Legislature(2017 - 2018)Anch LIO Lg Conf Rm
12/04/2017 06:00 PM House RESOURCES
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| Presentation: Aklng Project Update by the Alaska Gasline Development Corporation | |
| 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
Anchorage, Alaska
December 4, 2017
6:06 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Harriet Drummond
Representative Justin Parish (via teleconference)
Representative Chris Birch (via teleconference)
Representative DeLena Johnson
Representative George Rauscher (via teleconference)
Representative David Talerico (via teleconference)
MEMBERS ABSENT
Representative Dean Westlake, Vice Chair
Representative Mike Chenault (alternate)
Representative Chris Tuck (alternate)
OTHER LEGISLATORS PRESENT
Representative Tammie Wilson (via teleconference)
Representative Lance Pruitt
Representative David Guttenberg (via teleconference)
Representative Paul Seaton (via teleconference)
Representative Charisse Millett
Representative Dan Ortiz (via teleconference)
Representative Cathy Tilton (via teleconference)
Representative Dan Saddler
Representative Ivy Spohnholz
COMMITTEE CALENDAR
PRESENTATION: AK LNG PROJECT UPDATE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
KEITH MEYER, President
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Alaska LNG," dated 12/4/17.
FRANK RICHARDS, PE, Senior Vice President
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Answered questions and discussed regulatory
issues during a PowerPoint presentation entitled, "Alaska LNG,"
dated 12/4/17.
ACTION NARRATIVE
6:07:21 PM
CO-CHAIR GERAN TARR called the House Resources Standing
Committee meeting to order at 6:06 p.m. Representatives Tarr,
Drummond, Josephson, Johnson, Parish (via teleconference),
Rauscher (via teleconference), Talerico (via teleconference),
and Birch (via teleconference) were present at the call to
order. Also present were Representatives Pruitt, Wilson (via
teleconference), Guttenberg (via teleconference), Seaton (via
teleconference), and Millett. Representatives Tilton (via
teleconference), Ortiz (via teleconference), and Saddler arrived
as the meeting was in progress.
^PRESENTATION: AKLNG Project Update by the Alaska Gasline
Development Corporation
PRESENTATION: AKLNG Project Update by the Alaska Gasline
Development Corporation
6:08:04 PM
CO-CHAIR TARR announced that the only order of business would be
a continuation of the joint meeting of the House Resources
Standing Committee and the Senate Resources Standing Committee
held on 10/16/17. Since then, a joint development agreement
between the Alaska Gasline Development Corporation (AGDC),
[Sinopec, China Investment Corporation, and Bank of China] was
signed 11/9/17, and there have been additional letters of intent
and further announcements in this regard. The committee will
hear the remainder of the earlier presentation from officials at
AGDC, and a briefing on recent events. She advised the
presentation and monthly updates on the project are available to
members of the public at the AGDC web site: https://agdc.us.
6:10:35 PM
KEITH MEYER, President, Alaska Gasline Development Corporation
(AGDC), Department of Commerce, Community & Economic
Development, provided a PowerPoint presentation entitled,
"Alaska LNG," dated 12/14/17. Slide 1 was an array of
photographs related to the signing ceremony of the AGDC joint
agreement during a U.S. Department of Commerce trade mission in
China on 11/9/17. Mr. Meyer said the signing was a very
significant event that required a year of preparation, and which
has created momentum [for the project] in both the U.S. and
China. One of the objectives of the Trump Administration is to
increase the positive trade flow to the Asia region,
particularly with China. Slide 3 listed an overview of the
presentation and AGDC's mission: Maximize the benefit of
Alaska's vast North Slope natural gas resources through the
development of infrastructure necessary to move the gas into
local and international markets. He said AGDC "take[s] [its]
mission to heart" and seeks to balance the objectives of
customer, finance, and netback to the state for its natural gas.
6:15:40 PM
MR. MEYER continued to slide 4 that illustrated Alaska LNG
Capital Structure, which he said is a 75 percent debt and 25
percent equity structure that is reasonably typical for a U.S.
liquefied natural gas (LNG) pipeline project; however, this
structure is not as typical for an "oil and gas major [company]"
funded project, which would be closer to 50 percent debt and 50
percent equity. He explained an infrastructure project - for a
utility, for example - has a higher debt component because the
project has greater stability and longer-term contracts.
Therefore, for a $43 billion project, this means about $32
billion in debt and $11 billion in equity. Also on slide 4, the
total debt is split into major components: gas treatment plant
(GTP) facility; gas pipeline; LNG facility; $6.4 billion owner's
cost, which is cost of the management of the project; $10
billion in contingency, which is 30 percent of the base of $33
billion. He said the cost of $43 billion, which was derived
from $600 million spent to date by the producers and the state,
is a number that is "probably comfortable on the high side," and
potentially could be a little less. In response to
Representative Pruitt, Mr. Meyer said the source of the $11
billion in equity would be addressed in detail later in the
presentation.
6:19:08 PM
REPRESENTATIVE PRUITT asked whether it was expected that the $10
billion contingency would be spent on cost overruns.
MR. MEYER affirmed it is most likely the contingency would be
spent on unforeseen cost overruns; the $10 billion amount is
high compared to other projects with a 25 percent contingency.
REPRESENTATIVE PRUITT surmised "it definitely should be expected
that we'll spend a fair portion of that contingency."
MR. MEYER agreed. He opined that good management could save
some [money] in contingency and some owner's cost; however, the
economics are based on the full amounts.
REPRESENTATIVE BIRCH observed Alaska LNG is a "massive project"
that is competing with projects in the Gulf of Mexico that can
reach production with a $2 billion or $3 billion investment. He
asked how the project would compete and acquire contracts to
secure equity.
MR. MEYER responded the project is very competitive with the
Gulf. In fact, the LNG plant is "about par with a Gulf Coast
facility at roughly, around, [$1,000] per ton." He acknowledged
the Gulf Coast has some advantages such as construction labor on
site. Also, the Gulf Coast has a pipeline to tidewater, so to
make the Alaska LNG pipeline economical, the project must carry
sufficient volumes to bring the per unit overall cost down. Two
significant advantages for Alaska LNG are a one-third shorter
distance for shipping compared to the Gulf Coast, and a proven
conventional stranded resource that can be priced attractively
and safely, as opposed to Henry Hub [natural gas spot] prices
that have a history of volatility. Further, Alaska LNG natural
gas avoids the Panama Canal which can be a restriction point.
Thus, Alaska LNG can compete quite well with Gulf Coast projects
on a unit cost basis, provided there are sufficient volumes to
justify "the overall bill." Mr. Meyer acknowledged the Gulf
Coast "probably offers our sharpest competition."
