Legislature(2017 - 2018)BARNES 124
01/24/2018 01:00 PM House RESOURCES
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| Presentation: Alaska Lng Project Update by the Alaska Gasline Development Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
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ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 24, 2018
1:01 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Harriet Drummond
Representative Justin Parish
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative David Talerico
Representative Mike Chenault (alternate)
Representative Chris Tuck (alternate)
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Gary Knopp
COMMITTEE CALENDAR
PRESENTATION: ALASKA LNG PROJECT UPDATE BY THE ALASKA GASLINE
DEVELOPMENT CORPORATION
- 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 1/24/18, and answered questions.
LIEZA WILCOX, Vice President Commercial and Economics
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Participated in a PowerPoint presentation
entitled, "Alaska LNG" dated 1/24/18, and answered questions.
FRANK RICHARDS PE, Senior Vice President Project Management
Alaska Gasline Development Corporation
Department of Commerce, Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: Participated in a PowerPoint presentation
entitled, "Alaska LNG" dated 1/24/18, and answered questions.
ACTION NARRATIVE
1:01:30 PM
CO-CHAIR ANDY JOSEPHSON called the House Resources Standing
Committee meeting to order at 1:01 p.m. Representatives
Josephson, Birch, Parish, Tarr, and Drummond were present at the
call to order. Representatives Tuck (alternate), Rauscher,
Talerico, Chenault (alternate), and Johnson arrived as the
meeting was in progress. Also present was Representative Knopp.
^PRESENTATION: Alaska LNG Project Update by the Alaska Gasline
Development Corporation
PRESENTATION: Alaska LNG Project Update by the Alaska Gasline
Development Corporation
1:02:10 PM
CO-CHAIR JOSEPHSON announced that the only order of business
would be an update on the Alaska LNG project by the Alaska
Gasline Development Corporation.
CO-CHAIR TARR, as an aside, provided information to the
committee on a different topic related to a presentation at the
prior meeting on 1/22/18.
1:04:41 PM
KEITH MEYER, President, Alaska Gasline Development Corporation
(AGDC), Department of Commerce, Community & Economic
Development, provided a PowerPoint presentation entitled,
"Alaska LNG" dated 1/24/18, and answered questions. He directed
attention to slide 3, which was a capital budget variance
analysis dated December 2017, and pointed out the Alaska LNG
project is significantly underspending for 2017, after an
austerity program was implemented to extend existing funding and
thereby operate within the state's allotment. Ideally, the
project will attract third-party investment so that the state's
additional investment would be optional, but not necessary.
Slide 4 illustrated AGDC's fund balance and a forecast for
January through June of fiscal year 2018 (FY 18), showing an
expenditure of about $67 million and a forecasted fund balance
of about $41 million to carry over through FY 19. Slide 5
illustrated AGDC's FY 19 operating budget, its request to
receive program receipt authority, and its request to transfer
[In-state Natural Gas Pipeline Fund (1229-ISP)] funds from the
Alaska Stand Alone Pipeline (ASAP) project to the Alaska LNG
fund.
1:08:58 PM
REPRESENTATIVE JOHNSON asked for the purpose of the requested
program receipt authority.
MR. MEYER explained AGDC seeks authority to receive funds from
third parties for the continuation of the project; for example,
investments from third-party investors to pay for additional
development, front-end engineering and design (FEED) work, and
other costs through construction of the project. In response to
Representative Johnson's question as to who might be involved,
he opined the project would attract infrastructure investors
such as pipeline companies, pension funds, insurance companies
and/or foreign customers, but the project would not meet the
investment hurdle rate of an oil company.
REPRESENTATIVE JOHNSON surmised China Petrochemical Corporation
(Sinopec) could be a third-party investor.
MR. MEYER said yes.
REPRESENTATIVE PARISH asked for information on the
aforementioned 1229-ISP fund.
1:11:21 PM
FRANK RICHARDS PE, Senior Vice President Project Management,
Alaska Gasline Development Corporation, Department of Commerce,
Community & Economic Development, informed the committee the
ASAP project has advanced using the 1229 [In-state Natural Gas
Pipeline Fund]. [ASAP] has moved through the draft supplemental
environmental impact statement and public review, and is
expected to reach a record of decision (ROD) in June [2018].
REPRESENTATIVE PARISH asked when $12 million in funds would
transfer to AGDC.
MR. RICHARDS said late in FY 18, after the ROD is obtained, AGDC
seeks to transfer remaining ASAP funds to Alaska LNG.
