Legislature(2007 - 2008)SENATE FINANCE 532
05/01/2007 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
May 1, 2007
1:44 p.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
1:44:02 PM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Joe Thomas
Senator Fred Dyson
Senator Donny Olson
Also Attending: MARTIN MASSEY, Joint Interest Manager,
ExxonMobil Corporation;
Attending via Teleconference: From offnet locations: DAVID
HILL, General Counsel, U.S. Department of Energy; JAMES SLUTZ,
Deputy Assistant Secretary, Office of Fossil Energy, U.S.
Department of Energy.
SUMMARY INFORMATION
SB 104-NATURAL GAS PIPELINE PROJECT
The Committee heard from the U.S. Department of Energy and Exxon
Mobile Corporation. The bill was held in Committee.
1:44:19 PM
CS FOR SENATE BILL NO. 104(JUD)
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments;
and providing for an effective date."
This was the fifteenth hearing for this bill in the Senate
Finance Committee.
1:44:27 PM
DAVID HILL, General Counsel, U.S. Department of Energy,
testified via teleconference from an offnet location in
Washington D.C. giving his history at the Department of Energy
and prior to that as a private attorney.
1:45:05 PM
Co-Chair Stedman expressed interest in federal loan guarantees
and asked the current status.
1:45:28 PM
Mr. Hill told of the Alaska Natural Gas Transportation Act of
2005, which authorized the Department of Energy to issue loan
guarantees for the construction of an Alaska natural gas
pipeline. Public comment was taken on how the Department should
proceed. No other action had been taken on the matter.
1:46:26 PM
Co-Chair Stedman understood regulations had not been written and
asked when this would be done.
1:46:32 PM
Mr. Hill replied that the Act authorized the Department to issue
regulations, but did not require that regulations be issued. A
"number" of public comments recommended against the issuance of
regulations due to the unique nature of the project. Those
providing this recommendation argued that regulations could
"tie" developers "down too much", given that the financing
method was unknown. Mr. Hill was unsure whether regulations
would be written.
1:47:35 PM
Co-Chair Stedman asked the loan underwriting procedures that
would be employed.
1:47:47 PM
Mr. Hill qualified that the Department had not issued loan
guarantees for "a long time". The 2005 Act also provided
authorization for the issuance of loan guarantees for other
types of projects.
Mr. Hill anticipated that in the case of the Alaska natural gas
pipeline project, the Department would investigate the credit
worthiness of the project and any commercial commitments made,
in addition to conduction of due diligence.
Mr. Hill furthered that the Federal Energy Regulatory Commission
(FERC), as part of the issuance of a certificate, would also
undertake a technical review from which the Department would
benefit. Any technical financial factors relevant to
establishing the cost of the federal loan guarantee would also
be considered.
1:49:26 PM
Co-Chair Stedman asked if the loan underwriting debt would be
similar to the process employed by financial institutions or
banks issuing bonds.
1:49:46 PM
Mr. Hill answered the process would be similar. Because the
Department would issue loan guarantees but not debt itself, it
would collaborate with the financial institution that actually
issued the debt. The financial institution could be a commercial
lender.
1:50:13 PM
Co-Chair Stedman clarified that the federal government would not
issue government backed bonds, but rather a guarantee to another
lending institution.
1:50:33 PM
Mr. Hill affirmed and reiterated that Section 116 of the Act
authorized the Department to enter into agreements to issue
federal loan guarantees. It also partially defined eligible
lender as "non-federal qualified institutional buyer."
1:51:05 PM
Co-Chair Stedman asked if the lender and the federal government
would each conduct underwriting reviews.
1:51:17 PM
Mr. Hill stated that the Department would collaborate with the
lender in the underwriting process.
1:51:25 PM
Senator Elton asked if the due diligence would be undertaken
within the "bureaucracy" or contracted out.
1:51:48 PM
Mr. Hill qualified that it had been a "long time" since the
Department had issued loan guarantees. He anticipated that the
underwriting would be overseen by the Department with
collaboration with the federal Office of Management and Budget
and that the actual underwriting activities would be contracted
out.
1:52:33 PM
Co-Chair Stedman requested an explanation of the process
"through construction to first gas".
1:52:49 PM
Mr. Hill replied that the guarantee assured repayment of debt in
the event of default on the debt obligations by the project. As
the guarantor, the Department was not the project owner or
operator. The provisions of Section 116 prohibit the issuance of
the guarantee until the project received FERC certification. The
point at which the loan guarantees would be issued, disbursement
of funds and other terms and conditions would be subject to
negotiation with the project developer.
1:54:40 PM
JAMES SLUTZ, Deputy Assistant Secretary, Office of Fossil
Energy, U.S. Department of Energy, testified via teleconference
from Houston, Texas. The Office had been assigned to administer
the issuance of this loan guarantee.
1:55:32 PM
Co-Chair Stedman asked if the loan guarantees would expire at
some point after the FERC certificate was obtained.
1:55:46 PM
Mr. Hill explained the "normal FERC process" was outlined in
Section 7 of the Natural Gas Act. The ability of the sponsor to
finance its project would be considered in the FERC evaluation
of the project. The FERC would review any agreements reached to
date. In the case of the Alaska natural gas pipeline, FERC would
investigate whether the sponsor would utilize the federal loan
guarantees, for which debt they would be used and the point in
which the guarantees would be activated. The loan guarantee
could not be issued until the project was certificated by FERC.
1:57:16 PM
Co-Chair Stedman understood the loan guarantees had a two year
timeline.
1:57:23 PM
Mr. Hill affirmed. The provision of Section 116(a)(3) stipulated
that "the authority of the Secretary to issue federal guarantee
instruments under this section for a qualified infrastructure
project shall expire on the date that is two years after the
date on which the final certificate of public convenience and
necessity is issued for the project." The subsection further
defined the final certificate.
1:57:57 PM
Co-Chair Stedman asked if the loan guarantee functioned in a
similar manner to other guarantees issued for bonds.
1:58:21 PM
Mr. Hill affirmed.
1:58:24 PM
Co-Chair Stedman asked the different recourse procedures on a
defaulted loan that occurred during the construction phase
versus post construction and production.
1:58:47 PM
Mr. Hill explained the recourse would depend on how the terms
were structured. The federal statute did stipulate that "the
Secretary shall not require as a condition of issuing a federal
guarantee instrument under this section, any contractual
commitment or other form of credit support of the sponsors other
than equity contribution commitments and completion guarantees
or any throughput other guarantees from prospective shippers
greater than such guarantees that shall be required by the
project owners." The details of this provision would be
negotiated with the project owners.
Mr. Hill surmised that the structure of the project would
determine whether recourse would be allowed "beyond the project
sponsor and the project assets."
1:59:51 PM
Co-Chair Stedman restated his question asking if the recourse
procedure would be different during the construction phase and
after completion of the project. He wanted to know if "the
corporate balance sheet" of the project owner would be required
to "back up" the loan guarantee; and if the loan were defaulted,
whether the corporate entity would be "at risk and at what
magnitude".
2:00:34 PM
Mr. Hill reiterated that this would depend on how the sponsor
structured its project. He noted that the Credit Reform Act of
1990 required the Department to have appropriated funds to pay
the cost of the loan guarantee prior to issuance. The elements
that would increase risk to the government would have the
potential for increasing the amount of the appropriation needed.
Efforts must be undertaken to determine the amount of the risk
and to identify the assets available for recourse.
2:02:01 PM
Co-Chair Stedman asked if a limited liability corporation or
other entity was formed to undertake the pipeline project
whether its assets would be subject to recourse.
2:02:25 PM
Mr. Hill answered that the Department and the project sponsor
could negotiate terms to allow ultimate recourse to the parent
companies, but this would "not necessarily" be the case.