6:24:47 PM
REPRESENTATIVE BIRCH agreed and stated the Lower 48 is awash in
gas - LNG is becoming fungible [and available from many
sources], whether exported to the Pacific Rim or Europe;
however, he said the investment side is his largest concern and
questioned whether [China Petroleum & Chemical Corporation
(Sinopec)] is a viable investor, or if China has sufficient
demand for the "massive quantities of gas that this would
propose to put on the market ...."
REPRESENTATIVE SADDLER recalled previous iterations of the
project forecast a cost range of between $40 billion and $60
billion, which is almost the same as a cost of $43 billion plus
a $10 contingency for known overruns. He asked for the average
cost of unanticipated overruns in similar projects.
MR. MEYER clarified the previous cost range of $45 billion to
$65 billion was developed two years ago before $600 million was
spent on engineering to refine the cost; he opined the present
cost is "a pretty comfortable number. It does not have
completely unforeseen events ...." Prior to obtaining financing
and making a final investment decision (FID), AGDC will identify
events that are insurable and those that are not. [AGDC] feels
$43 billion is a good number.
6:28:14 PM
FRANK RICHARDS, PE, Senior Vice President, AGDC, added the
numbers [shown on slide 4] were developed by AGDC partners and
its former partners BP, ConocoPhillips Alaska, Inc., and
ExxonMobil Corporation. The contingency in this level of detail
is completed in the preliminary front-end engineering design
(pre-FEED) effort, following the industry practice established
by the American Association of Cost Engineering of approximately
plus 35 to minus 25 percent contingency: Alaska LNG has a 30
percent contingency. After significant research related to
vendors and scheduling, and factoring in the cost by components,
AGDC used a Monte Carlo analysis to determine the base
contingency.
REPRESENTATIVE SADDLER expressed his understanding AGDC
engineered the project down to a cost of $33 billion and added a
$10 billion contingency to that.
MR. RICHARDS said the total cost includes owner's cost to manage
the construction and design aspects of the project, and the
contingency, so, yes, it is a segment of the overall cost.
REPRESENTATIVE SADDLER restated his question about whether the
amount of average unanticipated overruns is known.
MR. RICHARDS pointed out one of the major potential risks is
regulatory permitting, which can add years and dollars to the
project. [AGDC] has undertaken - in its application to the
Federal Energy Regulatory Commission (FERC) for its [section 3
of the Natural Gas Act] authorization - a step to help de-risk
that in the regulatory component through the environmental
impact statement (EIS) work, this year or next.
CO-CHAIR JOSEPHSON returned attention to Representative Birch's
suggestion that with a $2 billion to $3 billion investment, the
market could be satisfied by Gulf Coast natural gas production.
If so, [the signing of the aforementioned agreement on 11/9/17]
would not have occurred. He asked Mr. Meyer to clarify his
response to Representative Birch.
MR. MEYER explained LNG costs about $1,000 per ton, so a $2
billion investment on the Gulf Coast is [equal to] about 2
million tons, which is about one-tenth the size of Alaska LNG;
by no means would that satisfy the market in Asia. Alaska LNG
is not the largest facility in the U.S., in fact, facilities on
the Gulf Coast are larger and smaller. A $2 billion facility is
the size of the existing [ConocoPhillips Alaska, Inc., Kenai LNG
plant in Nikiski, Alaska] built in 1969. He said the demand in
Asia is far greater than this project and will easily need over
five plants equal to the size of Alaska LNG; perhaps ten new
facilities will be needed between now and 2030, depending upon
the impact of fuel-switching [from coal to LNG].
6:33:21 PM
CO-CHAIR JOSEPHSON affirmed Mr. Meyer's testimony is that the
demand curve [for natural gas in China] is valid.
MR. MEYER said yes, the demand is there. China currently
consumes one-half of the world's coal; shifting a small fraction
of its demand from coal to natural gas is a significant number.
China is number three in the world in terms of LNG consumption,
behind Japan and Korea, and is the fastest-growing market; the
Asian region market is also growing. He advised the Asian
market could easily absorb production from Alaska LNG; however,
Alaska LNG must compete with other U.S. states, as well as
Australia and Papua New Guinea. He was unsure whether the
market could absorb all of the proposed projects; in the U.S.,
all of the proposed projects would produce nearly 40 billion
cubic feet per day, all competing for the same market.
CO-CHAIR JOSEPHSON returned to an earlier comment that natural
gas is so plentiful and available, it is fungible. He recalled
when Senate Bill 138 [passed in the 28th Alaska State
Legislature] in 2014, there was also a lot of gas in the world
market. Although there is now concern about the project price
of $43 billion, when the project was transferred from the
original Alaska LNG team led by [former Senior Project Manager
Steve Butt], the cost was $43 billion, and in that respect,
"there is no real surprise that's here ...."
MR. MEYER said correct. He continued, noting natural gas has
become the hydrocarbon molecule of choice.
[Due to technical difficulties, the remainder of Mr. Meyer's
response is indecipherable.]
REPRESENTATIVE GUTTENBERG urged for the presenter to return to a
description of the project.
REPRESENTATIVE JOHNSON expressed her hope to hear during the
presentation that the aforementioned agreement in no way
intentionally, or by commitment, obligates the Alaska Permanent
Fund as collateral or security against the proposed investment
in the project.
6:38:45 PM
MR. MEYER stressed [use of the Alaska Permanent Fund as
security] is not part of the plan and has not been discussed in
any way. He returned attention to a map on slide 3 and provided
the following description of the project: The GTP is located at
the north end of the pipeline and is designed for three
production trains. From there an 800-mile-long, 42-inch gas
pipeline with 8 compressor stations runs to a 20-million-ton per
year LNG facility, also designed with three trains. It is still
an option to design the plants using one train, and then adding
additional trains in phases; however, at this time the system is
designed for a GTP in the north and a pipeline to an LNG plant
in the south. The pipeline is bigger than the LNG plant in
order to transport about 500 million cubic feet per day [MMCF/D]
for instate markets, which is over twice the existing instate
consumption. Mr. Meyer then presented slide 5, which
illustrated three drivers: customers, financing, and resource
owner. On the customer side, AGDC can't set the price in a
competitive market; similarly, the project must be financed in
debt and equity markets, and be able to cover the cost of system
operations. In addition to these costs, there must be an
acceptable netback to the state.
REPRESENTATIVE PRUITT asked who is referred to as the resource
owner for the project.
MR. MEYER responded that technically the state is the resource
owner. Once the pipeline is in place, the producers have the
ability to pull the reserves out of the ground to monetize them,
so AGDC will have a gas supply contract with the producers; he
opined the first entity to satisfy is the State of Alaska.