REPRESENTATIVE PARISH returned attention to the program receipt
authority and surmised AGDC expects all the investments would
come from "non-Alaska state government sources."
MR. MEYER said no. In fact, the project structure requires AGDC
to make offerings available to Alaskans, Alaska municipalities,
and regional corporations.
REPRESENTATIVE PARISH restated his question as to whether
offerings would be to state government agencies.
MR. MEYER said AGDC would not exclude any entities.
MR. RICHARDS clarified the request for receipt authority is
related to receiving outside funds, and there is no request for
additional appropriations from the State of Alaska in AGDC's FY
19 budget.
1:14:33 PM
REPRESENTATIVE BIRCH asked whether the program receipt authority
would allow AGDC to accept funds from the Alaska Public
Employees Retirement System (PERS) pension fund as a prospective
investor.
MR. MEYER said AGDC has not had discussions with PERS in regard
to its pension fund; however, the project is a perfect
investment for pension funds and insurance companies.
REPRESENTATIVE BIRCH stated his great concern regarding
potential investment by [PERS] or by the Alaska Permanent Fund
Corporation.
REPRESENTATIVE JOHNSON asked whether program receipt authority
allows investment into AGDC.
MR. MEYER indicated not at this time. He explained that a
project company would hold the assets, and investors would
participate in the project company, but would "not own a piece
of AGDC"; currently envisioning that AGDC would remain 100
percent state-owned. Slide 6 illustrated future funding needs
and desires. He said AGDC's spend profile includes Class 3 Work
leading to lump sum turnkey (LSTK) FEED and a 2024-2025 in
service date. Mr. Meyer said AGDC intends to complete FEED and
future development work, but stop short of long-lead
procurement.
CO-CHAIR TARR asked how AGDC was able to respond to the Federal
Energy Regulatory Commission (FERC) information requests in an
efficient manner.
MR. MEYER stated AGDC's response is an example of working well -
with a minimal use of contractors - under its austerity program;
AGDC answered eight hundred and one questions during six months
of work.
1:19:37 PM
MR. RICHARDS, in further response, pointed out AGDC sought to
"de-risk the project" by addressing regulatory issues. [AGDC]
applied to FERC in April and received requests for specific
information; a team at AGDC that has been working with FERC on
ASAP provided answers to FERC and FERC has begun the National
Environmental Policy Act of 1969 (NEPA) process.
MR. MEYER further explained AGDC took over an existing [FERC]
filing, which is now very complete with minimal use of outside
contractors.
REPRESENTATIVE DRUMMOND surmised the receipt authority is needed
to accept investments in the amount of $645 million to support
the cost of the Class 3 Work.
MR. MEYER said yes, and receipt authority is also needed for
construction work.
REPRESENTATIVE DRUMMOND further understood the receipt authority
is not limited to the costs that are shown on [slide 6].
MR. MEYER said the receipt authority is needed to complete the
project.
1:22:35 PM
MR. MEYER continued to slide 8 and explained the Alaska LNG
pipeline capacity exceeds that of the proposed LNG plant by
approximately 500 million cubic feet per day (MMcf/d); this is
the amount reserved for in-state use and is more than twice the
current use of gas by Alaskans, which should allay fears about
the project exporting all the gas. The gas price is estimated
at between $5.00-$6.00 dollars per million British thermal units
(Btus), which would be a savings in the Matanuska-Susitna (Mat-
Su) and Fairbanks regions; however, less is known about the
distribution of LNG to remote and coastal communities in Alaska.
1:24:22 PM
REPRESENTATIVE PARISH returned attention to slide 8 and asked
whether the $1,000 average energy savings shown on the slide
relates to all Alaskan households or for those on the Railbelt.
MR. MEYER answered Railbelt [household], with an emphasis on the
Mat-Su area.
1:25:00 PM
REPRESENTATIVE PARISH suggested there could be a program similar
to the Power Cost Equalization (PCE) Endowment Fund to support
rural communities.
MR. RICHARDS recalled AGDC was created by the legislature to
work on an in-state pipeline project to benefit Fairbanks and
Southcentral Alaska. Therefore, Senate Bill 138 [passed in the
Twenty-Eighth Alaska State Legislature] created a rural energy
fund that will be supported by 20 percent of the [state] revenue
from the Alaska LNG project to secure funds directed to rural
communities for energy.
REPRESENTATIVE PARISH asked that future presentations make clear
whether references are to [all] Alaska households or to Mat-Su
and Fairbanks households.
MR. RICHARDS and Mr. Meyer nodded yes.
