Legislature(2015 - 2016)BUTROVICH 205
10/30/2015 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| Presentation: Aklng Project Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
THIRD SPECIAL SESSION
October 30, 2015
9:04 a.m.
9:04:47 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:04 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Steve Butt, Project Manager, AKLNG Project; Senator Cathy
Giessel; Senator Mia Costello; Senator Kevin Meyer; Senator
John Coghill; Senator Gary Stevens; Senator Charlie
Huggins; Representative Lora Reinbold; Representative Liz
Vasquez; Representative Les Gara; Representative Andy
Josephson.
SUMMARY
SB 3001 APPROP: LNG PROJECT & FUND/AGDC/SUPP.
SB 3001 was HEARD and HELD in committee for
further consideration.
PRESENTATION: AKLNG PROJECT UPDATE
SENATE BILL NO. 3001
"An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), ch. 1,
SSSLA 2015; and providing for an effective date."
9:05:37 AM
STEVE BUTT, PROJECT MANAGER, AKLNG PROJECT, explained that
he worked as the senior project manager for the Alaska's
Liquefied Natural Gas (AKLNG) project. He specified that he
worked for all the project partners to the AKLNG project,
which was formed in June, 2014; and included the Alaska
Gasline Development Corporation (AGDC), BP, ConocoPhillips,
ExxonMobil, and TransCanada. He shared that he had been
with ExxonMobil for just over 30 years, with most of his
time spent in project and production roles; including 14
years in South America, West Africa, and Qatar working on
gas and liquid natural gas (LNG) projects.
Mr. Butt explained that he wanted to show some slides and
give a detailed quarterly update that was provided to the
House and Senate Resources Committees in Palmer the
previous September. He shared that he would be utilizing
slides from the presentation in Palmer as well as other
previously used slides. He added that he would be providing
members with a book including all project updates that had
been given starting in September, 2014.
^PRESENTATION: AKLNG PROJECT UPDATE
9:08:10 AM
Mr. Butt drew attention to the PowerPoint presentation
"Alaska LNG, Fueling Alaska's Future: Project Update" (copy
on file). He discussed slide 2, "Alaska LNG - Project
Overview," which gave a high-level overview of the AKLNG
project, showed photos of various project sites, and
communicated the scope and breadth of the project. He
stated the intent of the project was to commercialize
between 32 and 35 trillion cubic feet of natural gas on the
North Slope, primarily in Prudhoe Bay (75 percent) and
Point Thomson (25 percent).
Mr. Butt drew attention to key elements of slide 2, such as
the central gas facility in Prudhoe Bay, which provided the
gas to the project and had successfully operated the oil
field for over 40 years by reinjecting gas to support
additional oil production. He furthered that the intent of
the project was, in the event of export, to take a portion
of the gas (currently being reinjected) and put it into a
treating facility to be cleaned, transported, and
liquefied. He pointed out a photo of an oil rig at Point
Thomson and shared that the facility hoped start up in
early 2016, furthering that the combination of the Point
Thomson and Prudhoe Bay resources were the "anchors" of the
project.
Mr. Butt continued to discuss slide 2, and related that he
would like to give project updates throughout the
presentation. He shared that the Prudhoe Bay and Point
Thomson operator had successfully worked with the Alaska
Oil and Gas Conservation Commission (AOGCC) to secure
permission for gas export for the first time. He furthered
that a facet of the decision was permission to take CO2
coming out of the AKLNG project and reinject it back into
the Prudhoe Bay field. He furthered that managing the CO2
had been a big risk that had been discussed since 2012, and
the regulatory decision by AOGCC was an important
milestone. He discussed the large amount of CO2 present in
the Prudhoe Bay field, and compared it to other LNG project
source fields, most of which had much less quantity. He
described the process by which the gas could be returned to
the ground, after an extraction process at a treatment
facility (indicated in the photo "Gas Treatment Plant" on
the slide); and noted that care was needed since CO2 could
be a greenhouse gas. He anticipated that the project
(extracting 12 percent from the Prudhoe Bay field and 4
percent from the Point Thomson field) would put roughly 450
million cubic feet of CO2 back into the ground every day,
which would equate to 4.5 trillion cubic feet over the life
of the project. The CO2 processing was an enormous
undertaking which added to the expense of the gas treatment
plant, and would cost the project $10 billion to $12
billion.