Slide 6 focused on LNG market price. Mr. Meyer said Alaska LNG
is competing in the Asia Pacific LNG market only, the project is
not competitive in Europe due to the shipping distance, nor in
the American market, or in Africa. The Asian market is the
focus for Alaska LNG, and competition for the Asian market is
from the Lower 48 and international gas suppliers. Lower 48
suppliers trade gas on the Henry Hub index, based on a pipeline
hub point in Louisiana where the New York Mercantile Exchange
sells futures contracts, thus many Gulf Coast contracts are
based on a Henry Hub plus price for natural gas. Recently, the
price has been around $3-$3.25. In order to compete in Asia
[Gulf Coast suppliers add] the costs of shipping through the
Panama Canal, liquefaction, fuel, and gas supply, which totals
around the Henry Hub price plus $5. On the international side,
most LNG is linked to an oil price index, which is currently
around 12-14 percent of the price of oil. For example, at 12
percent, LNG is $12 at an oil price of $120 per barrel, and
currently at an oil price of $63, the price of LNG is $7.56.
Using about $8 as the market price in Asia, he said, "and so
we've got to get to the beach in Asia, at 8 bucks a million
[British thermal units] BTU[s]." In response to Co-Chair Tarr,
he clarified Alaska LNG must show it can compete with the U.S.
Gulf Coast and Australia at an $8 landed [in] Asia price.
6:45:22 PM
REPRESENTATIVE BIRCH noted the real competition is from natural
gas shipping out of the Alberta Canada, hub, which is typically
priced about $1 less than Henry Hub. He said $2 Canadian is
about $1.60 U.S. and that is a more realistic and certainly a
lower number than Henry Hub.
6:46:12 PM
MR. MEYER said no, adding that Canadian projects have fallen
away because they have a virgin [pipeline] corridor over the
mountains and do not have an existing corridor as does Alaska.
Further, Canadian projects have significant First Nations issues
unsettled by an agreement similar to the Alaska Native Claims
Settlement Act (ANCSA). He said he has no fear about competing
with Canadian projects.
MR. MEYER continued to further pricing information shown on
slide 7. The project needs about $0.80 shipping cost from
Alaska to Asia, and he restated Alaska is about one-third the
shipping distance to China from the Gulf Coast: at $8, minus
$.80, the LNG must reach Nikiski at a cost of $7.20 [MMBtu].
Mr. Meyer said slide 8 turns attention to financing. Because
the project plans for $32 billion in debt and $11 billion in
equity, financing is big piece of the project. Further, about
$1.4 billion is estimated for system operations including
operations and maintenance (O&M), and payments in lieu of taxes
(PILT) to communities. After dividing the costs by throughput,
"which is just shy of one trillion cubic feet [TCF] per year,"
the project needs O&M costs of no more than $1.45 per MMBtu.
Further, financing the $3.5 billion debt service payment for 20
years, at 5 percent, including 5 years of capitalized interest
during construction, [cost $3.60]. The equity return to
investors is about $1.1 billion per year, thus with O&M, debt
cost, and the equity cost of about $1.15, the total cost of the
Alaska LNG system is about $6.20.
6:50:06 PM
CO-CHAIR TARR observed PILT paid to communities along the
corridor would help defray the cost of infrastructure to
accommodate the construction of the pipeline, and O&M money
would also stay in the state to pay workers.
MR. MEYER agreed that no matter who owns the project, $1.45
billion [MMBtu] stays in the state for the life of the project,
estimated to be from 50 to 100 years. Payments for Alaska
labor, contractors, and to local communities would come from
overseas. In response to Representative Guttenberg, he said the
payments for debt and equity begin after construction and [the
project is] in service. Typically, LNG facilities are given
about one year of operating "cushion" before debt service
payments have to be made, although interest will accrue.
REPRESENTATIVE SADDLER asked whether the interests in China
would demand participation - in proportion to their equity share
- in terms of contracting, jobs, and procurement.
MR. MEYER said, "No, it does not come with that requirement."
REPRESENTATIVE BIRCH asked if there is an expectation that there
would not be a change in oil and gas tax policy over the life of
the project. He recalled over the last few years [Alaska has
had] a changing tax structure and questioned whether there is an
expectation by the Chinese government of a "fixed" [tax
structure].
MR. MEYER responded that the issue of taxes and related topics
has not been finalized with the Chinese and will be addressed in
2018.
REPRESENTATIVE BIRCH questioned whether PILT would be the total
of the taxes paid by the project. He opined the Chinese style
of government dictates taxing structure and policy, however, in
the U.S., and especially in Alaska, these issues are more fluid.
MR. MEYER said AGDC has maintained that PILT would be $450
million for the life of the project and would be paid to
communities as part of doing business.
CO-CHAIR TARR pointed out PILT was incorporated into Senate Bill
138 to resolve some of the issues related to the Trans-Alaska
Pipeline System (TAPS).
6:56:26 PM
REPRESENTATIVE PRUITT, returning attention to the discussion of
tax structure, suggested that a producer with expectations of a
stable tax structure would include in gas supply contracts a
provision to pass on any [increased costs] due to changes by an
unstable state government, thereby affecting the proposed gas
price expected by [China]. He asked whether AGDC has discussed
what can be delivered in terms of tax stability, and the tax
structure in Alaska.
MR. MEYER said AGDC has not had specific discussions on the
future tax structure in Alaska; AGDC has characterized Alaska as
a stable regime. Prior to funding and the finalization of the
commercial contract, the issue will be addressed on "the gas
supply side and the buy side." To date, AGDC has not had to
"paper this solution;" he pointed out every regime must address
the issue as to who takes the burden of shifting taxes.
Although Gulf Coast projects typically pass tax changes through
to the customer, this project in Alaska is unique because the
state is developing the project.
REPRESENTATIVE PRUITT asked for clarification on whether the
[$11 billion] equity is resource or non-resource equity.
MR. MEYER explained equity in the project is a dollar commitment
from investors such as third-parties, the state, bonds issued by
AGDC, investment by Alaska regional corporations, investment by
municipalities, or a combination of sources.
REPRESENTATIVE SADDLER restated his question related to whether
there is a current agreement that would require the project to
give Chinese interests 75 percent of the contract work in
proportion to their equity. As an agreement has not been
finalized, he asked for a commitment from AGDC to legislators
that a future final agreement would not allow China to get a
significant percentage of the contracting and labor work in
Alaska.
MR. MEYER restated AGDC has not finalized discussions on this
topic, and he pointed out it would be impracticable for China to
have a majority involvement in construction. The labor
requirement for construction will severely stress Alaska, so
outside labor will be needed. He said he expected Alaskan
contractors will have a degree of priority, and he does not
expect Chinese companies would provide labor under any
circumstances. The project will be built by Alaska contractors,
and Alaska labor, as was TAPS, although many workers came from
out of state. Mr. Meyer stressed there is not an entity in
Alaska that has the systems and competency to manage a
megaproject, thus some expertise will have to come from
elsewhere and AGDC is in contact with large entities - domestic
and foreign. He remarked:
To be clear there is not an Alaskan contractor that
can handle a $43 billion construction project, and so,
so, we look for those large companies. ... I just
don't want to, to be disrespectable to our, to Chinese
companies that also have a very high degree of
competency, that also build pipelines. ... Sinopec has
built a pipeline longer than ours with an altitude
peak higher than ours and a gas treatment plant larger
than ours.