CO-CHAIR TARR asked whether Mr. Meyer's reference to small-scale
[rural] LNG distribution would be of a refined product.
MR. MEYER said yes, the product would be LNG. He clarified
small scale LNG distribution may be in a tank, such as an ISO
container that could be shipped by barge, moved by truck, or
transported as cargo by the Alaska Railroad.
REPRESENTATIVE TUCK asked how the expected price of natural gas
from Alaska LNG would compare to the price of natural gas from
Cook Inlet.
1:28:35 PM
LIEZA WILCOX, Vice President Commercial and Economics, Alaska
Gasline Development Corporation, Department of Commerce,
Community & Economic Development, explained the estimate on
slide 8 is a broad calculation for current gas-consuming
households; mid-single digit pricing was compared to current gas
contracts for Cook Inlet and the total was divided by the total
number of households. Savings for households that are not
currently served by natural gas would be affected by the cost of
delivery and conversions, but may still be higher.
MR. MEYER continued to slide 9 which compared the structure of
the project under the previous producer-led consortium [of BP,
ConocoPhillips and ExxonMobil] with the new AGDC structure,
pointing out the new 75 percent debt/25 percent equity structure
defines that AGDC participation is 100 percent of ownership;
however, some of the ownership would be sold to raise the equity
of $11 billion. Slide 10 illustrated engineering, procurement,
and construction costs for Alaska LNG of $27.9 billion, and Mr.
Meyer said over $600 million was spent in engineering,
optimization, and project management to develop the construction
and capital cost estimates. Slide 11 illustrated owner's costs
not included in the construction cost estimate such as the cost
of the Project Management Team, which is $3.4 billion.
Additional owner's costs include FEED, insurance, operations,
and training for a total in owner's costs of $6.2 billion.
Estimates of overrun risks and contingencies were estimated
through probabilistic simulations of "what could go wrong" and
total $9.3 billon (slide 12). Slide 13 illustrated the total
project cost of $43.4 billion; Mr. Meyer pointed out
contingencies are included in the total, and said he is
"reasonably comfortable" with the total cost.
1:35:47 PM
CO-CHAIR JOSEPHSON recalled the previous project estimate in
2014 was $45-$60 billion and surmised contingencies were
included in the original framework.
MR. MEYER said yes. He characterized the framework as a
reasonable approach that incorporates contingencies and project
management. In further response to Co-Chair Josephson, he
affirmed the original framework would have also included the
components of contingencies and project management.
REPRESENTATIVE RAUSCHER asked for examples of contingencies.
MR. MEYER stated the project could be delayed due to materials
shortages or a labor strike.
REPRESENTATIVE TUCK asked whether the percentage of total
owner's cost to construction cost is typical and standard.
1:39:31 PM
MR. RICHARDS advised the Department of Transportation & Public
Facilities (DOTPF) allows a range from 16 percent to 22 percent
for construction-related oversight, which is similar to the
Alaska LNG [owner's cost] estimate of nearly 25 percent of the
base cost; however, the Alaska LNG estimate includes the
additional factors of training, insurance, and FEED that are not
included [in owner's cost estimates] by DOTPF.
MR. MEYER directed attention to slide 14 and advised AGDC
engaged Fluor [Corporation] that identified a potential net $2
billion in savings related to optimization and strategic
sourcing; further, AGDC received an informal response from a
major contractor that it would perform project management for
significantly less than the estimate of $3.4 billion. These
potential savings are not reflected in the $43.4 billion
construction cost estimate. Slide 15 illustrated the project's
75 percent debt/25 percent equity structure of $32 billion and
$11 billion respectively. Operations and maintenance (O&M)
costs were shown on slide 16.
REPRESENTATIVE JOHNSON returned attention to slide 14 and asked
for the amount of the "significantly less" estimate for project
management.
MR. MEYER said AGDC did not have a formal number. In further
response to Representative Johnson, he said he included this
information because he feels the cost of project management
could be less than $3.4 billion.
1:44:27 PM
CO-CHAIR TARR reminded the committee the spending on O&M shown
on slide 16 would largely be dollars that would stay in Alaska
and provide jobs for Alaskans.
MR. MEYER agreed.
REPRESENTATIVE PARISH inquired as to the contractual and legal
commitments to [local hire].
MR. MEYER explained slide 16 describes O&M over the life of the
project, not during construction. Work done over the life of
the project is suited to those who live locally; in fact,
generations would be employed on the project, and it would
provide an attractive career choice.
REPRESENTATIVE PARISH restated his question as to how this
project would be fundamentally different than other resource
extraction businesses that typically have approximately 30
percent of their workforce staffed by outside labor.