9:12:51 AM
Mr. Butt continued to speak to slide 2, and updated the
committee on the continuing work on the pipeline, which
went just over 800 miles from the Prudhoe Bay area to the
terminus in Nikiski. He discussed the size of the pipeline
and related that the project had focused on the 42-inch
pipeline after research indicated it was sufficient. The
state had requested that the AKLNG project review a larger
diameter (48-inch) pipeline. The project had received the
42-inch pipe materials for testing from a mill in the Lower
48, and the 48-inch pipe materials were ordered and
expected to arrive in January 2016. Testing on both systems
was expected to be done approximately by April 2016; along
with the Pre-Front-End Engineering and Design (Pre-FEED)
work.
Mr. Butt discussed continued work on the liquefaction
facility in the Nikiski area; and detailed activities such
as securing acreage, geophysical and geotechnical testing,
and progress on the plant design. The work would inform
resource reports for the Federal Energy Regulatory
Commission (FERC), which would allow the project to obtain
the needed permits. He estimated that the project had
invested approximately $430 million between the concept and
Pre-FEED stages. The majority of the project funds went
toward the cost of permits, which were needed to begin
construction. The project submitted the first set of permit
requests in January 2014; and in January 2015 the resource
permits were submitted. In May 2015; FERC agreed to create
a docket for an environmental impact statement (EIS), the
second draft of which would be complete in the first
quarter of 2016, leading to an EIS application in the
fourth quarter of 2016.
9:15:04 AM
Co-Chair MacKinnon referred to past projects that had
attempted to monetize Alaska's North Slope gas, using
examples such as the Denali project, and wondered if more
funds were being spent to forward the AKLNG project with
the current partnership structure. Mr. Butt thought that
every past project had a different element that made it
unsuccessful or uneconomic to progress; including the Yukon
Pacific project, the Denali Pipeline project, and the
Alaska Pipeline Project (APP)[a joint effort between
TransCanada Corporation and ExxonMobil Corporation to
develop a natural gas pipeline under the Alaska Gasline
Inducement Act (AGIA)]. He thought it was difficult to have
a robust gas project, due to the tight profit margin and
particularly when the gas needed treatment and transport.
He furthered that most projects did not have their own
pipeline, nor were most projects removing a commensurate
amount of C02. He discussed the plentitude of gas in the
Lower 48, which had been a detriment to past projects that
were trying to move gas there.
Mr. Butt thought there were elements of AKLNG which were
different than past projects; it was an integrated LNG
project with a large volume of gas underpinned by foreign
markets, which tried to make enough economy of scale to
make the project viable. If the project were big enough and
accessed enough market with LNG, it could be justified
economically. He mused that a pipeline could only go from
one fixed point to another, while liquefied gas could be
moved anywhere and was much more flexible with broader
markets and strengths to give it economy of scale. He
considered the most important difference from past projects
to be the fundamental intent of the project design; with
the producers and the state working together to
commercialize the resource.
9:19:51 AM
Mr. Butt furthered that the state had a derivative right to
the revenues from the production of LNG from the leases.
The state received royalty shares at Prudhoe Bay and Point
Thomson, taxes, and different forms of tax structures; all
of which the state would take in the form of a share of the
gas. He discussed the favorable alignment of the four
parties who had a claim on the gas, with a focus on driving
down costs and finding buyers to drive up price to create a
profit margin. He mentioned other projects in the state
that were not necessarily as well aligned, and had
experienced value transfer and value leakage. He summarized
that AKLNG was designed to be more flexible and economic,
and had tried to create alignment between the state and the
producers, which put the state in a role of a project owner
rather than merely a revenue receiver.