MR. MEYER, in further response to Representative Saddler, said
he expects the project will be subject to a project labor
agreement. He returned to the presentation, restating the cost
to the Asia market is $8, less $0.80 shipping, and so is $7.20
delivered to Nikiski; less the costs of O&M, debt service, and
equity return, leaves $1 per MMBtu - about $1 billion per year -
to the gas suppliers, of which the state garners 25 percent
[slide 9]. Slide 10 illustrated the balance of the three
drivers: the market gets a cost of $8 for delivered natural
gas; financiers receive a modest equity return; operations are
paid; PILT is paid; and the netback is $1 at the gas treatment
plant.
REPRESENTATIVE JOHNSON asked whether $1 for gas is acceptable to
the gas suppliers.
7:06:02 PM
MR. MEYER further explained the [netback of $1] "comes from sort
of what's leftover." [AGDC] cannot change the market price of
LNG, and the costs to operate the system and PILT must be paid.
He characterized the financing and cost of equity is "reasonable
debt financing," and $1 [netback] is what is leftover. About 8
BCF of gas is produced in Prudhoe Bay. The project needs about
3 BCF, and about 400-600 MCF/D is burned by pushing the gas back
in the ground, so the cost of not pushing gas back in the ground
is negative. He advised getting $1 billion per year - for a
resource that today is lost - is reasonable; although the
netback is not as high as Henry Hub, [the gas priced by] the
Henry Hub index is not on the North Slope. Mr. Meyer said AGDC
feels this is a reasonable return for a resource that is
otherwise stranded and would be burned up by pushing it in the
ground.
REPRESENTATIVE JOHNSON expressed her desire to hear from the
producers regarding the netback, and whether the netback could
be higher for gas delivered to other parts of the world. She
requested further information from the producers in this regard.
Returning attention to PILT, she asked if the state is the owner
of the pipeline, is it accurate to call the tax PILT.
MR. MEYER advised PILT was part of the arrangement in place and
therefore is unquestioned; a provision to pay some compensation
to all of the affected Alaska communities has always been part
of the project.
REPRESENTATIVE JOHNSON inquired as to the possibility that AGDC
- or a portion thereof - could be purchased by Chinese
investors.
7:10:05 PM
MR. MEYER said the reason for PILT is not in anticipation of a
change in the ownership of the pipeline. He was not 100 percent
sure whether PILT has to be paid, but the economics of the
project have always included [the cost of] PILT paid either in
cash, gas, or another form. In further response to
Representative Johnson, he said he does anticipate third-party
investors in the project, not at "the AGDC level," but the
project will be held in a project-company structure, and
investors would invest in the project as opposed to having an
investor in the role of AGDC. He said he envisions AGDC would
remain 100 percent state-owned. Mr. Meyer further explained an
owner in the project-company would own an asset. For example,
there would be one project-company for each of the main assets:
an LNG project-company; a pipeline project-company; and a gas
treating plant project-company; each conceivably with different
owners.
REPRESENTATIVE PRUITT expressed concern that the $1 netback
seems uncertain. He asked for the cost of producing natural gas
from Point Thomson; in fact, if the netback is the catalyst for
the project, the model should be built around the cost of
supplying the gas.
MR. MEYER advised at Prudhoe Bay, it is arguably a negative cost
because [producing] the oil keeps the cost of producing the gas
significantly less than one dollar. He cautioned that
"everybody wants more ... the equity guy, the PILT guy, the
operations guy, everybody." He opined the $1 netback is easily
justified at Prudhoe Bay but acknowledged Point Thomson maybe
needs a higher price. However, the netback formula is common
worldwide and is "what all the producers deal with," with the
exception of the Lower 48, because of its mature market and the
accepted index of Henry Hub, and a similar exception in Canada.
He restated that all producers deal with netback throughout the
world, as this is the standard process, particularly for
stranded gas. Mr. Meyer posited stranded gas in Australia would
garner higher prices because it has a domestic market that would
provide competition for LNG; however, in Alaska, for a stranded
gas resource, the netback has to reasonably cover the cost of
the gas. Internationally, because the price of gas is linked to
an unknown price for oil, the sellers "live with this, this
fluctuating price." He opined netback is a sound way to
determine a market price, and removes the volatility associated
with netback by fixing the price, and by inflation-proofing.
Although some producers prefer the volatility associated with
oil markets, the netback could be indexed, and as the $8 market
price increased, the $1 netback would increase. These terms are
part of the producer discussion.
REPRESENTATIVE PRUITT noted the state must get the highest
benefit from its resources, but Mr. Meyer earlier stated putting
gas back in the ground is essentially burning gas. If a
producer is going to make $0.75 for gas, the producer's concern
is whether to get the higher benefit from the production of oil
in Prudhoe Bay - and the state is getting revenue from tax and
royalty in taxes on the production of oil - whether the better
value is $1 netback from gas or reinjecting the gas and
producing higher-value oil.
7:19:29 PM
MR. MEYER said the answer can be demonstrated by the Alaska Oil
and Gas Conservation Commission's (AOGCC's) decision to allow
gas to be taken off, because in order to maximize recoverable
hydrocarbons, it is necessary to pull the gas off by 2023 or
2024. Eventually, it doesn't pay to continue to pressure the
field. [AOGCC] said removing 3.6 BCF/D of gas from the Prudhoe
Bay reservoir will have no detrimental impact, and that is the
reason the Alaska LNG facility is sized at about 3.3 BCF/D. He
said there has been sufficient analysis on the reservoir, which
is now a large gas reservoir with oil, instead of the other way
around. When the oil is gone, and the gas is all that is left,
the gas must pay for all the associated facilities for gas, but
not the entire Prudhoe Bay complex, so he acknowledged that the
price of gas cannot go below the cost to operate the system when
the oil is gone.
REPRESENTATIVE PRUITT asked whether AGDC has presented [the
economics of the project] to producers.
MR. MEYER remarked:
We have had conversations, they have seen this
presentation. Everybody wants more, no one said it's
not accepted. I think it's very acceptable, but at
the same time, I know everybody wants more. ... But
none of the producers have said 'This doesn't work,
that this is higher than our, or lower than our cost.'
It's not."
MR. MEYER opined $1 billion per year upstream, when compared to
nothing, looks good. On slide 11, he pointed out the project
provides benefits to the state in the amount of $1.75 billion to
$2 billion, and $750 million to $1 billion to the producers,
regardless if the state is an owner or not. He turned attention
to slide 12, noting that there is at least 500 MCF/d in the gas
pipeline reserved for instate use, which is more than twice the
instate consumption of 60 trillion Btu [TBtu] in 2016, and
restated the pipeline is sized larger than the LNG facility in
order to transport additional gas for instate use.