MR. MEYER advised a pipeline and LNG facility provide more
normal-day work, except at the gas treatment plant [on the North
Slope]. For example, at the LNG plant in Nikiski and at control
centers along the pipeline, workers would drive to work and
home, unlike the usual North Slope work schedules of two weeks
on and two weeks off.
1:48:13 PM
REPRESENTATIVE TUCK advised one way to ensure Alaskans have
first access to jobs is through a project labor agreement; in
addition, apprenticeship programs often require one-year
residency to ensure Alaskans receive training first, and which
could be part of a project labor agreement (PLA).
MR. MEYER urged for the state to start training pipeline workers
as soon as possible; training for all the prospective work is
available now in Alaska.
CO-CHAIR TARR recalled during the State of the State Address the
governor mentioned a PLA as a component of Alaska LNG.
MR. MEYER affirmed the project would have a PLA. Slide 17 was a
projection of the construction costs in phases beginning in
2019, with and without contingency: Train 1 would be in service
by the third quarter (Q3) of 2024, Train 2 would be in service
by Q3 of 2025, and Train 3 would be in service by Q3 2026.
Looking at debt funding, the debt term would be about 20 years
at 5 percent thus the annual debt service would be $3.5 billion.
A graph illustrated $3.5 billion payments for debt service
during the life of the loan (slide 18). He pointed out in this
debt for capacity proposal, customers help secure the debt and
the cost and term of the debt would pass through to customers.
Slide 19 described the state's equity investment of $11 billion
on the full project; owners receive a return on investment
through the sale of system capacity after debt service and O&M
expenses; Alaska benefits from its 25 percent excess capacity;
the return on investment would depend primarily on the sale
price of the LNG and the cost of the debt; under current
assumptions, the return on equity would be 8 percent during the
initial term, 10 percent during the life of the project, and 15
percent for the state if it is the investor.
1:53:36 PM
REPRESENTATIVE PARISH asked what level of state investment is
envisioned.
MR. MEYER restated the state's equity would be $11 billion.
REPRESENTATIVE TUCK asked for the effect on consumer costs after
paying off the debt service, such as a possible reduction in
consumer costs.
MR. MEYER explained after the debt is repaid, the contract
expires, and all the capacity returns to the owners. The state
can sell the capacity after the system is paid for, which
results in a significant uplift in revenue. In further
response, he clarified that under the debt for capacity
arrangement, the debtor pays the debt by buying system capacity;
that is, the customer pays for the right to move the LNG through
the system as does a pipeline company.
REPRESENTATIVE PARISH posited a scenario in which cheap,
abundant renewable energy dominates globally and the price of
oil crashes; in this case, what would be the state's position in
regard to its debt.
MR. MEYER remarked:
The probability of hydrocarbon usage ... going away
completely in our lifetime, and [our] children's, is
probably low. The probability that the world embraces
a cleaner hydrocarbon molecule, which is the methane
molecule ... that's very high. So, we're going to
start to see heavier molecules - coal, heavy oil, that
type of thing - be in less demand in favor of that
lighter molecule, methane. And we see that in a big
way in China, which currently buys half the world's
coal, they're shifting to, to natural gas.
MR. MEYER continued to explain his expectation is demand for gas
will go up over time relative to other hydrocarbons. He
acknowledged in certain areas wind, solar, and battery
technology energy are effective; however, in other areas natural
gas will be in demand for a long time. Alaska is well-
positioned to supply Asia, the largest LNG market in the world,
and there will be increases in methane use in Asia to replace
coal. Further, oil consuming industries such as the marine
industry are shifting to natural gas resulting in demand for gas
for fuel for high-horsepower engines, for home heating, and for
electric generation. To the question of what would happen to
the state, he opined during the debt period of the project, if a
customer does not take the gas, the system and 75 percent of O&M
are already paid; after the system is paid for, the pipeline
could link methane to world markets.
1:58:49 PM
REPRESENTATIVE PARISH recalled the state twice did not
anticipate a downturn in oil prices. If, for any reason, the
price of LNG drops, he asked, "How exposed are we as a state?"
MR. MEYER said, "very little." The revenue and return on the
Trans-Alaska Pipeline System (TAPS) has been steady even though
the state does not own TAPS; in this project AGDC is building
the pipeline and the LNG facility thus is insulated from
commodity price fluctuation. The project is attractive to risk-
adverse investors. With certain prices the gas price may
fluctuate; however, most of the project's customers are large
gas or electric utilities which seek a stable price that is not
linked to oil price. Alaska can offer a natural gas supply not
linked to the Henry Hub price index.