Vice-Chair Micciche inquired about a spend-comparison to
past projects, as a way to see how far along the project
had progressed, and asked for a total of expenditures of
the AKLNG project to date. Mr. Butt estimated the spend to
date to be approximately $430 million to $435 million
total, with about $110 million spent on concept design,
about $305 million spent through the end of September, with
estimated monthly spending at about $30 million. He thought
that through the end of 2015 spending would be over $500
million.
Mr. Butt considered total spending to be a good way to
measure progress, however he thought milestones were a
better way. He recalled that Yukon Pacific had received an
EIS, which was a great achievement, and as of yet AKLNG had
not attained one. He noted that the project had received
(from the U.S. Department of Energy) the two export permits
required to underpin export, and only a handful of current
U.S. projects had achieved the same. He recounted that the
AKLNG project had received authorization in under a year,
after completing several hundred pages of documentation to
support the permit request for both free trade and non-free
trade countries. The project had also advanced the FERC EIS
through the first set of resource reports and were close to
the second set, none of which had been completed by past
projects. He specified that there would be a later slide
that addressed the larger process.
9:24:35 AM
Vice-Chair Micciche asked for the spending to date on Point
Thomson. Mr. Butt relayed that the Point Thomson operator
had publicly expressed that they had spent nearly $4
billion to develop the resource.
Vice-Chair Micciche asked about the value of Point Thomson
without the AKLNG export project. Mr. Butt discussed the
size of Point Thomson, which had about 6 trillion to 8
trillion cubic feet of gas, a few hundred million barrels
of oil; and the vast value of the resource was in the gas.
ExxonMobil, in partnership with BP and ConocoPhillips, had
put in $4 billion dollars. The facility would make about
10,000 barrels per day of condensate, which did not
constitute a wise investment. He stated that Point Thomson
was designed for the export of gas; and the facilities were
built, integrated, and intended to be used for the AKLNG
project gas export. He detailed that the project worked
very closely with the Point Thomson and Prudhoe Bay
operators to keep the designs integrated. He discussed
calibration of equipment in the high-pressure, high-volume
system that was sensitive to even minute changes. He
projected that the project could produce about 3.3 billion
to 3.7 billion cubic feet of gas, with about 2.4 billion to
2.5 billion cubic feet per day of LNG, which was ten times
what the state used; and as much gas as the country of
Germany could use. He projected that, with a timely start,
future AKLNG gas production could constitute more than five
percent of the global LNG demand. He reiterated that it did
not make sense to spend $4 billion to develop Point Thomson
for only 10,000 barrels a day of condensate, but it would
make sense as a part of the larger project. He referred to
the Point Thomson Settlement [a 2012 settlement between the
State of Alaska and leaseholders (ExxonMobil Corp and
partners) regarding the development of Point Thomson] and
the importance of being a stand-alone project.
9:28:11 AM
Vice-Chair Micciche asked if there was any potential for
the Point Thomson project to have a positive value to the
developer if it was unable to monetize the gas. Mr. Butt
thought it depended upon the price of condensate, but at
the current price it was not favorable.
Vice-Chair Micciche thought it was fair to combine the $4
billion investment into the potential investment of the
AKLNG project. Mr. Butt viewed the funds that had been
expended toward the Point Thomson (as well as funds
expended toward developing Prudhoe Bay) to be part of
project development of AKLNG.
Vice-Chair Micciche stated that billions had been spent in
preparation for AKLNG, and he thought such unprecedented
level of investment demonstrated the states seriousness
about the project.
Senator Hoffman asked Mr. Butt to discuss the previous
comment that the project producers needed the state at the
table. Mr. Butt discussed the importance of good
relationships with the sovereign (State of Alaska) due to
the complex and difficult nature of the project. He
emphasized the importance in having confidence in the
ability to work through challenges with the sovereign. He
thought that the most successful LNG projects he had
observed were ones in which the state had a clear role and
in which there was a good working relationship.
9:32:14 AM
Senator Dunleavy discussed the aforementioned $430 million
spent on the project and wondered who had spent the funds.