7:25:43 PM
REPRESENTATIVE BIRCH inquired as to the price of gas for instate
use.
MR. MEYER estimated between $5-$6 delivered to Alaska
communities through at least five interconnects. This price is
assuming all parties are reasonable, and the cost of the gas is
about $1.
REPRESENTATIVE JOSEPHSON observed the economics proposed in the
presentation reflect a low-price environment, and slides 9 and
11 illustrate the amount of the state's royalty interest; as
interest debt is retired, the state's netback would grow, and
the state would also profit from selling 500 MBtus of gas on the
market. He pointed out although slide 11 indicates the state
would reap $250 million per year from its investment, "the
scenarios could prove much rosier than that, in total."
MR. MEYER agreed and clarified on the financial side the total
[benefit] is about $5 billion, but about $3.5 billion of that is
debt service. Once the state is 100 percent owner, it would
earn $1.1 billion for about 20 years, increasing to about $5
billion for the remainder of the life of the pipeline, if the
tariffs remain unchanged. An asset returning about $5 billion
per year could be sold or monetized, if desired. The project is
the gas equivalent of TAPS, however, unlike crude oil, natural
gas can be used right out of the pipeline and thus Alaska LNG
will grow lateral branches to Fairbanks, to mines, and to other
communities.
MR. MEYER continued to slide 14 and said AGDC created a megadeal
to build a megaproject by taking advantage of Alaska's status as
a sovereign government, and utilizing a government to government
approach in Asia, where there are large state-owned utilities,
with the exception of Japan. [AGDC] approached Japan, Korea,
and China with the structure illustrated on slide 15. He
explained this approach:
... in the form of a loan we will give you back in
repayment - to one of your buying companies - capacity
in our system. That entity can actually make the debt
service payments to you directly, which mitigates
credit risk, and also, we don't care what currency
they pay you with, [and that] can minimize exchange
rate risks. So, we become somewhat insulated for the
debt - you give us a bunch of dollars, we'll give you
a bunch of capacity. That works for large, credit-
worthy entities that are holding big dollars, so it
only really works in three countries: Japan, Korea,
China.
MR. MEYER further explained Alaska LNG will have to raise and
provide the equity funds of $11 billion. He recalled the
structure on slide 15 resembles the original structure, however,
the original producer-partners took 75 percent ownership of the
project and with structure now proposed the state retains 100
percent of ownership and will find a customer for 75 percent of
the capacity.
7:32:08 PM
REPRESENTATIVE SADDLER posited whether the state, as 100 percent
owner, will have to make up any deficit in the value of gas -
and guarantee China financiers their expected rate of return -
if the price of gas drops after the pipeline is built and
commitments are made.
7:33:01 PM
MR. MEYER said no. He returned to slide 15 and pointed out in
addition to capacity in the system, the buyers pay for a
proportional share of O&M and the gas supply, whether a fixed or
indexed price. Although buyers have an interest in an oil-
linked gas price, from AGDC's point of view, the price is a flow
through, giving [the buyer] system capacity in exchange for the
debt. He restated no, the state would not have to make up
anything in a changing price environment.
REPRESENTATIVE JOHNSON returned to slide 14 and asked whether
"Chinese" could be substituted for "in-country," and if so,
whether Chinese companies are nationalized companies.
MR. MEYER responded yes. In further response to Representative
Johnson, he clarified the project company referred to on slide
14 is a marketing entity of the project company, which would be
a marketing entity that currently would be 100 percent owned by
AGDC, although there may be third-party investors in that
company. The owner of the 25 percent - that could sell into
potentially higher-valued, shorter-term regional markets - might
not underpin long-term debt. What it's really for is to do
other, more traditional deals with countries such as Japan and
Vietnam.
7:36:36 PM
REPRESENTATIVE JOHNSON concluded that would be the partial
ownership investment, not AGDC, and expressed her hope the
presentation would at some point ensure that another large-scale
company would not be in competition for the gas, and the focus
would be on maximizing the resource for Alaskans.
MR. MEYER stated a good a part of AGDC's mission is that the
whole system is being built largely to provide gas for Alaskans;
however, Alaska does not have sufficient demand to anchor an
800-mile pipeline from the North Slope. He stressed the
difference between Alaska LNG and Canadian projects is that
Canadian LNG projects need a pipeline, but Canada doesn't want
to build a pipeline. Alaska LNG is a gas pipeline that needs an
LNG project - and everybody wants the gas pipeline. Mr. Meyer
assured the committee Alaskans will have gas from the Alaska LNG
project; he added that pipelines can be expanded through
compression and through looping, as has happened to every major
pipeline in the Lower 48 as the market grew.
REPRESENTATIVE JOHNSON restated her desire for a clear sense of
the financing structure that is integral to the project and
stressed the importance of the project's value to the state in
jobs, management, and gas supply; although Sinopec has the
capability to build the pipeline "we might not necessarily want
them to."
MR. MEYER pointed out the benefit to Alaska's economy would be
not just during construction, but may last 50-100 years, and
that the use of natural gas would improve the environment in
Alaska and in China.
REPRESENTATIVE PRUITT asked how [AGDC] will hold 100 percent
ownership, yet still have third-party investors [in the
project].
MR. MEYER explained AGDC now has 100 percent ownership, but at
the point it accepts third-party investors, their investment
will be in exchange for ownership. Further, he restated Senate
Bill 138 requires Alaska LNG to have a structure that allows
Alaskans, regional corporations, and municipalities to invest.
7:43:03 PM
REPRESENTATIVE PRUITT questioned how AGDC will maintain its tax-
exempt status. He added that his earlier question was not about
Alaskans acquiring ownership but, as shown on slide 14, "partial
ownership investment by foreign entity ...." If China is
investing in the project, the U.S. government would not consider
maintaining the project's tax-exempt status.
MR. MEYER clarified AGDC has tax-exempt status that could be
extended to a wholly-owned subsidiary; however, tax-exempt
status cannot be extended to a third party that is not a U.S.
tax-exempt entity, thus the ownership held by AGCD will be tax-
exempt, and AGDC can issue tax-exempt bonds, however, other
parties on the distribution side of the project company will be
taxable. He acknowledged this is a more challenging "economic"
for tax-paying investors, such as hedge funds.