CO-CHAIR TARR returned attention to slide 18 and asked for the
amount of the total debt.
MR. MEYER said $32 billion.
CO-CHAIR TARR returned attention to slide 19 and asked for
clarification on the graph depicting the Annual Construction
Spend - Equity Capital.
MR. MEYER clarified the $11 billion [debt] lines up with the
debt payment per year and the total construction spend for each
year. In further response to Co-Chair Tarr, he confirmed the
initial contracts for service are for 20 years and the debt term
is 20 years, although AGDC could extend up to 30 years. Slide
20 showed the project must balance three factors: market price
for customers, the financial market, and an acceptable netback
price to the resource owner - the state. To explain how AGDC
determined the expected market price of [$8.00/MMBtu], he first
noted one of the sources for the project's competition is
Texas/Louisiana with gas selling at Henry Hub index of
approximately $3.00, plus $5.00 for liquefaction, fuel for
liquefaction, shipping, and [the expense of] the Panama Canal.
He advised a product that can beat a competitor's price of Henry
Hub plus $5.00, can be marketed in Asia (slide 21). The
shipping cost [for Alaska LNG gas to Asia] would be $0.80 thus
the gas must reach the plant at Nikiski at a cost of $7.20,
which can be accomplished by the Alaska LNG system (slide 22).
He broke down the costs of the Alaska LNG system as follows:
O&M and payment in lieu of taxes (PILT), $1.4 billion annually
or $1.45/MMBtu; $3.5 billion/year debt service, $3.60/MMBtu;
equity $1.15/MMBtu. The total cost for the infrastructure
system to deliver gas from the North Slope, liquify, and export
from Nikiski would be $6.20/MMBtu (slide 23). Slide 24
illustrated the market price and all the aforementioned costs,
resulting in $1.00 netback for the gas supply; he concluded the
required quantity of gas would be approximately 1 trillion cubic
feet per year which would garner $1 billion per year to
suppliers. Slide 25 illustrated the equal costs of the system
and the cost of gas delivered to Nikiski: $7.20 MMBtu.
2:06:46 PM
MR. MEYER continued to slide 26, which was the investment
profile for the state's investment of $11 billion during the
three main phases of the project: construction; operation while
repaying debt; operation after debt. He noted after the debt is
paid, income increases to approximately $6 billion. Further
information on benefits to the state without investment - $11
billion is invested by outside sources - were provided on slide
27. Mr. Meyer stressed even without investment, the state's
economy would receive $250 million to $500 million for its gas
supply, $450 million to $500 million from PILT, and $950 million
from O&M.
REPRESENTATIVE TUCK questioned whether said income is total
economic gain or state revenue.
MR. MEYER said, "... not so much revenue, but into the state's
economy...." He then described the November 9, 2017 Joint
Development Agreement signed in China (slide 28). During the
[trade mission] AGDC proposed to the top LNG consuming nations
in Asia, and to the Asian governments, that money for
[construction] debt would be repaid in capacity in the project.
Further, 25 percent of the cost of the project would be funded
by the owners for 25 percent of capacity and AGDC retains 100
percent of ownership, with the potential for partial ownership
investment (slide 29).
CO-CHAIR TARR asked whether "in-country bank provides the debt
for 75 percent of the capital cost" would be a lump sum payment
or annual payments.
MR. MEYER said the funding would align with the construction
schedule draw during the construction period. Slides 30 and 31
were illustrations of the proposed transaction. He further
explained the loan for 75 percent of the capital cost would be
repaid by "giving capacity to a buyer, and the buyer is going to
make the debt service payments to the lender and, therefore, the
term and the pricing of that is somewhat insulated from us, and
even the currency. And so, our obligation is to provide the
capacity, the buyer pays the lender, and that happens for the
term of the loan. [The] buyer also has to pay 75 percent of the
O&M, for the life [of the loan], and has to buy the gas supply."
He turned attention to equity funding and said AGDC is currently
focused on acquiring funding for 25 percent equity in the amount
of $11 billion (slide 32). The return on this investment would
be from the sale of system capacity not dedicated to debt
service or to debt for capacity customers, and is dependent on
the market price of the gas (slide 33).
2:14:07 PM
CO-CHAIR TARR asked whether the gas would be sold on the spot
market.