2:02:47 PM
Co-Chair Stedman requested the witness address "completion risk"
and its impact to the loan guarantee in the event the project
encountered substantial cost overruns during the construction
phase or if the "entity fails".
2:03:20 PM
Mr. Hill reported that the Department had not yet decided on the
method in which completion risks would be addressed. This would
be resolved later in the process.
2:03:42 PM
Co-Chair Stedman asked the time limit on the loan guarantees.
2:03:51 PM
Mr. Hill replied that federal statute provides that the term of
any loan guarantee could not exceed 30 years. The term for this
project could be less, but could not be longer.
2:04:11 PM
Senator Dyson asked the stage of the project in which the two
year time limit to secure the loan guarantee would be in effect.
2:04:27 PM
Mr. Hill reiterated that the Department had the authority to
issue the guarantees up to two years after FERC certification
was completed. He cited from Section 116 that "a final
certificate would be considered to have been issued when all
certificates of public convenience and necessity have been
issued that are required for the initial transportation of
commercially economic quantities of natural gas from Alaska to
the continental United States." The Department had not "taken
any authoritative position as to exactly how it would construe
that section." He predicted that the Department would attempt to
"construe it in a flexible way" to "not unduly bind a particular
project sponsor in a way that was commercially unrealistic."
Mr. Hill informed that FERC "often" would issue a certificate
that had various conditions. A period of time could be required
after the issuance before the conditions were satisfied and
before work authorization could be granted. The Department would
construe the two year limitation flexibly, to allow for the
congressional intent of the loan guarantee.
2:06:25 PM
Senator Dyson clarified that the final FERC certificate would be
issued at the point all permits were secured and had no
relevance to construction startup or commencement of operation.
2:06:38 PM
Mr. Hill agreed the term "construction" was not referenced in
the statutory language. Neither was production from the
completed facility mentioned. The Department would interpret
Section 116 in a manner that would allow a project developer to
satisfy FERC conditions and to undertake activities required by
its lenders. The intent was to not bind the project developer in
such a manner that it could not comply with the section.
2:07:51 PM
Senator Elton pointed out that the project would also require
certification from the Canadian government, which could be
issued after the FERC certificate. Therefore the two-year
timeline would not begin until after both certificates were
issued.
2:08:23 PM
Mr. Hill affirmed that the Canadian certificate was included as
a certificate or permit needed before the FERC certification
would be considered final. The Department had not taken a
position on whether the flexibility would be extended to allow
for compliance with any conditions attached to the Canadian
certificate.
2:09:10 PM
Senator Elton surmised that completion of financing would be
difficult for any sponsor without Canadian certification.
2:09:27 PM
Mr. Hill agreed and assured that the Department was considering
its implementation of the subsection to allow the project to
proceed in a "commercially reasonable" manner.
2:09:49 PM
Co-Chair Stedman asked the structure of government loan
guarantees and whether it would be possible or practical to
structure the financing of the Alaska natural gas pipeline
project in which the federal government "would issue the $18
billion and then the debt service would just be paid through an
intermediary to retire that debt."
2:10:32 PM
Mr. Hill repeated that the federal statute granted the
Department the authority to issue loan guarantees; it did not
authorize the Department to issue affirmative debt obligations.
The statute stipulated the definition of an eligible lender and
a nonqualified lender, which included pension plans and
government entities.
2:11:46 PM
Senator Olson asked the number of instances in which loan
guarantees were utilized to "bail out" a larger petroleum
transportation system.
2:12:08 PM
Mr. Hill did not know. The federal government issued loan
guarantees for a variety of projects, including agricultural
projects, export and import banking, airlines and student loans.
Most programs experienced low default rates; other programs had
high default rates.
2:13:05 PM
Senator Olson asked specifically about energy related projects.
2:13:11 PM
Mr. Hill recounted that the Department of Energy had issued loan
guarantees during the 1980s and experienced "a number" of
defaults. Several factors were likely the cause. As a result the
Federal Credit Reform Act of 1990 was passed to govern the
manner in which federal agencies administered loan guarantee
programs and included the requirement that funds in the amount
of the guarantee must be appropriated in advance.
2:14:10 PM
Senator Huggins referenced subsection 116(a)(3), pertaining to
the two year time limit for a project sponsor to obtain the loan
guarantee following final FERC certification. Mr. Hill commented
to the intent that the Department would interpret this provision
to allow for "maximum flexibility". However, previous testimony
warned the Committee to "look for what could go wrong." Senator
Huggins asked that if the two year period was not "operative"
why it existed.
2:14:56 PM
Mr. Hill assured that the two year time limit would be
"operative" and must be complied with. The issue would be
determining the date in which the time period commenced. He did
not intend to imply that the provision would be ignored, but
rather that it would be administered in a reasonable manner.
2:15:53 PM
Senator Huggins, citing a proposed timeline of the Alaska
natural gas pipeline project, estimated the project would have
been underway for approximately nine years at the time the loan
guarantee deadline was reached. Construction would not yet have
commenced. At this point, it could be argued that the State was
in jeopardy.
2:16:21 PM
Senator Huggins next spoke to recourse. He asked if lending
institutions would be required to seek payment from the parent
companies or holding companies of the project developer before
collecting on the federal loan guarantees.
2:16:56 PM
Mr. Hill answered that the point at which the lender could call
upon the loan guarantee would be subject to negotiation of the
loan guarantee commitment. He anticipated that project sponsors
would chose to not have a requirement to seek payment from their
parent companies before the federal guarantee was activated.
However, that would affect the "credit subsidy score", the cost
of the loan guarantee, and subsequently the amount of funding
that must be appropriated.
2:18:01 PM
Mr. Hill offered his assistance and that of the Department of
Energy. The Department supported the project and its process.
2:19:16 PM
MARTIN MASSEY, US Joint Interest Manager, ExxonMobil
Corporation, read his testimony into the record as follows.
I am the US Joint Interest Manager for ExxonMobil, a
position I have held since November 2001, and I am
responsible for the commercialization of ExxonMobil's gas
resources in Alaska.
ExxonMobil has been in Alaska for over 50 years and has
been a key player in Alaska's oil industry development. We
hold the largest working interest at Prudhoe Bay (36.4%)
and our current net production in Alaska is approximately
150,000 barrels per day. We have benefited from our
involvement in the State of Alaska, and we believe that
Alaska has benefited from this long-term relationship as
well. Commercializing Alaska's North Slope gas will allow
us to continue this mutually beneficial relationship for
another 50 years or more.
EXXONMOBIL READY TO PROGRESS PROJECT
The Alaska Gas Pipeline Project is important to Alaska, to
our nation, and to ExxonMobil. The project has the
potential to generate billions of dollars in revenues for
the State of Alaska, the U.S. federal government, and
Canada, and could provide a stable and secure source of
clean energy for Alaska and North America for decades to
come. For ExxonMobil, the project is significant and has
the potential to add over 1 billion cubic feet per day of
gas sales, which would be more than a 10% increase to our
current worldwide daily gas production. This project could
also add over one billion oil-equivalent barrels to proved
reserves, nearly enough to replace a year of our
production. Given the significant impact this project
could have on our business, we strongly support efforts to
advance a pipeline project.
As an illustration of our commitment, ExxonMobil has spent
more than $180 million studying ways to commercialize
Alaska gas. Since the 1970's we have evaluated LNG, gas to
liquids and gas pipeline alternatives. Based on these
studies we have determined that a Producer Gas Pipeline
Project will result in the best value for the State, the
Producers and the nation.
GENERAL FEEDBACK ON AGIA
I would now like to provide you with some feedback on AGIA.