MR. MEYER continued to the following slides:
• slide 16 illustrated China represents the primary demand
for energy
• slide 17 illustrated the Asian LNG demand and its
contracted supply of LNG, and that Alaska LNG is not a big
project in the worldwide view
• slide 18 illustrated: China is moving to cleaner fuels
including [gas], renewables, and clean coal; China's
historical demand for natural gas; in China the number of
LNG import-receiving terminals grew from 1 to 19 in 10
years
MR. MEYER described China's interest in the joint development
agreement and said China wants 15 million tons of capacity -
which is three-quarters of the total capacity of 20 million tons
- in exchange for debt. By the terms of the joint development
agreement, China would pay for O&M and gas separately. The
agreement involves three parties: Sinopec, the third largest
company in the world by revenue; Bank of China, the fourth-
largest bank in the world; China Investment Corporation, China's
sovereign fund worth $813 billion, the third-largest in the
world; all of which are owned by the Chinese government. Thus,
the agreement has a buyer, a lender, and a potential investor
all in one. By the target date of May [2018], AGDC seeks to
further define the roles, the distribution of the gas, whether
the banks will issue a nonrecourse debt instrument, and other
terms. By the end of 2018, executing definitive agreements
would allow for a final investment decision (FID) in 2019, and
to start construction and be in service by 2024 or 2025 [slide
19].
7:49:29 PM
MR. MEYER said slides 20-22 provide more information on Sinopec,
Bank of China, and China Investment Corporation. Slide 23 was a
diagram that showed how AGDC benefits from a single in-country
buyer that distributes the product within China. In terms of
price, he explained the Chinese consumers will pay for the cost
of debt and for the capacity, and this provides "tension, and
you know, some balance there as well, but from our point of view
we get one buyer for the 75, who takes care of the debt portion
... the 25 percent we want to sell to regional markets, so
you'll notice we followed up ... and we signed with PetroVietnam
Gas, which is Vietnam's state-owned company." He noted
PetroVietnam Gas is state-owned but does not have the credit
capacity of China, and this is a "completely different
transaction." Also soon to be announced, is a transaction with
Tokyo Gas Co.; he added Japan can provide funding through the
Bank of International Cooperation (JBIC), which has a mission to
lend money into resource projects if the resource products are
distributed to Japan.
REPRESENTATIVE JOHNSON, speaking on behalf of her constituents,
expressed their concerns about China as a trading partner,
adding that Sinopec was previously disqualified from
participation in the TransCanada [gas pipeline] project, [due
to] "human rights violations, and so on." She inquired as to
what has changed, so that China can now be a trading partner,
from the views of the Trump Administration and Mr. Meyer.
MR. MEYER said he has been impressed with the progress China has
made. He recalled Sinopec has long been interested in [doing
business in] Alaska; however, his understanding is that Sinopec
pulled out of Alaska because its bid was never considered.
Sinopec is China's number-one rated credit entity and has about
700,000 employees. [AGDC] has been impressed with Sinopec as a
company, and Mr. Meyer said China has made reforms and progress
in factors such as air quality. Mr. Meyer pointed out China is
Alaska's number-one trading partner in seafood. For the U.S.,
China is a trading problem, and currently holds $1.24 trillion
in U.S. Treasury bills and is a big trade partner. He
acknowledged China did have human rights abuses, but is
"Alaska's number-one trade future, and [will be] the largest
resource-buyer on the planet ... for the rest of our lives." He
returned attention to slide 18 and noted China's demand for
resources that Alaska could provide. He opined China is a
valuable, viable, credible, and quality partner, and cautioned
against prejudice, urging the committee to look to the future,
encouraged by the Trump Administration's interest in China.
7:57:09 PM
REPRESENTATIVE PRUITT stated his concern is that China would
have such a large stake in the project that Alaska would no
longer be its partner, but would be a vassal, and thereby
treated as a colony. He asked how Alaska could partner with the
Chinese and avoid a role where Alaska is subservient; further,
he noted it is indicated that through the joint development
agreement [there is 75 percent debt] and asked whether that
percentage is scalable. For example, can others who may be
interested, such as PetroVietnam Gas and Japan, play a role and
diversify [investment] beyond the major stake held by the
Chinese. He questioned whether the proposed Chinese partners
are amenable to diversification.
7:58:55 PM
MR. MEYER said there is no scenario envisioned in which the
Chinese would own a majority interest in the project. In terms
of whether the project is scalable, he said yes, in two ways:
other entities - such as Japan or Korea - could participate, and
the facility is also scalable, and could be limited to two
trains with the third train added in the future. In fact,
Alaska LNG with two trains and an 800-mile, 42-inch pipeline
would only require 3 compression stations instead of 8; he said
the unit economics are "a little bit worse ... but they're not
so bad that it breaks the balance." He advised Gulf brownfield
projects are those that have been built in phases, and said,
"It's the pipeline that's tough, once you get that pipeline in,
the rest of this is easy."
REPRESENTATIVE PRUITT surmised the remaining 25 percent
represents the Alaska share that would be sold on the market by
Alaska.
MR. MEYER answered yes, AGDC would sell that capacity to
regional and private entities - that could also be Chinese
private entities - and other parties; however, it is more work
to sell to buyers without credit depth. He stressed AGDC does
not have a "balance sheet" and so must look for nonrecourse
debt, which leads AGDC to focus on selling to large, credit-
worthy entities.
REPRESENTATIVE SADDLER related the U.S. government has described
China as an authoritarian regime, China has denied Western
forces access to Southeast Asia oceans in restraint of
international free trade, is the patron state of North Korea,
executes prisoners, has a policy of forced abortion, and other
practices. He quoted [Nikita Khrushchev, First Secretary of the
Communist Party of the Soviet Union 1953-1964], "The West would
sell communist Russia the rope to hang us with." Further, the
U.S. sold raw materials to business partners in Japan until
Japan attacked Pearl Harbor [Hawai'i, on 12/7/41]. He opined
China has a long-term goal of political gain and seeks to
control the supply of minerals, coal, gas, and oil, and has
control of access to the Panama Canal. Representative Saddler
cautioned the State of Alaska and its governor are playing an
economic and political game to get a gas pipeline "at almost any
cost." He said he wished Alaska would propose an agreement with
South Korea, Japan, India, or Vietnam as opposed to doing
business with China. He questioned whether there are moral
considerations, or considerations related to Alaska's
contribution to global stability, for those who deal with China.
8:04:27 PM
MR. MEYER said no to both questions. China is Alaska's largest
customer today and Alaska's largest trade partner. In fact,
Alaska has welcomed China's business in seafood and minerals,
and [Alaska LNG] is an extension of an existing trade
relationship. He said trade with China did not bother him and
pointed out the trade mission had the full support of
Washington, D.C. Mr. Meyer advised the Chinese contacted U.S.
Senator Lisa Murkowski for assurance in this regard. Turning to
Alaska's participation in the global economy, he opined stable
energy prices lead to regional stability, and providing stable
energy prices to countries brings stability to regions; the U.S.
recognizes using energy trade as a geopolitical tool to
establish a relationship with a country and thereby create a
dependency. Furthermore, the Trump Administration seeks global
energy dominance. He said trade would bolster the U.S.
geopolitical position through the use of energy as a trade tool.