2:14:15 PM
MR. MEYER said the market price could be affected by the spot
markets or shorter terms; the spot market has a high degree of
volatility due to fluctuations in demand. He said the bottom
line is that the project expects a rate of return based on 100
percent equity, with the ability to leverage the cost by issuing
bonds or obtaining bank financing (slide 34). Slide 35
illustrated the project's financing structure, which he
characterized as "pretty traditional, pretty standard, and
that's where we need that receipt authority, that program
receipt [authority]" (slide 35).
CO-CHAIR TARR recalled AGDC has the authority to form
subsidiaries and asked whether AGDC subsidiaries would perform
specific pieces of the project.
MR. MEYER agreed state involvement in the project could be
through AGDC or subsidiaries such as a non-profit subsidiary
that would be established for in-state sales as required by
Senate Bill 138; however, the Alaska LNG project company would
be a for-profit entity.
REPRESENTATIVE DRUMMOND surmised from Mr. Meyer's earlier
statement China is already in need of gas.
MR. MEYER said yes. China has surpassed Korea as the number two
buyer in the world for LNG, behind Japan.
REPRESENTATIVE TUCK returned attention to slide 30 and asked
whether AGDC is concerned about the lender/buyer relationship.
2:18:28 PM
MR. MEYER acknowledged AGDC must ensure the project is fair and
balanced and that it can clear financial markets from what would
probably be a consortium of banks. The purchase agreement must
satisfy lending agreements, AGDC, the equity owners, and the gas
suppliers without too much risk for parties. Currently, China
has a lot of U.S. dollars, and the governments of the U.S. and
China have agreed providing LNG to China would be beneficial.
He implied protections are provided by the review and approval
of the project by the Committee on Foreign Investment in the
United States (CFIUS); subsequently, AGDC "will have about $32
billion from China, we'll bury it in the ground in Alaska - in
the form of pipes and LNG facilities - and we'll be a long-term
supplier for them ...."
REPRESENTATIVE PARISH asked what the state should be wary of
[regarding negotiations].
MR. MEYER stated an unbalanced deal with too much risk on the
state would be unacceptable, for example, an agreement with
significant majority ownership. He assured the committee the
negotiations will be high profile and transparent with many
opportunities for scrutiny.
MS. WILCOX provided a commercial update of the project. She
began her presentation, recalling the committee requested
further information on the various sources of data for the LNG
supply-demand forecast that was previously provided. Slide 38
was an updated chart of the long-term contracts for Japan,
Korea, mainland China, and Taiwan, all of which have expiring
long-term contracts. Ms. Wilcox advised Japan is reducing the
number of its long-term contracts; however, China is increasing
long-term contracts, and now has 19 LNG terminals and more are
planned. China LNG imports have increased by 46 percent this
year because its domestic natural gas production is not keeping
up with demand. She stressed China has a track record of
growth, and more growth is forecast by the industry. In China,
natural gas provides 7-8 percent of its energy and coal provides
65 percent. She noted the president of China has expressed
China's growing interest in environmental matters and seeks to
turn China's focus from coal to natural gas.
2:25:20 PM
MS. WILCOX explained slide 38 also shows a diverging range of
demand for the abovementioned Asia markets, and how supply from
the Alaska LNG project fits in the supply-demand forecast that
was provided by three consultants. She continued to Alaska LNG
project competitiveness as follows (slide 39):
· LNG market is growing more liquid but long-term contracts
are beneficial to sellers for financing, and to buyers for
stability
· buyers seek a mix of contract portfolios
· buyers seek a variety of pricing structures and to ensure a
variety of supply to meet their specific long-term needs
MS. WILCOX said in 2017 AGDC's commercial team focused on market
awareness and relationships with potential buyers from nearby
markets and growing markets, such as China and Vietnam. [AGDC]
also has taken a government-to-government approach through a
memorandum of understanding (MOU) with state-owned Vietnam Oil
and Gas Group (PetroVietnam). In other cases, AGDC negotiated
directly with buyers, through executed unannounced letter of
intent agreements, and other announced agreements with Korea Gas
Corporation (KOGAS), Tokyo Gas, PetroVietnam, and Sinopec (slide
40). In 2018, the commercial team will work in legal,
commercial, and financing aspects to convert the aforementioned
first agreements into definitive agreements. Ms. Wilcox noted
the project has expanded its industry expert support staff
located in Houston and in Anchorage. Further, AGDC plans to
conclude agreements envisioned in the Joint Development
Agreement with Sinopec, Bank of China, and CIC Capital
Corporation, and to advance other agreements to ensure
sufficient sale and purchase agreements are acquired to enable
project sanction and project financing in 2019 (slide 41).
CO-CHAIR JOSEPHSON referred to an announcement made by Ms.