Mr. Butt explained that funds were spent by all the project
participants, and the four parties had each spent 25
percent. He clarified that the spending on Point Thomson
was by the Point Thomson participants, which was a little
different.
Senator Dunleavy referred to concern that the state was
spending large amounts of money to no end, and thought that
the project partners equivalent spending was a good sign.
Co-Chair MacKinnon explained that the committee represented
the population of Alaska, and she hoped the project
partners understood that the legislature and administration
were responsible to the people. She expressed support for
the project and support for the administration in being the
head of state and leading the project to a successful
conclusion.
Mr. Butt discussed slide 3, "Alaska LNG - Project
Overview," and reviewed the spending and completion rates
for various project stages. He relayed that the project had
spent about $303 million on the Pre-FEED stage, and $110
million on the concept design that preceded the Pre-Feed
stage. He thought that spending would begin to taper off.
He discussed the design scope, specifying that it was about
83 percent completed and was sufficient to inform the
resource reports and make decisions. He discussed the scope
of the work within the Pre-FEED stage, and the goal of
trying to "de-risk" the project in order to understand a
detailed level of executable plans that included materials
and expertise.
Mr. Butt reported that the summer field work was about 100
percent done, and had been comprised of approximately 250
people in Alaska, 80 percent of which were Alaskans. Most
of the summer field workers were involved in testing the
route to determine environmental impacts, including
examination of historical and archeologically significant
sites. He continued that Alaska Native historical sites had
been found in proximity to the pipeline route, and after
working with the Department of Natural Resources State
Historic Preservation Office to document and protect the
sites, the route was changed. He added that the project had
worked with AGDC to complete and confirm the pipeline
route, which also provided information for the resource
reports. He expressed great appreciation that the field
season was completed without a single safety incident.
9:37:40 AM
Mr. Butt discussed the 2016 work program and budget (WP&B),
and explained that it had been completed and submitted to
the project partners. He clarified for the committee that
on December 4, 2015, all parties remaining in the project
were required to make an affirmative election on the WP&B
for 2016. In the event that any partner elected to not
invest in the project and move forward, the project would
go in to wind-down stage or would cease. He specified that
the WP&B would define in great detail who would complete
particular tasks to accomplish specific goals to advance
the regulatory work, complete the project design, and
attempt to drive down costs.
Co-Chair MacKinnon referred to increased funding being
requested in the bill, and asked if the project partners
had pre-approved the Pre-FEED expenses. She wondered if the
project operated differently than the state with regard to
needing ongoing approval for funding. Mr. Butt conveyed
that traditionally partners (state or private enterprise)
funded projects in phases, and furthered that he had a
slide to illustrate the AKLNG project phases. He thought it
very uncommon and problematic to fund on an annual basis,
explaining that the uncertainty of such a method created
risk. He furthered that normally all parties invested by
phase that was not tied to a calendar. He asserted that the
structure of the funding (a construct that was part of the
Pre-FEED process) was unique and did not exist in most
other ventures.
Co-Chair MacKinnon reminded Mr. Butt that the committee was
new to the negotiation table and was doing its best to
provide stability. She agreed to move the work plan forward
as quickly as possible within the process.
9:41:18 AM
Mr. Butt referred to the aforementioned book that would be
provided to all legislators, noting that there were key
messages that had been consistent in every project review
for the last three to four years. He emphasized that the
integrated AKLNG project was much bigger and more complex
than a pipeline. To have a product that could access world-
wide markets, the gas must be liquefied and cleaned. The
gas liquefaction and treatment facilities were major
project components, and without them the pipeline
(constituting only 20 percent of the project cost) would
not make sense.
Mr. Butt suggested that because AKLNG was a FERC Section 3
regulated project, it was a different construct than
traditional pipeline projects. In a traditional pipeline
project, such as APP and Denali, FERC regulations dictated
that the people who built the pipeline were unable to talk
to the people who sourced the gas because it was considered
an anti-competitive act. The regulatory concerns pertaining
to anti-trust resulted in a lack of communication and idea-
sharing. He referred back to the fundamental alignment
between the state and the project partners, and revealed
that under FERC Section 3 all parties in AKLNG were allowed
to communicate, which allowed for beneficial project
integration and extensive cost savings.