MR. MEYER continued to slide 24 and said the Alaska LNG Project
Structure is an entity that would hold assets through separate
entities, including, but not shown on the slide, separate
entities for LNG, gas represented by commercial contracts for
repayment through commercial banks, export credit agencies,
project bonds, and other debt lenders. Turning to the source of
the $11 billion equity, he said the desired structure gives the
state the option to invest, but it is not required to do so,
meaning there would be funding from outside from third parties
such as financial investors, trading houses, or sovereign wealth
funds. He said if funding does not come from third parties, it
must come from the state or other Alaska entities. Also shown
on slide 24 was the requirement in Senate Bill 138 that Alaskans
can invest in the project. Further, AGDC could issue bonds or
get funding from the state, as determined in the future.
8:10:14 PM
REPRESENTATIVE SADDLER asked whether phase construction would
affect the financing structure or the agreement with China.
MR. MEYER said no. The structure would be the same with 25
percent equity and 75 percent debt; dropping one train for a
later phase lowers the cost to about $33 billion. Regarding
phase construction's effect on the China agreement, he stated,
"we could talk them into less [gas]."
REPRESENTATIVE BIRCH expressed his deep concern that possible
risks will mean "Alaskans are going to end up holding the bag on
this." He assumed China has a clear understanding of the
project and cautioned that Alaska's gas on the North Slope is
not competitive. He observed the Chinese government has access
to gas from Russia, where a major new pipeline will begin
shipping in 2019, and another is being negotiated. During the
discussion of equity financing options, there has been no
mention of Sinopec executing an earnest money agreement or
sharing in the cost of ongoing operations. With Alaska's
current budget, further investment in the project requires
comforting words about shared costs and risks of exposure on the
part of Alaska's perceived partners in the project.
MR. MEYER advised cost-sharing is typical with a potential
partner, but not with a customer. In terms of the risk of
overrun, he said getting the risk out of the project will be a
focus in 2018, and who bears the risk, "and it most likely will
not be AGDC in a big way."
REPRESENTATIVE BIRCH further observed AGDC is dealing with
astute, major multi-national government-owned concerns with
tremendous resources, "... and I'm worried about us getting out-
gunned." For the first time, Alaska does not have a major oil
company and producers participating; for four decades the oil
industry, as lease owners, has borne all the costs of gas
projects, pipeline investigations, and other costs, and he
recalled oil [development] costs were borne by the producers who
held the obligation and challenge to develop a viable project.
Because shale gas entered the energy market 10 years ago, Alaska
has a stranded asset, and he questioned whether Alaska LNG is a
viable project; in fact, the $1 netback could be "squeezed down
to zero or negative." Representative Birch said he did not see
substance in the joint development agreement and restated his
concern about the project moving forward.
8:16:21 PM
MR. MEYER agreed there are big entities involved, but Alaska is
also bringing big legal and financial firms, and expertise in
the industry, to the negotiations. The Chinese entities are
very capable and relatively new to LNG. He pointed out the
producers are major successful companies that have higher
priorities and said, "I don't think we can, we can have the
producers in there and have a project, we've done rather well,
you know, since stepping into this in 2017." He opined AGDC is
not out-gunned and restated AGDC will have law firms and
investment bankers involved in the project to "paper this deal."
In addition, lenders have to be satisfied, and the state will
have to be satisfied. The challenge for AGDC is to put together
contracts, an investment perspective, and a portfolio of the
project that is acceptable to the state and to customers,
lenders, equity investors, and gas suppliers. Mr. Meyer
described some of work that must be completed in 2018, and
challenges for AGDC to address. He advised making more progress
will assuage doubt.
CO-CHAIR TARR directed attention to regulatory issues beginning
on slide 31.
8:20:15 PM
MR. RICHARDS informed the committee to reduce regulatory risk,
AGDC entered into an application with the Federal Energy
Regulatory Commission (FERC) on 4/17/17; the application is
required by FERC to license an LNG terminal. The project is
deemed an integrated project - from FERC's perspective - because
it incorporates an LNG plant and a pipeline, so the entire
project is included in one application. The application
represented 60,000 pages of environmental and engineering work
submitted to meet FERC's minimum requirements for the Natural
Gas Act Section 3 application. The application is currently
under review by FERC and AGDC's third party contractor, and AGDC
is responding to about 200 questions that remain from FERC's
original 801 environmental data requests. [AGDC's] goal is for
FERC to be in a position to publish the schedule of the
environmental impact statements (EISs), issue a final EIS at the
end of the year, and issue a record of decision the first
quarter of 2019 [slide 31]. Mr. Richards said the Trump
Administration, in advance of the aforementioned trade mission,
recommended AGDC apply for Fixing America's Surface
Transportation Act (FAST-41) authorization in which the federal
government puts major infrastructure projects on a "dashboard"
and requires that federal agencies respond and provide timelines
for federal permits, and to report to Congress if there is a
change or delay. The project was accepted, and FERC is
responsible for obtaining timelines from federal agencies;
however, state permitting agencies are not included on the
dashboard at this time [slide 32].
MR. RICHARDS advised the project has support from Alaska's
congressional delegation in the form of provisions in the
National Park Service Organic Act to allow a high-pressure gas
pipeline to enter a national park, revisions to the Alaska
Natural Gas Pipeline Act (2004), and briefings to ensure those
who have been nominated to serve on related agencies are aware
of the Alaska LNG project and its challenges. The White House
has provided an executive order defining the response from
federal agencies for permitting authorizations and to reduce the
duplication of work [slide 33]. Finally, slide 34 illustrated
the regulatory timeline envisioned for the next year: April
2017, initial FERC filing; August 2017, FAST approval; August
2017, executive order; November 2017, joint development
agreement; December 2017, EIS schedule (requested); December
2018, final EIS (requested); February 2019, record of decision
(requested) [slide 34].
CO-CHAIR TARR said slide 35 reflects AGDC's budget and forecast
budget projections that will be discussed in a future meeting.
8:26:57 PM
CO-CHAIR JOSEPHSON related [U.S.] two-way trade with China
totals $576 billion, and said he assumed the project would
increase the trade number but decrease the trade deficit. He
opined the U.S. has an enduring trade relationship with China in
place and commended the presenters for their work. He said he
feels the efforts for the project have had some real success,
and [the Walker Administration] cares about the project and has
worked very hard on the project.
REPRESENTATIVE PRUITT recalled several previous presentations on
the project and its schedule and asked what happened to front-
end engineering and design (FEED).
MR. RICHARDS explained the money identified on slide 35 is the
money spent last year [on major activities] since the initiation
of the project by AGDC, and totals about $28 million. The
amount identified as Class 3 Work (Prepare for FID) is what has
been previously referred to as the work efforts that AGDC would
undertake to take the project through FEED, and to progress to a
lump sum turnkey (LSTK) cost estimate that would guarantee the
price on a project component that would be used in the final
investment decision (FID). He said AGDC is not discounting FEED
but is going to define the steps to progress to that stage.