ExxonMobil embraces the concept of competition all over the
world and is ready to participate in a competitive and
market-based environment. AGIA, as it is written today,
does not encourage market-based competition due to its
prescriptive nature. In addition, AGIA does not adequately
address the significant upstream issues and risks
associated with the scale and magnitude of the Alaska Gas
Pipeline Project. We have consistently advised the
Legislature and the Administration that AGIA, in its
current form, will not encourage competitive proposals and
will not result in a commercially viable project. We
strongly believe AGIA will not create an acceptable
framework for this world-scale mega-project unless it
allows the parties taking the risks to make a proposal that
properly manages the risks.
After listening to the testimony over the past several
weeks, it has become clear to me that one of the reasons
the Administration's view of the project is so different
from ours is due to flawed assumptions in the State's
economic model. The Administration's model fails to
recognize the integrated nature of this basin-opening
project. The upstream pays for the midstream and you
cannot split them apart when evaluating commercial
viability. Any attempt to do so will deliver erroneous
results. This issue is critically important, because if
you put in place a process based on a flawed analysis, it
will most likely fail. For this reason it is important
that the State's economic model be corrected. The
Administration's approach is not consistent with how
project economics are evaluated, and I'll expand on this
later in my testimony.
To ensure the best result, the logical way forward in our
opinion is for AGIA to establish the State's broad key
objectives, then allow applicants flexibility so that they
can compete to meet those objectives and define the
parameters that are necessary to make the project
commercially viable. As an illustration of what I am
proposing, AGIA could allow the applicant to demonstrate
how their proposal encourages exploration and development
in Alaska rather than specifying the method of project
access and expansion.
If you were to amend AGIA to make it objective driven, it
would allow open competition, maximize the number of
applicants and allow those applicants to propose innovative
solutions to meet the State's needs and open the basin.
The State could then evaluate the proposals and select the
one that best serves Alaska's needs and assures Alaskans
realize the maximum value for their resource. That process
would allow ExxonMobil, the largest leaseholder of gas on
the North Slope, to compete under the AGIA process while
providing the State complete flexibility on who is chosen
to move the Alaska Gas Pipeline Project forward.
To understand why it's important to use broad objectives as
opposed to prescribing specific requirements, it is helpful
to review project risks and issues surrounding its
development that will have to be addressed by an applicant.
PROJECT RISK / PRODUCER CAPABILITIES
The tendency exists for many to underestimate the size,
magnitude and risks associated with this project. The
Alaska Gas Pipeline Project is a world-scale undertaking
with significant risks. In fact, the project would be the
largest private investment in North America - significantly
larger than most "model" worldwide oil and gas "mega"
projects. Let me be clear, this will be a precedent
setting global mega-project. As you heard last week from
Mr. Fred Rich of Sullivan and Cromwell (Head of Global
Project Development and Finance), this project's financing
could be many times greater than the largest North American
project financing to date (the Alliance pipeline). There
is not really another project that compares.
Because of this size, many factors impact commercial
viability, including cost and the potential for cost over-
runs, gas price, schedule delays, construction conditions,
and regulatory and State fiscal uncertainties. Our
previous cost estimate of $20 billion (which is in $2001)
will be substantially higher due, in part, to increasing
steel prices, which have nearly doubled since 2001, and
because we are experiencing hyperinflation on industry and
construction labor costs. World-wide mega-projects are
also placing pressure on pricing and availability of global
materials, and skilled manpower. In addition, as we have
observed over many years, natural gas prices remain highly
volatile.
The State of Alaska cannot anticipate how individual
applicants will view the various risks I have discussed or
how applicants may choose to address them. Establishing a
set of rigid, prescribed terms in AGIA will not allow the
flexibility needed by individual applicants to weigh and
manage those risks in a way that maximizes value to the
State and the applicant.
HOW PIPELINES ARE FINANCED
The way projects are financed gives some insight into who
bears the risks for projects of this type and how these
risks are managed. Last week you heard how pipelines are
financed from Mr. Rich. Commercially-sound oil, gas, and
pipeline projects traditionally have been able to obtain
financing if they have strong sponsors with proven track
records and the financial strength to both provide upfront
lender required sponsor equity and to backstop key project
commitments. For the Alaska Gas Pipeline Project, key
project commitments take the form of completion support
(either a full debt guarantee or additional equity overrun
commitments) and firm, long-term gas transportation
commitments. Firm transportation commitments are binding
obligations made by companies to pay for the cost of
reserving long term gas capacity as shippers on a pipeline.
These commitments are made during an "open season", which
is a period during which any and all prospective gas
shippers can make binding commitments for a specific volume
of transportation capacity.
As you may recall, Mr. Rich indicated that for a project of
this scale and magnitude, financial institutions will
require substantial, long-term, firm transportation
commitments to provide funding. These commitments must be
provided by creditworthy shippers because this tariff
stream underpins the debt repayment. Furthermore, lenders
not only look at the contractual commitments, but place
equal importance on the underlying economics of the
project. Any potential reduction in the Producer's netback
is a concern to the lender since it increases the
likelihood that the integrated project may not be economic,
that the transportation charges are not paid, and that as a
result the lenders are not repaid. Looking at this another
way, the lenders are assessing how effectively the parties
taking the risks are managing these risks. They will also
want these risks reduced to a minimum to make sure they
will get paid back. For this reason they would prefer
stable fiscal regimes, project sponsors who have a proven
track record of delivering mega projects on time and on
budget, project sponsors with ownership in the upstream,
and shippers who can support and will honor multi-billion
dollar firm transportation agreements.
WHO BEARS PROJECT RISKS
That is why it is so important to understand who bears the
project risks. Through the firm transportation commitments,
the project development costs and the associated cost over-
run risks are ultimately borne by the shippers. For this
project, the shippers will be the Producers, and, directly
or indirectly, the State or the State's shipper. These
firm transportation commitments are valued in the tens of
billions of dollars for our company alone, and could be
over $100 billion for all the shippers. Shippers must make
long-term ship or pay transportation commitments and agree
to pay transportation and treating rates that are
ultimately based on the final cost of the pipeline and
treating facilities. The only information the shippers
will know in advance of making these multi-billion dollar
commitments will be a projection of the transportation
charges based on the project sponsor's initial estimate of
costs. The firm transportation commitments must be paid
regardless of whether the shipper making those commitments
actually transports gas through its reserved capacity and
irrespective of the actual transportation charges. The
shipper is also required to pay this reserved capacity
commitment even if the market price for the gas is less
than the cost of transportation.
For these reasons, the parties taking the risks for a
project of this magnitude need to be able to manage those
risks. The Producers, as shippers, cannot make firm
transportation commitments during an open season unless
they are confident the gas pipeline project can be built
and operated cost effectively so that producing and
shipping gas over the long-term is commercially viable.
INTEGRATED GAS PIPELINE PROJECT ECONOMICS
For this reason, AGIA needs to bring together the upstream
and the midstream and provide for an integrated proposal.
Any approach that evaluates them separately is flawed. Let
me expand on this point. You heard last week that lenders
evaluate the upstream very carefully when financing the
midstream. The reason is simple - the upstream pays for
the midstream. When I say upstream, I'm talking about the
revenue generated from production and sale of the gas and
liquids through the pipeline project. Without the
commitment of capital to the pipeline by a producer-
affiliate or the huge financial obligation required for
firm transportation commitments to a third-party pipeline,
there is no way the transportation system will be built.
Thus, any analysis of the project which excludes midstream
capital or the firm transportation commitments is not
correct. Lenders and project sponsors do not make that
mistake because they recognize that major gas pipeline
projects are built on the back of direct capital
commitments or, long-term, firm transportation commitments.