9:45:06 AM
Mr. Butt emphasized the importance of competing in a global
market. He considered the single most important metric of
the AKLNG project was to determine if LNG could be
delivered to the global market for less than it cost to
generate. He listed important factors for project success
as alignment, risk reduction, and cost reduction.
Mr. Butt discussed the importance of alignment and how it
related to the project. Rather than working on complex
commercial challenges, it was important to streamline for
maximum profitability and commensurate return to each
partner.
9:48:12 AM
Senator Olson thought that the state was at a disadvantage
by utilizing consultants rather than technically qualified
in-house employees who shared the same philosophy and were
part of the same team. He discussed the technical
qualifications of the individuals who were working on the
state's behalf, and wondered how Mr. Butt could allay his
concerns. Mr. Butt thought that Senator Olson made a fair
comment. He restated the importance of alignment, and
thought that ideally the project would be structured so
that all parties equally benefitted. He used the example of
a comparably-structured LNG project in the South Pacific
which had come in under budget and ahead of schedule, in
which the sovereign had a 23 percent interest. He stated
that the partner structure was not designed to create
commercial advantage or disadvantage; but rather intended
to create a sense of trust and alignment.
Mr. Butt moved to slide 4, "Project Team", and highlighted
a photograph of the project team, which he described as
incredibly experienced. He acknowledged that there was a
difference in background and experience, and understood
Senator Olson's concern.
9:52:07 AM
Mr. Butt continued to discuss slide 4, noting that a new
role had been added to the organizational chart. He
described that there were about 135 people working in four
different offices: an office in Anchorage managing
regulatory issues and community affairs, an office in
Calgary where the pipeline was being designed, an office in
Houston where the LNG plant was being designed, and an
office in Denver where the gas treatment plant was
designed. He explained that the teams were in place in the
chosen cities due to design and contracting expertise in
place in each location.
Mr. Butt discussed the integration of the AKLNG team, and
the process of how AKLNG jobs were staffed. He referred to
the principle of "the best player plays", and elaborated
that there were organizational charts with specific job
descriptions with clear deliverables and resourcing
requirements. He outlined the staffing process by which
project roles were filled, where managers from each project
partner constructed lists of qualified employees to
potentially fill roles in the project. He discussed
integration of employees from all the partners using
balance and succession plans.
9:56:58 AM
Senator Hoffman referred to two positions on the
organizational chart that were staffed by employees of
TransCanada. He wondered how the positions would be
addressed if TransCanada left the project. Mr. Butt
outlined that TransCanada had committed to have employees
in place through May 2015; and added that the pipeline
deliverables were targeted to be completed by April 2015.
He verified that there were 15 employees from TransCanada
on the AKLNG project, 12 technical professionals and 3
support professionals. Between January 2016 and May 2016
the project would work with TransCanada and other partners
to find a place where the employees could migrate back into
productive roles in their parent corporation and then be
replaced. The employees would transition from 15 to about 4
or 5 by the end of May 2015. TransCanada had also committed
to ensuring all Pre-FEED deliverables were done, as well as
making sure the employees were accessible through different
contract structures such as secondment.
Mr. Butt discussed secondment agreements, under which a
person from another company was contractually part of the
lead party's organization. Under the Pre-FEED joint venture
agreement (JVA), ExxonMobil was the lead party because it
owned the largest share of gas between Prudhoe Bay and
Point Thomson, which meant it had the obligation to use its
systems in a way that drove down costs for everyone. He
added that when individuals from other companies came in as
secondees, they signed an agreement that they would be
treated exactly like every other employee and have access
to all information, but promised to treat the information
in a confidential manner.