REPRESENTATIVE PRUITT pointed out [slide 34] indicated a
decision in February 2019, but some of the engineering may be
done by AGDC or by the Chinese, and suggested the project is
skipping a step that the legislature has been told is critical
prior to FID. If the Chinese design some features of the
project, he questioned how AGDC will have sufficient engineering
and time to reach a final decision between December [2018] and
February [2019].
MR. MEYER acknowledged previous presentations included a stage-
gate process that had a pre-FEED bid, FEED, and a construction
bid, which is how major oil companies proceed. However, many
pipelines and Lower 48 projects are different, instead
approaching a contractor with the expertise for construction,
and paying the contractor to complete an LSTK bid which includes
FEED. For example, for the LNG plant, Chiyoda Corporation - a
very large and experienced Japanese company - has done most of
the work, and AGDC asked Chiyoda for an LSTK [bid]. Chiyoda
doesn't have to complete FEED to offer a bid. He acknowledged
major oil companies maintain that FEED will result in a cheaper
construction bid; however, if a project skips the construction
bid and seeks an LSTK quote from a contractor, then the project
has a contractor with the competency to build, and FEED is part
of the construction bid. Although the cost may be higher, this
process saves years, and several Gulf Coast projects have gotten
into service using "more of a pipeline approach" to a company
that knows how to build an LNG plant.
8:33:44 PM
REPRESENTATIVE PRUITT restated every presentation has included
the stage-gate approach. He stressed this is huge change; LSTK
may work for an LNG plant, but not for an 800-mile pipeline.
MR. MEYER agreed and said, "the pipeline is the place where
we've got some risk and we may have to do some FEED ...."
However, the GTP on the North Slope and the LNG plant are no
problem. He remarked:
In terms of not hearing about the FEED step, that was,
you know, in the last, last year and a half - two
years ... since we got here, that, that is a
traditional process for a pipeline - in the Lower 48 -
project. FEED gets done, no question about it, but it
doesn't have to be a whole separate step. We've got
to go to a contractor that can do FEED as part, as
well, as the construction of the facility. But you
are absolutely right, the pipeline is the piece where
I think we're going to have to spend our, our focus on
engineering work. You've got the [Alaska Stand Alone
Pipeline (ASAP)] project ... AGDC did the ASAP project
and it had FEED ... we've done FEED for an
uncompressed, 36-inch pipeline ... [with the] same
exact centerline, right, there's no, no difference.
The only difference is ... 6 inches of diameter which
is really not a different trench size. ... They won't
be identical necessarily, but they'll be very close,
... but we've already got quite a bit of work done on
the pipeline that would qualify as FEED.
MR. MEYER said he recognizes the pipeline is where AGDC has
construction risk.
REPRESENTATIVE TALERICO referred to the schedule and asked for
the appropriate time to "bring the leaseholders in." He said
that previous projects have failed because the state failed to
recognize those who own the leases, and the leaseholders are
needed to help the state negotiate, talk with buyers, and
provide a level of expertise to facilitate a successful project.
8:37:23 PM
MR. MEYER said now is the time to more seriously engage the
leaseholders. AGDC's initial focus was on the marketing and on
financing, but will now engage in discussions on the gas supply.
However, the major oil companies will not be involved in project
ownership because the project does not garner a rate of return
that "clears their internal hurdle rate." Alaska LNG is a
pipeline project and there are no major oil companies involved
in gas pipeline projects in the U.S., because the returns are
too low. He said oil companies will not be an ownership
component; in terms of negotiations - as negotiations are
sensitive - some of the oil companies are involved in
negotiations with the same customers, but not on the Alaska LNG
project. Mr. Meyer explained that oil companies focus on their
shareholder return; he cautioned against inviting oil companies
to take the negotiations because AGDC is the only one looking
out for Alaska's best interest. The other entities are looking
out for their interests, and AGDC is fighting for Alaska.
REPRESENTATIVE SADDLER, noting these discussions are serious
business, pointed out that Alaska LNG has financiers, customers,
and constructors, but not suppliers; those who own the leases to
produce and sell the gas are not at the table. Although there
was a reference in the structure of how the producers may affect
the commitment of gas, he related there is an official who has
held up the Prudhoe Bay plan of development progress on a
pipeline. If the hurdle rate is not high enough for the
construction of a pipeline, what happens if the $1 netback is
insufficient for the suppliers' internal rate of return? Is the
duty to produce - that is implicit in leases - the argument that
will induce producers to supply gas to the pipeline?
MR. MEYER said [the question of the duty to produce] is not
within the purview of AGDC but is a Department of Natural
Resources issue. [AGDC's] focus is to keep the cost of the
system as low as possible. He said AGDC will buy gas at a
reasonable price that will bring a profit of $1 billion to the
producers. However, if gas can be sold at a better price, the
producers should take it - as long as it is "an Alaska deal ....
[not] in a different country." Further, the gas could be
purchased at Nikiski for $7.20 and resold. AGDC will engage gas
suppliers, but first it had to finish its work on marketing
issues. He opined producers acting in the best interest in
Alaska will accept this price; the companies have to behave
rationally and responsibly for their shareholders, and also must
meet the obligations and expectations of the state as the
resource owner. Mr. Meyer reminded the committee Alaska
licenses the extraction rights to producers, so they can extract
and commercialize, but not to hold it in the ground and
commercialize another project because there is no penalty,
unlike in other parts of the world where if there is no
production within 5 years, the right to produce is lost. He
agreed that producers are a big part of the project, and the
project will have a reasonable solution.
REPRESENTATIVE BIRCH recalled ASAP was a $10 billion pipeline
and questioned the total project cost of Alaska LNG. In regard
to nonrecourse debt, he asked if nonrecourse debt meant in the
case of default to its creditors - for example, the Chinese -
the creditors take over the assets of the pipeline and
facilities, and the state would not owe a deficiency payment.
He asked for clarification of nonrecourse debt and the state's
liability.
8:45:18 PM
MR. MEYER answered nonrecourse debt means nonrecourse to the
state, so the state is not providing a guarantee of the debt or
of repayment. He said the proposed structure is that the
payment is in the form of capacity to an affiliated buying
entity. Thus, the only payment back to the state is O&M and the
gas supply. He clarified nonrecourse project debt means the
lenders have to look to the sanctity of the project entity, and
not to a guarantee from a parent [company] or beyond.
REPRESENTATIVE BIRCH inquired as to whether the debtor ends up
owning the pipeline.
MR. MEYER said no, the debt is secured by capacity that AGDC
provides to the buyer, and the buyer pays the bank.
CO-CHAIR TARR announced at upcoming meetings the committee will
discuss further netback price, ownership interest, PILT, impact
aid, FEED, and the previous stage-gate timeline.
8:48:17 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 8:48 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGDC House Resources Presentation 12.4.17.pdf |
HRES 12/4/2017 6:00:00 PM |
AK LNG |