Wilcox [document not provided] and asked for a better sense of
the status of the project.
2:31:38 PM
MS. WILCOX remarked:
The direct quote ... came from the Bank of China
representative and the comment that he made was
related to the fact that it is a large project, and
the Bank of China will be looking to, to bring in
other banks in order to support the investment ... for
the debt for capacity portion of it, they would, they
would be the lead in China because they've taken on
that role and they will be bringing in others.
MS. WILCOX continued to explain the aforementioned type of debt
arrangement is common to the industry in all major projects and
she gave examples. In further response to Co-Chair Josephson's
question about progress made from 11/9/17 to present, she said
she was surprised by the current level of support for the
project from the [consulate of the People's Republic of China]
in San Francisco and the Bank of China [at the World Trade
Center Anchorage - China Business Conference, 1/23/18].
REPRESENTATIVE PARISH returned attention to slide 38 and pointed
out the forecast represents the contracts, but is not a forecast
of future LNG capacity that may be provided by new supplies. He
questioned how many new entrants into the industry are expected
in the next 10 years, their production capacity, and the effect
of new entrants on contract renegotiations. Representative
Parish acknowledged the presentation addressed some of his
concerns; however, he restated his interest in knowing the
overall picture of the supply of gas.
MS. WILCOX will provide the requested data and said the number
of new suppliers into the market "is always somewhat fungible."
She suggested if all existing contracts were renewed and all
factors were considered, a gap between supply and demand would
still exist.
2:37:05 PM
REPRESENTATIVE PARISH asked for the cost to dismantle the
project at the end of its productive life.
MR. MEYER was unsure but pointed out LNG plants are a clean
operation thus a plant could be scrapped, and gas pipelines are
typically left underground; furthermore, he suggested that
reserves on the North Slope would supply gas to the pipeline for
many decades.
REPRESENTATIVE JOHNSON asked for a timeline on binding
agreements.
MR. MEYER said AGDC expects to focus on definitive agreements in
2018, particularly for contracts with China, and all commercial
agreements should be in place within the first six months of
2019 to facilitate a final investment decision - also within the
first six months of 2019 -in order to begin construction in the
last six months of 2019. Binding commercial agreements, binding
loan documents, equity investors, and regulatory paperwork are
required for a final investment decision. He characterized the
timeline as an aggressive schedule.
2:40:38 PM
MR. RICHARDS turned attention to the Alaska LNG Regulatory
Timeline shown on slide 44: in April 2017, FERC application
filing and request for additional responses; in August 2017, the
project received approval for [Fixing America's Surface
Transportation Act Title 41] (FAST Act); in August 2017,
Presidential Executive Order for expedited review of major
projects was issued; in November 2017, the Joint Development
Agreement was signed. Future expected datelines are: January
2018, FERC EIS schedule published; December 2018, Final EIS
published; March 2019, Record of Decision. Mr. Richards
continued to note AGDC is also interacting with Joe Balash,
Assistant Secretary for Land and Minerals Management, Department
of the Interior (DOI), who oversees the Bureau of Land
Management. One issue the state has with DOI is Public Land
Order (PLO) No. 5150, a longstanding issue related to
transferring federal land to the state; a portion of this land
is needed for the Alaska LNG pipeline corridor. Another issue
related to DOI regulation is the question of aboveground or
belowground pipeline construction for a section of the pipeline
south of Prudhoe Bay; AGDC seeks DOI support to bury the
chilled, high-pressure natural gas pipeline underground for
safety and security (slide 45). Further federal interactions
occurred with the Environmental Protection Agency (EPA); the
National Oceanic and Atmospheric Administration (NOAA), U.S.
Department of Commerce, for incidental take authorizations in
the Beaufort Sea and Cook Inlet; the U.S. Army Corps of
Engineers (USACE) related to additions to the [Clean Water Act]
Section 404 permit; the Pipeline Hazardous Materials Safety
Administration (PHMSA), U.S. Department of Transportation,
related to environmental special permits (slide 46).
MR. RICHARDS added state authorizations are required from the
Alaska Department of Fish & Game (ADFG), the Department of
Environmental Conservation (DEC), and the Department of Natural
Resources (DNR), with the goal of permitting completed by the
first quarter of 2019 (1Q 2019) in order to reach a final
investment decision (slide 47).
2:47:40 PM
REPRESENTATIVE TALERICO asked for the status of obtaining
permission for the project to cross private property.