Mr. Butt continued discussing secondment agreements and
used the example of AKLNG project manager Mike Britton, who
had access to all the project information, but had agreed
to protect information that was "lead party intellectual
property" (such as how certain things were built). He
elaborated that a trust relationship was fostered so there
were no barriers within the team. He asserted that
confidentiality to the project was about preserving
competitiveness. He elucidated that a project team such as
AKLNG would not want the information it created to be used
by other project teams to get their cost of supply down to
capture market share that AKLNG wanted to capture. He
clarified that there were confidentiality structures to
share information with all project participants and
signatories so they could see everything. Additionally, the
confidentiality structures were for companies AKLNG worked
with - the company that built the large cryogenic heat
exchangers had spent decades perfecting the technology and
they wanted to protect it from their competitors. He
summarized that the confidentiality structures were not
intended to undermine the free flow of information; rather
they were intended to ensure the project was as competitive
as possible and could access the best suppliers.
10:02:22 AM
Co-Chair Kelly discussed confidentiality agreements, and
referred to the hundreds of contractors that had been
mentioned. He wondered how many confidentiality agreements
were signed in the course of the project. He referred to
heated debate regarding the agreements, and inquired about
the problems that were created when an individual refused
to sign a confidentiality agreement. Mr. Butt qualified
that individuals signed agreements back to the
corporations. He related that he had signed only one
confidentiality agreement, indicating that as an employee
of ExxonMobil, he would honor all confidentiality
agreements of ExxonMobil. He explained that the
confidentiality agreements of a company were binding to
every individual in the company. He thought that AKLNG had
a couple dozen suppliers with confidentiality/non-
disclosure agreements currently in place, but would have
hundreds by the end of the project.
Mr. Butt discussed some concerns pertaining to AGDC that
were put into public record two weeks previously. He
stressed the importance of creating simple structures to
protect those that were partnering with the project,
pointing out the difficulty and complexity of operating a
successful project with some individuals having waived or
foregone confidentiality agreements. He summarized that
confidentiality structures reinforced the alignment and
competitiveness that was necessary for a successful
project; and helped ensure that groups such as the
committee, the legislature, and broader participants in the
state could have confidence that the state's investment was
being used well.
10:08:33 AM
Co-Chair Kelly asked for a description of possible problems
if a key decision-maker did not participate in a
confidentiality agreement. Mr. Butt explained that in the
event that an individual were to receive confidential
information and chose not to keep it confidential, anyone
who had provided the confidential information would have
breached their confidentiality agreement. The
confidentiality agreement was between the people that
signed the agreement, and people outside the agreement were
not bound by it. He related that there had been
conversations with representatives from the state about
making sure that regardless of a confidentiality agreement
in place (or not); they would honor the information as
confidential and treat it as such, and all agreements on
the information were going to be treated as confidential
before it was transmitted.
Mr. Butt expressed that at some point he would be going
beyond his area of expertise in project management and
design if the committee was to discuss confidentiality
agreements further. He reminded the committee that AKLNG
had already signed multiple confidentiality agreements with
key suppliers. He shared that the company that provided the
chemical to separate the CO2 from the gas had one of the
most strict confidentiality agreements that could be found,
and explained the motivation for such a strict policy was
the protection of their chemical formula. He furthered that
AKLNG could not proceed without the supplier, and the
supplier was aware of the fact.
Co-Chair Kelly asked if there was a key decision-maker who
was not under a confidentiality agreement, was it true to
say the individual could not make decisions in the best
interest of the organization they represented. Mr. Butt was
not sure if he was qualified to answer the question.
Vice-Chair Micciche stressed that all of the committee's
discussion was in aid of ensuring that the state had an
organization that could bring full value of the AKLNG
project to the State of Alaska. He discussed the attorney
general and confidentiality agreements. He used DOR and DNR
as examples of state agencies that frequently utilized
confidentiality as a matter of course. He related a
personal story regarding a confidentiality concern while he
was Mayor of Soldotna. He wondered how the legislature
could balance the difference between the need for
confidentiality and with the ability of the administration
to fully participate in the project and share the necessary
information.