Since firm transportation commitments are legally binding
commitments that are the backbone of any financing and
essential to funding a pipeline, it only makes sense to
account for these commitments when evaluating project
economics. Surprisingly, the Administration's analysis of
the economics fails to incorporate these financial
obligations associated with underpinning the pipeline. Let
me expand on this point by asking you to think about the
economics from a shipper perspective. The shipper can
either make the investment in the midstream through one of
its pipeline affiliates or make a commitment to a third
party to build the pipeline. In the case of making the
commitment to a third party, the shipper must pay the third
party for the cost of the pipeline plus a return to the
pipeline builder for the investment he ultimately made, not
what he projected the costs to be when the commitment was
made. So in this case the shipper is paying for the
ultimate cost of the pipeline plus the profit the pipeline
builder requires. When you think about it this way, the
economics have to be worse for the shipper when he makes a
transportation commitment versus directly investing in the
pipeline.
Because the Administration's economic analysis is flawed,
the resulting assertion that the producer's stand-alone
upstream economics are robust and improved without
ownership of the pipeline is absolutely incorrect. Again,
the upstream pays for the midstream and it is no more
complicated than that.
Since it appears AGIA is based on this flawed economic
analysis, it is critical the legislature address this issue
and AGIA be modified to recognize who is taking the risk,
the shipper. For ExxonMobil any decision to invest will be
based on integrated project economics. It only makes sense
for the State to evaluate the proposal on an integrated
basis as well because the State is in the same position as
the producers receiving the bulk of its revenue from the
sale of gas. Because we both receive our revenue from the
sale of gas, we should be aligned on the best approach for
minimizing transportation costs and maximizing netback
value.
IMPORTANCE OF STATE / PRODUCER ALIGNMENT AND BENEFITS OF
THE PRODUCER PROJECT
Let me now talk about the importance of alignment between
the State and the Producers and the benefits of a Producer
Project.
Maximizing the value to the State of Alaska and the
resource holders means selecting the right design concept
for this mega-project and then executing the Project to
deliver the lowest possible cost and fastest possible
completion. On a project of this size and magnitude,
project construction and operating experience should be a
significant consideration. Only a limited number of
companies have demonstrated the capabilities, financial
strength and arctic experience to effectively participate
in and manage world-scale mega-projects.
The Producers have mega-project experience on numerous
projects world-wide and have demonstrated success in
meeting project objectives. A critical component of that
experience is the Producers' Arctic experience in Alaska
and throughout the world. ExxonMobil's arctic experience
is extensive - over 40 years - with developments in
multiple types of arctic environments. Large projects with
significant complexity in harsh environments are what we do
and we are extremely qualified to take on this work.
ExxonMobil's global project development company is unique
within industry and leads the industry in project cost and
schedule performance.
ExxonMobil has also demonstrated world-class leadership in
safety, health and environmental performance. ExxonMobil
is a leader in operating efficiency and a pacesetter in
operating safety.
In addition to our project and operational excellence,
ExxonMobil has the financial strength to make this mega-
project a reality. ExxonMobil has consistently maintained
one of the strongest financial positions of any company in
the world. We are one of just a few public companies to
maintain the highest credit rating from Standard and Poor's
(AAA) and Moody's (AAA), and we have done so for each of
the last 88 years. Our financial strength minimizes the
likelihood that external financing requirements will
significantly delay the project timeline, even in times of
financial market turmoil.
It is important to remember that the Alaska Gas Pipeline
Project is a basin-opening project that will benefit the
State and the oil and gas industry in Alaska for decades
into the future. Basin-opening projects throughout the
world have progressed and been successful when there is
alignment between the host government and the leaseholders.
The Producers and the State both want a pipeline project to
commercialize the known ANS gas resources and open the
basin to gas exploration.
We believe a Producer gas pipeline project will result in
maximum value to the State and the Producers. The reason
is the Producers and the State have maximum incentive to
control costs. Low capital and operating costs, which
result in lower treating and transportation costs, and
access to premium market price, result in higher netback
value on the gas. It's important to keep in mind that the
State will receive the majority of its revenue from the
value of gas sales via revenue received under its lease
royalty agreements and from production taxes, which are
valued based on the netback received from the gas.
Third-party owners do not share the same incentives in that
they actually benefit from increased capital costs.
Based on the demand for workers that this Project will
generate, Alaskans are obviously key to successful project
execution. Both the State and the Producers want Alaskans
to benefit from the many job opportunities that will exist.
We believe that financial strength, experience and the
ability to get the job done should be critical components
of any evaluation of proposals. When you consider
carefully the options available, a Producer pipeline will
provide maximum value to the State of Alaska.
IMPORTANCE OF PREDICTABLE AND DURABLE FISCAL TERMS
I would now like to talk about fiscal predictability and
its importance for a mega-project such as the Alaska Gas
Pipeline Project. For ExxonMobil to progress this mega-
project and mitigate its inherent risks, we will need to
work together with the State on some very important fiscal
issues. Because of the nature and magnitude of the risks
associated with this Project, fiscal terms that are
predictable and durable are necessary. This is a common
thread for any mega-project investments. In all such
cases, we are willing to take geologic risks, we are
willing to take cost risks, and we are willing to take
commodity price risks, but we cannot take the risk of
fiscal terms changing. Let me expand on this further. The
first two risks, geologic and cost risk are risks for which
we have developed an industry leading expertise to manage.
This is what we do day after day at ExxonMobil. Market
risk is inevitable in a commodity business such as oil and
gas and we manage that by attempting to ensure that we
deliver those products into the highest value market at the
lowest cost. However, the risk of a change in fiscal terms
is of a completely different nature and completely outside
our control. We must have agreements that will allow us to
develop this mega-project under predictable and durable
terms, so that we can make an investment decision with an
adequate degree of certainty. This does not mean that
taxes cannot change over the life of the project.
Predictability means that the State's tax and take terms
are sufficiently understood that they can be defined and
predictably modeled over time for purposes of evaluating
the overall project economics. If fiscal terms can be
changed in unpredictable ways in the future, then we are
not able to make a well founded investment decision on
behalf of our shareholders, nor will lenders be as
confident in providing financing for a project of this
size.
The Alaska Gas Pipeline Project will require massive
investments, billions of dollars, to be made over a period
of many years before any revenue is generated from those
investments. As a result, increases in taxes on oil and
gas related activities during the life of the project could
significantly impact the commercial viability of the
project, offset the benefits of taking on a project of this
magnitude, and could increase lender concern. Because
fiscal terms could be modified under the proposed AGIA
legislation, it does not provide the fiscal predictability
necessary to ensure a commercially viable project.
It is important for the State to recognize that for mega-
project developments, governments do grant long term fiscal
stability. These contracts include fiscal stability
protection that in some cases runs for the length of the
contract and in other cases runs for 40 years or more.
AGIA should allow applicants to put forward their best
proposal on what is required to make the project
commercially viable, which will allow the State the
opportunity to consider those proposals that have the best
chance of actually delivering an Alaska gas pipeline.
ADDITIONAL FEEDBACK ON AGIA
I would like to now give some specific feedback on AGIA
which is based on the conclusions and principles I've
mentioned. I will also outline some additional thoughts on
how AGIA should be modified to ensure the best chance of a
successful result and allow the State to maximize value.
As I previously stated, alignment between the State and the
leaseholders is essential to a basin opening project of
this magnitude. Therefore, establishing the right approach
going forward is the most important activity for the
project at this time. To be able to calculate the revenue
from the upstream we must have clarity on the taxes and
royalty from our oil and gas operations and the taxes and
royalties must be set at a level that makes the project
viable. In order to ensure a viable project from the
outset, we believe this must be done at the beginning.
ExxonMobil recognizes the importance to the State,
explorers and others of having access to the project so
their gas can be treated and transported to markets. To
ensure that a project is constructed, it must be
commercially attractive to shippers at the time they make
their initial firm transportation commitments. Shippers,
particularly those who must invest substantially to explore
for, develop and produce gas resources, will not be willing
to enter into long-term financial commitments for the
transportation of gas if they believe there is a
substantial likelihood that their initial rates will be
significantly increased in the future in order to
accommodate expansions.
