2/18/2015 1:00:00 PM |