MR. RICHARDS advised the project affects approximately 40 miles
of private land, including Alaska Native Claims Settlement Act
(ANCSA) corporation land mostly owned by Ahtna, Incorporated
(Ahtna) and a leasing process with Ahtna is underway.
REPRESENTATIVE BIRCH inquired as to the potential devasting
impacts of the Alaska Salmon Habitat Protection Standards and
Permits (Stand for Salmon) Initiative, and its "parallel"
proposed legislation in the context of permitting for the Alaska
LNG project.
MR. RICHARDS directed attention to slide 48 that identified the
number of waterways crossed by the project. Stream surveys
indicated 194 waterways contain anadromous fish and require
[Alaska Statute] Title 16 permits. AGDC is in the permitting
process with ADFG to ensure statutory requirements for water
crossings are met. Mr. Richards cautioned any additional
burdens on permitting requirements could add risk and delay to
the project.
REPRESENTATIVE BIRCH expressed his grave concern regarding the
aforementioned [initiative and proposed legislation] and asked
about any reaction on the part of AGDC.
MR. MEYER agreed this is an important issue and said, "Part of
the importance is the language in the, in the legislation that
was proposed, now that's not the HB 199, ... I'm not that
familiar with that language." He related certain language could
be stifling to development, for example, that which suggests
certain habitat could support a species even though the species
isn't there. The Alaska LNG project crosses over 600 streams,
and Mr. Meyer said the proposal is detrimental to any
development project in the state.
CO-CHAIR JOSEPHSON said, "I think [HB]199 speaks to substantial
effects: If there's a potentiality for substantial effects, a
major permit would be required." He asked for AGDC's plan
[under current regulation] when the pipeline approaches an
anadromous stream.
2:53:13 PM
MR. RICHARDS explained the process with ADFG is to determine
which streams have anadromous fish and then to identify the best
time to cross and what mitigation efforts AGDC must put in place
to meet ADFG's requirements under its Title 16 permit, based on
factors specific to the waterbody and environmental conditions.
He turned attention to the Kenai Spur Highway which must be
rerouted because it transects the site of the proposed LNG plant
in Nikiski. Although AGDC would build the reroute, after
construction, operation of the road would be transferred to
DOTPF, therefore, approval of the reroute must be obtained from
DOTPF and the [U.S. Department of Transportation]; two
alternatives will be offered for public comment at a hearing in
Nikiski [2/12/18](slide 49). Continuing to stakeholder issues,
Mr. Richards provided detailed background information related to
the Mat-Su Borough's complaint to FERC that AGDC and the former
project consortium incorrectly considered siting of the LNG
plant in 2012, without including Port Mackenzie, prior to
choosing Nikiski. [AGDC] is not opposed to the Mat-Su Borough
becoming an intervener in the FERC process; however, he pointed
out the borough has previously supported the Nikiski site and
returning to the comparable site analyses would delay the
project. He restated Nikiski is AGDC's preferred site (slide
50).
2:58:34 PM
MR. RICHARDS returned attention to ASAP 2018 activities as
follows: January 31, complete Cultural Resource Management
Plans; March 31, USACE Final Supplemental Environmental Impact
Statement; wetlands mitigation plans; July 1, Records of
Decision from USACE and other federal agencies (slide 51). He
related sources of federal support are: the National Economic
Council and the Council on Environmental Quality; Trump
Administration cabinet members Secretary of Commerce Wilbur Ross
and Secretary of the Interior Ryan Zinke; the Alaska
Congressional delegation (slide 52). Mr. Richards advised AGDC
is working on strategic country sourcing which is the best way
to acquire materials for the project. The four countries
considered are China, Japan, Korea and the U.S. The former
project team focused on China for the fabrication of the modules
for the gas treatment plant; in fact, there could be savings of
approximately $1.4 billion by utilizing materials from countries
that are buyers of the product and investors in the project. In
addition, the zero-based execution review covered the three main
subprojects seeking opportunities for savings in the execution
of the project (slide 53). Mr. Richards noted at a previous
hearing AGDC was asked to provide project information in terms
of a stage-gate project process, and he reviewed the project
timeline to date. New elements in the decision to enter FEED
include securing customers, gas, lenders, and capable
engineering, procurement, and construction contractors (slide
54). Finally, during 2018-2019, the project will progress from
FEED to LSTK with the major subprojects of the LNG gas treatment
plant, and pipeline and compressor stations with major spending
between $400 million and $700 million (slide 55).
3:03:28 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:03 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGDC Legislative Presentation_House Resources Committee 1-24-18.pdf |
HRES 1/24/2018 1:00:00 PM |
AK LNG |