Under the Alaska Natural Gas Pipeline Act, Congress struck
what it determined was the proper balance between
encouraging investment by those willing to commit to pay
for initial capacity and encouraging exploration by
providing an opportunity for future access to the pipeline.
Because of the unique nature of the Alaska gas pipeline
project, FERC approved unprecedented policies to enable a
FERC-mandated expansion to benefit explorers. The issue of
how potential future shippers may access initial capacity
and future expansion capacity, if needed, should be
administered by the FERC for all elements of the project in
the United States.
In addition, the pipeline entity should not be required to
accept a FERC certificate irrespective of FERC imposed
conditions.
Under AGIA, the proposed upstream inducements would require
significant modification to ensure a commercially viable
project is obtained. In fact, we do not believe it is
practical to address these terms in legislation.
Therefore, it would be better for AGIA to not prescribe
specific upstream terms and allow applicants to make
proposals to address those terms.
AGIA also prescribes activities that must be completed
within a specific timeframe or date certain. Setting
arbitrary target dates is not consistent with good project
management practices. Further, milestones are not
necessary if the project is commercially viable. The
Producers will progress the project at the maximum prudent
pace, consistent with the industry proven "stage-gate"
process for project development - there is no reason to do
otherwise.
In general, AGIA lacks specifics on key fiscal terms and
other requirements. To address these gaps, AGIA gives
commissioners broad authority to adopt additional
requirements and establish regulations. Not knowing the
requirements now creates significant uncertainty.
Finally, because of the complexity and risk associated with
this project, the parties must have an efficient and
impartial means of handling disagreements when they arise.
We believe project related agreements should provide for
binding neutral arbitration as the mechanism for resolving
disputes. Binding neutral arbitration is widely utilized
in U.S. and international commercial agreements and is not
a new concept with the State of Alaska. Arbitration is the
method used to resolve disputes under the State's Royalty
Settlement Agreements.
CONCLUSION
In closing, I would like to reiterate that ExxonMobil is
committed to moving the Alaska Gas Pipeline Project
forward. However, we cannot move the project forward if it
is not commercially viable. AGIA as written does not
provide for a commercially viable project. The
Administration's stated goal for AGIA is to increase
competition through an open and transparent process.
However, in its current form, AGIA will result in less
competition because it fails to adequately address the
issues raised by those parties who will ultimately pay for
the project. It also appears AGIA is based on flawed
economic assumptions. It is critical that the legislature
and administration address these problems in AGIA or we
will end up with a process that sets unrealistic
expectations and results in disappointment and failure. In
addition, the existing prescriptive terms in AGIA will
preclude ExxonMobil from being able to make an open,
competitive and conforming proposal; thus, the State will
be denied the opportunity to even consider terms from the
party holding the largest discovered gas resource and has
the capability to deliver a successful project.
ExxonMobil possesses the financial strength and project
experience required to make this project a success. We are
ready to work with the Administration and the Legislature
to establish a process that recognizes the integrated
nature of the project and mitigates the risks I've
discussed to allow the project to progress. We suggest
AGIA be amended to provide for a broad objective driven
process that sets out what the State wants to achieve and
allows each applicant to propose how best to meet those
objectives and identify what is required from the State to
advance the project. This process will secure more viable
applications, create more competition, afford the State the
opportunity to secure the most value and actually get the
pipeline built. We are ready to participate in a
competitive, open and transparent process as I've
described, but unless AGIA is modified we will not be able
to participate.
What we are struggling to understand is why the State is
insisting on such a prescriptive way forward. AGIA should
allow all interested parties to submit a conforming bid so
that the people of the State of Alaska have the opportunity
to see and compare all of the bids put forward to build the
Alaska gas pipeline.
2:49:34 PM
Co-Chair Stedman remarked that AGIA should be constructive to
the interests of both ExxonMobil and the State.
2:50:12 PM
Co-Chair Stedman requested the witness identify concerns with
the bill and provide recommendations at a later date.
2:51:25 PM
Co-Chair Stedman spoke to the $500 million reimbursement
incentive intended to demonstrate the State's commitment to the
natural gas pipeline project. He asked ExxonMobil's position on
this proposal.
2:52:01 PM
Mr. Massey acknowledged that the Palin Administration needed to
take action to "kick start" the project. However, the incentive
would apply only to the pipeline itself and would not address
the "critical" upstream issues, which would determine whether
the project was undertaken. These issues had not been adequately
or "appropriately" addressed in AGIA. If the State intended to
invest in the project, it should "get return from it moving
forward" and be a participant in the project. This would provide
more leverage to the State and the AGIA applicant.
2:53:36 PM
Co-Chair Hoffman shared questions asked of him that he had
committed to learning the answers. He asked if ExxonMobil was
currently exploring for natural gas on the North Slope or had
plans to explore in the future.
2:54:03 PM
Mr. Massey provided the following response.
We have ongoing work that is competitive in nature in terms
of assessing the basin and where might be the most
attractive exploration opportunities. The key will be
[whether] we get a gas pipeline going. Right now we have
discovered resources that are in a 35 tcf [trillion cubic
feet] to keep this thing full for thirty-something years,
we're going to need 50 tcf. So there's going to be plenty
of opportunity to put gas into this pipe. And that's not
even considering the fact that we should be able to expand
the pipe.
The way I'd answer your question is: we're doing studies
preparing for that. Those are competitive in nature. Our
activities primarily on the Slope right now are focused on
the oil side; maximizing the recovery of the discovered oil
resource. Plus looking at oil opportunities that are around
existing infrastructure that haven't been fully developed,
need to be further explored. A lot of this activity is
occurring at the western side of the Prudhoe Bay field
right now where the partners are bringing on a significant
field called the Orion [unverified] field. It wasn't
thought to be attractive in significant resource and we're
working to bring that on production.
2:55:41 PM
Co-Chair Hoffman listed facts considered in the questions posed
to him, which he was relaying to the witness. Other companies
were actively exploring for natural gas and the more
identifiable reserves held by a company would provide a more
accurate prediction of that company's actions during an open
season. This legislation contained projections on the open
season. Only 35 tcf of gas was currently identified and the
amount must be at least doubled to allow for a viable pipeline
project. ExxonMobil had the financial resources available for
exploration activities and Mr. Massey asserted the company's
commitment.
Co-Chair Hoffman considered a validation of a company's
commitment was whether that company was actively pursuing "gas
in Alaska". He asked if the witness agreed with this measurement
of commitment to the Alaska natural gas pipeline.
2:57:10 PM
Mr. Massey answered that an adequate discovered gas resource
existed to "back this firm commitment". However, it would be
likely that the firm commitment could extend "beyond the plateau
of this discovered resource", thus providing a strong incentive
if ExxonMobil made the commitment, to identify additional
resources.
Mr. Massey explained that the discovery process to "put any sort
of sizable development on place" required ten years and included
planning, conducting and evaluation of seismic surveys, drilling
and ultimately development.
Mr. Massey considered this time period satisfactory, given that
the pipeline project would last ten years. He opined, "Everyone
will have a running start to build gas for the first expansion
as well as build gas for the fill this gap back in the end."
Mr. Massey disagreed with Co-Chair Hoffman's characterization
that a company that was not actively exploring demonstrated a
lack of commitment. The commitment would "actually come from the
discovered resource." Once the pipeline project was underway,
"we won't have any trouble finding folks [to] go out and explore
for gas" due to the ample opportunity for expansion.
Mr. Massey anticipated ExxonMobil would be one of those "folks".
He stated, "We're quietly preparing ourselves for that …
opportunity, once we realize that gas on the North Slope is
viable." Currently, the company did not have this assurance.
2:59:29 PM
Senator Thomas shared Co-Chair Hoffman's concerns. Discussion on
this legislation had repeatedly focused on upstream risk. Lack
of known resource was a major issue contributing to that risk.
Efforts should be undertaken to reach the approximately 50 tcf
capacity and while he appreciated ExxonMobil's stated commitment
to the pipeline project, he questioned why the company was not
"working toward confirming" the known resource to mitigate the
risk.
3:00:22 PM
Mr. Massey understood the perception. Discovered gas reserves
equaled 35 tcf but that amount was not currently commercially
viable. Therefore, the time and expense of exploration efforts
would not be commercially viable either. Making the 35 tcf
reserves commercially viable would mitigate the upstream risk.
Sufficient discovered gas resources existed to make the "the
initial commitment" and to "get the initial pipeline going."
However, if not commercially viable, the commitment could not be
made.
3:01:31 PM
Senator Thomas reported that the financers share the concerns
about the upstream risk, specifically the uncertainty of the
known resources. While financers could be willing to accept
ExxonMobil's explanation and agree to finance the project, he
surmised that more confirmation was necessary.
3:02:08 PM
Mr. Massey pointed out that the credit worthiness of the shipper
that made the firm transportation commitment would also be
evaluated. If ExxonMobil, ConocoPhillips and BP made the
shipping commitment, and "the gas wasn't there" the financers
would have greater assurance of getting paid.
3:03:11 PM
Senator Huggins asked the optimum consortium of the pipeline
sponsor, if it were to include ExxonMobil.
3:03:41 PM
Mr. Massey responded that the entities assuming the risk must
have the capability to manage that risk. At present, ExxonMobil,
Conoco Phillips and BP would comprise the optimum consortium.
The State would assume a portion of the risk as well.
3:05:00 PM
Senator Elton furthered Co-Chair Hoffman and Senator Thomas'
questioning. ExxonMobil's "2005 10k filing" with the Federal
Trade Commission capitalized its wells located at Point Thomson.
To do this, the company must make a determination that the field
was commercially viable given the market conditions and
technology.
3:06:14 PM
Mr. Massey responded that the Point Thomson wells "have been on
the books for many years." ExxonMobil considered itself to be
partaking in active discussion with the State to achieve a
commercially viable project at that location. As a result, those
wells could be capitalized.
3:06:41 PM
Senator Elton clarified that the determination was made by
ExxonMobil in 2005 that given the current market conditions and
current technology, the project was commercially viable.
3:06:55 PM
Mr. Massey answered, "I'd say we're in discussions with the
State as to how to achieve a commercially viable project."
3:07:06 PM
Senator Elton contended that capitalization must be based on
"what you think is true not what you think could be true given
certain future events."
3:07:23 PM
Mr. Massey admitted he was not an expert in filing requirements
and he repeated his previous response.
Co-Chair Stedman ended the discussion on this item.
3:07:36 PM
Senator Elton asked if the competition attested as necessary by
ExxonMobil and other producers, could be achieved if the
producers did not apply for the AGIA license. He asked if the
producers could create a proposal to coincide with the timing of
the public hearing process and legislative review process of the
AGIA applications. This would allow the legislature to judge the
producer's proposal in comparison to the AGIA application
proposals.
3:08:54 PM
Mr. Massey deemed this possible. However, ExxonMobil would
rather operate "in a full and conforming way" within the process
established by the Administration so that its proposal would
receive "the scrutiny, the debate, the comparisons with every
other project that's been proposed". The Palin Administration
had determined that AGIA would be the process.
3:09:35 PM
Co-Chair Stedman directed the discussion "away from the historic
practices" and to "get down into the actual language". He
intended to learn which sections of the bill were considered
"positive" or "negative" to ExxonMobil. He requested the company
submit suggested language. Concern was expressed about "some of
the flawed analysis" that was not addressed in the bill.
3:10:17 PM
Co-Chair Stedman asked the witness to comment on the provision
of subsection (3)(a) of Section 43.90.130. Application
requirements, on page 5, lines 5 through 8, which required the
AGIA licensee to conclude a binding open season no later than 36
months after the date the license was issued.
3:10:54 PM
Mr. Massey relayed the position of ExxonMobil that AGIA should
not establish any date certain. ExxonMobil would intent to meet
this timeframe, but it should not be a requirement.
3:11:31 PM
Co-Chair Stedman asked if this provision would be a "show
stopper" that would prevent the company from submitting an AGIA
application.
3:11:43 PM
Mr. Massey affirmed that ExxonMobil would not undertake a
project that included an arbitrary deadline.
3:12:06 PM
Co-Chair Stedman noted the provision of subsection (5), on page
5 lines 25 through 27, which stipulated that the application
"commit that after the first binding open season, the applicant
will assess the market demand for additional pipeline capacity
at least every two years through public nonbinding solicitations
or similar means." He asked if the witness considered this
common practice.
3:12:43 PM
Mr. Massey responded as follows.
There's a number of must haves in here relating to
expansion, open season requirements. Our suggestion would
be that you turn those into a broad objective that the
State wants to make sure that the project can be expanded
and that there would be availability to access the pipe and
allow each applicant to come forward and determine how best
- how they would propose to achieve that overall objective.
Mr. Massey assured, "This stuff works its way out." If a party
wanted the pipe expanded because of a discovery, it would
approach the owner of the pipeline. The market would not have to
be assessed every two years because "this is business, people
know how to do these sort of things."
Mr. Massey qualified that compliance with the provision would
not be overly cumbersome; however, it focused on "a detail that
ought to be left to the applicant's proposal".
Mr. Massey reiterated that the provisions of this section
pertained to the pipeline and did not address the upstream
"critical issues" that would determine whether the pipeline
project would be undertaken.
3:14:13 PM
Co-Chair Stedman understood the witness' concern with the
upstream issues, but intended to review each section of the bill
to "have a logical flow" to the discussion.
3:14:35 PM
Co-Chair Stedman next addressed subsection (7) on page 6, line
11, pertaining to rolled-in rates. The presumption of the FERC
was that all parties preferred rolled-in rates.
3:15:17 PM
Mr. Massey understood the importance to the State that explorers
had access to the pipeline. FERC had addressed this matter in
"the proper way" and ruled that because of the unique nature of
the project, it would approve "unprecedented policies to enable
a FERC mandated expansion to benefit explorers." FERC was
positioned to determine the proper rate for the expansion. FERC
determined a presumption for rolled-in rates, but also announced
that a subsidy would be considered in determining whether the
rolled-in rate was appropriate. ExxonMobil did not oppose this.
However, the provisions of AGIA included a "proposed 15 percent
increase in the rate," which was too great of a risk. That
increase could increase the cost of the tariff for the initial
shippers by $500 to $800 million annually.
Mr. Massey suggested that the incentive that the State would be
required to offset this tariff increase could be detrimental to
the State. If the 15 percent rate increase was approved,
ExxonMobil would factor the affect into its "economics" and
would need "some sort of reduction on the upstream side to
compensate for that." He did not consider such compensation by
the State to be in the State's best interest.
3:17:15 PM
Co-Chair Stedman requested ExxonMobil conduct an analysis of the
fiscal impact of this provision.
Mr. Massey agreed to do so.
3:17:44 PM
Co-Chair Stedman asked if the witness had comments on the
provision of subsection (8) on page 7, line 29, relating to a
North Slope gas treatment plant.
3:17:57 PM
Mr. Massey acknowledged that the applicant would have to address
the gas treatment plant. This provision should be "broadened" to
allow the applicant to "provide more description of how they
intent to deal with the gas treatment plant." The requirement of
"net book value" for "rate-making purposes" should instead be
"left up to the applicant" because "that particular approach"
might not be in the best interest of the State or the applicant.
The applicant should be allowed to propose how it would address
the issue.
3:18:41 PM
Co-Chair Stedman next spoke to subsection (10) on page 8, lines
14, through 17, which would commit the applicant to a 70 percent
debt to equity ratio. He relayed discussions about lowering the
"equity position, all else being equal of course" because "the
lower the tariff, the higher the net back, the better value to
the State". A lower equity position would be in the interest of
the State, "ruling out the impacts of the financing." He asked
ExxonMobil's position on the ratio and whether it should be
changed.
3:19:26 PM
Mr. Massey characterized this as another issue that should be
"left to the applicant to come forward" and propose the ratio
that would "drive their particular needs". The debt to equity
ratio was only one portion of the tariff structure. The cost to
construct the project would have the largest impact on the
tariff.
3:20:46 PM
Co-Chair Stedman requested comment on subsection (12) on lines
21 and 22 that would "commit the applicant to provide for a
minimum of five delivery points of natural gas in this state".
3:20:54 PM
Mr. Massey remarked "We're not talking about a lot of money here
for a delivery point" and that the requirement should therefore
be "left open for the applicant to describe".
3:21:25 PM
Co-Chair Stedman next asked the witness' position on the
provision of subparagraph (16), on page 9, lines 9 through 11,
which would require the applicant to waive the right to appeal
the final FERC certificate ruling.
3:21:43 PM
Mr. Massey noted the advantages and disadvantages of this
provision. It would be favored by unsuccessful AGIA applicants,
but not favored by the successful applicant. Given the
importance of this project, he surmised that participants would
want the opportunity to appeal. This provision could "limit some
folks from bidding."
3:22:29 PM
Senator Olson, returning to the provision of subsection (8),
relayed a comment that the North Slope might not be the best
location for the gas treatment plant due to the complexity of
separating individual components of natural gas. He asked
whether Mr. Massey agreed.
3:22:58 PM
Mr. Massey reported ExxonMobil's contention that the North Slope
would be the best location for the gas treatment plant. This
would allow for all the CO2 to be removed and thus not shipped
through the pipeline, which would subsequently create room in
the pipeline for more gas.
3:23:38 PM
Co-Chair Hoffman requested the witness comment on the provision
of subsection (15) on page 8 line 30, which would require
"Alaska hire", to the extent permitted by law.
3:24:02 PM
Mr. Massey referred to his testimony, emphasizing that Alaskans
would "play a very important role" in the project and should
benefit from "the many job opportunities". He suggested this
provision should be "broadened" to request that the applicant
describe its "total Alaska hire plan".
3:24:44 PM
Co-Chair Stedman directed the witness to submit alternative
language.
3:24:56 PM
Co-Chair Stedman continued to subsection (17) on page 9, lines
12 through 16, that would require the applicant to commit to
negotiate a project labor agreement before construction.
3:25:04 PM
Mr. Massey deemed such a requirement as "premature at this
time". Job opportunities would be available for union and
nonunion workers. Project labor agreements should be negotiated
by the major contractor of the project, if the contractor
decided to enter into an agreement.
3:26:08 PM
Co-Chair Stedman spoke to subsection (20) on lines 28 through
30, which provided that the applicant must "otherwise
demonstrate that the applicant is ready and able to perform the
activities specified in the application, including the detailed
work plan, timeline, and associated budget. He remarked that
ExxonMobil had the financial means to undertake the project with
or without external financing. He asked about availability of a
workforce and materials such as steel, and the impact of
competing projects elsewhere in the world.
3:27:07 PM
Mr. Massey advised that the applicant's ability to secure labor
and materials should be considered. ExxonMobil expends $20
billion per year for capital expenditures. Therefore, the
company had "the muscle" to "move projects in and out of the
cue" with various service providers. The Alaska natural gas
pipeline project would be a "huge undertaking" that would
"stretch the resources" and therefore, the successful applicant
should have had access and continue to have access to the
necessary resources to complete the project. ExxonMobil met this
criterion.
3:28:21 PM
Co-Chair Stedman recalled testimony from a previous hearing in
which Enbridge informed that the Alaska project would be too
large for that company to undertake alone and would require it
to change its capital structure. He asked if the project,
estimated to cost between $20 and $30 billion, would require
ExxonMobil to change its capital structure.
3:29:01 PM
Mr. Massey answered it would not.
Mr. Massey further commented.
There's a lot of other things that you could build into
this one, you know, experience in executing projects of
similar scope. You're [going to] want to see that a person
has the experience, that they've done something of this
scale and magnitude. You know, can they provide the project
management resources. You're [going to] want them to
demonstrate that they have the project management resources
that they can come to bear: what's their safety, health,
environmental record; how do they go about quality
management and assurance capabilities. One of the key
things in a project is project control - how do you control
the project, how do you know that the cost that you're
getting is correct and your future projection of cost is
right, you're [going to] want to make sure that an
applicant has the capability and the processes to make sure
that's done very well. Then it's just the overall
integrity, business ethics - how comfortable are you from
that standpoint with the company that you're picking;
you're [going to] get the right deal.
Co-Chair Stedman suggested that ExxonMobil could recommend these
factors as requirements of the AGIA applicants.
3:30:28 PM
Senator Olson responded to Mr. Massey's statement, "with all due
respect", declaring that the integrity and business ethics
record of ExxonMobil was likely the worst in the state. The
Exxon Valdez oil spill was a "disaster" and 20 years after it
occurred, "conflicts" remained unresolved. He therefore
challenged the assertion that ExxonMobil's demonstrated
experience would be a benefit to the State.
3:31:05 PM
Mr. Massey responded that the company had "learned from that
particular incident" and had "improved our work processes and as
a result, have become a much better company in terms of how we
go about doing our business."
3:31:37 PM
Senator Dyson noted that testimony given by representatives of
BP and ConocoPhillips opined that this project would not be
"wildly or even profoundly profitable". He asked if ExxonMobil
shared this position and if so, requested an analysis.
3:32:18 PM
Mr. Massey replied that the current provisions of AGIA did not
provide him with sufficient information to determine whether the
project would be commercially viable because he did not know
which terms to utilize to calculate the project's economics. If
the current provisions remained unchanged, the project would not
be commercially viable and that he "would have to assume today
that what's on the books will only get worse and that the taxes
and so forth will go up over time."
3:32:58 PM
Senator Dyson asked the projects ExxonMobil had undertaken in
North America that provided the fiscal certainty requested of
this project.
3:33:07 PM
Mr. Massey set forth the following as a response.
I wish we had another project that we could be talking to
somebody else on this continent that has this magnitude and
potential impact. It has to do with the project and where
this project is located; this project is in Alaska. Alaska
gets 80, 90 percent of its revenue from the oil and gas
business. Everywhere around the world where there are mega-
projects, we get the sort of fiscal stability that I've
described - predictability in terms of understanding what
the taxes are. So mega-projects - that's what we get.
That's the norm it's not the exception. And in many of
those places around the world, they're in the same position
as Alaska in that the bulk of their revenue comes from
their oil and gas operations as well. So when you take that
context, the fact that Alaska, if they need some money in
the future, where are they [going to] come - they're [going
to] come to the oil and gas business. And that's why we
have to understand what the taxes are and understand for a
very long period that those taxes are not going to change
and ultimately impact the commercial viability.
3:34:22 PM
Senator Elton stated that fiscal stability was a "big issue". He
questioned the implication that Alaska operated such a
"predatory tax regime" as to pose a greater risk than price
fluctuation for the product or action taken by Hugo Chavez the
leader of Venezuela in taking possession of an oil field in
which ExxonMobil held partial ownership.
3:35:46 PM
Co-Chair Stedman noted that fiscal stability was addressed
elsewhere in the legislation.
3:36:11 PM
Mr. Massey responded to Senator Elton's comment, saying that
fiscal stability pertaining to mega projects was necessary to
"encourage that investment". The Alaska natural gas pipeline
would be a major project, a "basin opening" project. The
developers must therefore know what the tax rates and royalty
terms would be "such that we can make an adequate investment
decision". Whether "Alaska is less risky or not" was irrelevant
because "the risk does exist" and the State could change the
taxes to an extent that it would "undermine" the fiscal
stability.
3:37:30 PM
Senator Dyson requested a list of mega projects in which
ExxonMobil was the project manager, not just part owner, as well
as the size of those projects and the fiscal stability terms
received from the sovereigns governing the locations of the
projects.
3:38:20 PM
Mr. Massey cited "confidentiality protections" as the reason he
would not provide the information. He directed Senator Dyson to
review the "Interim Fiscal Interest Finding" complied the
previous year, which included a summary of all "major deals that
had been put together and had been made public." It was not
uncommon for major basin opening big projects "much, much
smaller scale than this" to have 35 to 40 years of fiscal
stability.
3:38:58 PM
Senator Dyson clarified that the witness could not state the
projects in which ExxonMobil was the project manager.
3:39:12 PM
Mr. Massey answered, "Those agreements are signed between us and
the country and they are confidential so we can not…"
3:39:31 PM
Senator Dyson interrupted to specify he was not requesting
confidential agreement information, but rather inquired as to
"the construction, management, project management that Exxon
managed the project" to demonstrate Mr. Massey's claim that the
company possessed the experience necessary to undertake the
Alaska pipeline project.
3:39:55 PM
Mr. Massey agreed to provide "a couple of those".
Co-Chair Stedman requested the witness submit the information in
writing and detail the date of construction, the consortium and
entities involved, the management partner, the "dollar amounts"
the geographic location, and "whatever terms that you can give
the Committee that's not confidential". He indicated that the
Committee had access to some of the confidential data.
Co-Chair Stedman pointed out the 22.5 percent tax structure "for
ten years" currently in statute. Therefore, the tax was not
"totally unknown".
3:40:53 PM
Co-Chair Stedman proceeded to Sec. 43.90.140. Initial
application review; additional information requests; complete
applications, on page 9 line 31 through page 10 line 14, asking
the recommendations of ExxonMobil.
3:41:17 PM
Mr. Massey suggested this language be amended to allow for a
"more efficient process" and that he would provide an example.
3:42:14 PM
Co-Chair Stedman asked the witness' position on the provisions
of Sec. 43.90.160. Notice, review, and comment, on page 11 line
1.
3:42:40 PM
Mr. Massey expressed that the legislature should have access to
"all the information". He stated that "from a constitutional
test standpoint," the legislature "should be involved through
enabling legislation like AGIA or the [former] Alaska Stranded
Gas Act; then they should look at the applicants and approve the
final selection of the applicant." This would "help the
constitutionality of whatever deal we end up cutting." This
provision was therefore, the "proper approach".
3:43:18 PM
Mr. Massey noted that Section 43.90.150. Proprietary information
and trade secrets., on page 10 line 15, had been bypassed. He
perceived this provision would require that an applicant's
proprietary information and trade secrets be made public.
ExxonMobil would not support this requirement. He predicted the
State would receive no "quality bid" because "no one is going to
give their trade secrets or proprietary information out to a
competitor." In place of this language, the provision should
stipulate that "if an applicant believes they have proprietary
information that is a trade secret that they note that in their
[application] when it's given and that not be made public."
3:44:24 PM
Co-Chair Stedman directed Mr. Massey to provide suggested
language that would "allow access to information but still
protect the corporate entities".
Mr. Massey did not oppose providing the proprietary information
to the State but did oppose allowing access to that information
by competitors.
3:44:52 PM
Co-Chair Stedman asked if ExxonMobil had concerns with the
ranking of proposed projects with the net present value as
provided for in Section 43.90.170. Application evaluation and
ranking., on page 11 line 19.
3:45:29 PM
Mr. Massey identified the "overriding objective of the ranking"
should be whether the proposal would "maximize the benefits to
the State. Net present value (NPV) was only one factor of a
multiple that should be considered. Other factors would include
some that would be "qualitative rather than quantitative" such
as "undiscounted cash flow".
3:46:05 PM
Co-Chair Stedman requested the witness provide suggested
language.
3:46:14 PM
Co-Chair Stedman directed attention to Section 43.90.200.
Certification by regulatory authority and project sanction., on
page 14 line 9, and asked for comment.
3:46:38 PM
Mr. Massey remarked that this language was unnecessary, and
should instead be "referred to as an objective of the State" and
the applicant be allowed to propose how it would address
expansions, open seasons, and access to the gas.
3:47:21 PM
Co-Chair Stedman next addressed Article 3. Resource Inducement.,
on page 19 line 25.
3:47:26 PM
Mr. Massey proposed that although the inducements listed in this
portion of the bill reflected the State's "view … of what they
should be", the applicants should instead present the resource
inducements that would make the project viable. The provisions
of Section 43.90.300. Qualification for resource inducement., on
page 19 line 26, would not allow for a commercially viable
project. As a result, "significant modification" would be
required, and should not be stipulated in legislation.
3:48:56 PM
Co-Chair Stedman spoke to Section 43.90.320. Gas production tax
exemption., on page 22 line 12, which pertains to upstream
fiscal stability. This provision would offer fiscal stability
for entities that participate in the first binding open season
and would offer that stability for ten years. He requested the
witness' "feedback".
3:49:08 PM
Mr. Massey asserted that this provision would not provide
adequate fiscal stability. The Palin Administration's
recognition of the need for such stability was "important"; but
this provision would address only "one aspect of the government
take". Subsequently, no fiscal stability would exist, as all
aspects must be addressed, including "where revenue comes from".
He again recommended that the applicant be allowed to propose
fiscal stability terms.
3:49:51 PM
Co-Chair Stedman announced preference to "operate under AGIA".
However, numerous concerns were expressed, and therefore a
"radical departure" could occur.
3:50:43 PM
Mr. Massey agreed and made the following statement.
What is necessary for us to be able to submit a conforming
bid, will require significant change to AGIA [in its]
current form. However, we would say that that should be in
the State's best interest. ExxonMobil is the largest
leaseholder of discovered gas resources. I believe you
would want to see what we would propose in the way of an
applicant that will allow this project to go forward. I
think we bring a lot to the project itself in terms of our
financial strength, our ability to execute, our ability to
make the project a reality, and it would be a shame if we
weren't allowed to participate in the AGIA process.
3:51:42 PM
Senator Elton understood ExxonMobil's desire to participate in
the AGIA process, as well as the company's position that this
bill was likely to not be "fixable". If ExxonMobil determined it
could not participate in the AGIA application process, he
encouraged it to participate in "an alternative way", which he
defined as "putting what you think you need to build a gas
pipeline on the table so that it can be part of the public
discussion when the Governor goes to public hearings with
hopefully a potential licensee; so that it can be part of the
Legislature's deliberations during the 60-day permit" process.
3:52:31 PM
Senator Huggins pointed out some predictions of success of a
natural gas pipeline project undertaken outside the AGIA
process, as well other predictions that such a project would not
be successful. He asked if ExxonMobil could envision a scenario
in which it could collaborate with other entities and
successfully construct a pipeline.
3:53:04 PM
Mr. Massey responded that the company must have a contract with
the State that "describes how we're [going to] share the revenue
on the upstream side of this project between the State and
ourselves before we can go forward." He surmised such a contract
could be entered into outside of the AGIA process under the
provisions of the Alaska Stranded Gas Act, or "outside of
legislation". Ultimately the contract would require legislative
endorsement.
Mr. Massey, addressing Senator Elton's comments, assured that
ExxonMobil would never "give up" on changing the provisions of
AGIA. The project was "too important" and the company must
participate in the AGIA process to "fix" the legislation.
3:54:13 PM
Co-Chair Stedman opined to Mr. Massey, "Hopefully the next time
you show up here, we'll have a contract and be going forward
under AGIA."
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 3:54:28 PM
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