10:13:57 AM
AT EASE
10:15:13 AM
RECONVENED
Vice-Chair Micciche thought perhaps his previous question
was a better question for the attorney general, and decided
to withhold his question for a future date. He felt sure
that important information about the AKLNG project could be
shared with the public while still being fully functional.
10:15:47 AM
Co-Chair MacKinnon mentioned a letter that directed the
attorney general to manage the special legislative session.
She pointed out that there were no administrative officials
in the committee room. She noted that the attorney general
was scheduled to testify in the committee later in the day.
She hoped that administrative employees would be prepared
to answer questions later in the day with regard to
confidentiality, in aid of preserving competitiveness and
creating alignment within the project partnership.
10:17:47 AM
Mr. Butt presented slide 5, "AKLNG Project Scope":
AKLNG Project Team - Pre-FEED Project Scope (under
JVA)
•Integrated Project Design Basis
•Train sizes and configuration
•Finalize Plot Plans
•Driver-compressor selection
•Air emissions and modeling
•Finalize Process Design
•Generate data for Resource Reports
•Finalize Pipeline Size and Route
•Cost & Schedule Deliverables
•FEED Execution Plan
•Regulatory/Permitting Plan
•ITT and FEED Contracting Plan
Other Activities being executed by Co-Venturers &
State of Alaska (Commercial Work by CoVs)
•SoA - Gas Fiscals, PILT, RIK
•Governance for FEED and beyond
•Long Term Organization, including roles and
responsibilities
•FERC Filings
•Commercial / Fiscal / Regulatory Agreements
•Gas supply / balancing
•Upstream Agreements
•Others…
Keys to Success (ARC)
•Alignment
•Risk reduction - reducing the range of
uncertainty (perceived risks)
•Cost reduction and predictability
Mr. Butt differentiated the two categories of AKLNG project
roles as listed on the slide. The AKLNG project team did
design and regulatory work under the JVA to make the
project less risky and drive down costs, and to secure the
needed permits to evaluate whether the project could move
from Pre-FEED into the FEED stage. He pointed out that in
addition to the 135 employers and 100s of contractors
supporting the project team, there was commercial work done
by the co-venturers and the State of Alaska. He specified
that each company in the project had dedicated dozens of
people to the commercial activities of establishing
structure to help the project move forward, while the other
team finished the work required to get certainty to move
forward.
10:19:25 AM
Mr. Butt presented slide 6, "Project Development Phases,"
and discussed the phased/gated project management process
used to manage large projects. He emphasized the importance
of making sure all project participants were ready to move
through each of the phases. He listed the development
phases, including concept select, optimize (Pre-FEED),
define (FEED), and execution-startup. The concept select
phase was where the "how" of the project was defined; key
questions as to line size, location of gas and LNG plants,
and plant size were addressed. He specified that the
concept select phase was completed in June 2014. The
current phase was optimize (Pre-FEED), where the project
endeavored to drive down costs, advance regulatory work,
make sure the design would work and be executed. He
specified that the 2016 WP&B supported the work in the Pre-
FEED stage but also set up the project for the FEED stage.
The FEED stage involved taking the simple and rudimentary
designs and making them more complex and with
specifications for building. The final phase was execution,
in which the project reached final investment decision
(FID) and the project was actually built.
Mr. Butt drew attention to the "Project Influence Curve"
graph on slide 2 and pointed out that as the project moved
through the phases, the ability to make changes and
influence details diminished. Conversely, the amount of
money spent increased and reflected the actual forecasted
spending line for the project. The spend line represented
about $30 million per year doing concept work, and in the
Pre-FEED phase, $30 million per month was spent to do the
more detailed design. He estimated that in the FEED phase,
the project would spend $30 million per week to be more
detailed, and in the in the final phase the project would
spend $30 million per day to procure and construct for the
project. He stressed the importance of honoring the
function of the different project phases, in order to
prudently spend larger amounts of money when the project
was fully defined, informed, and permitted. He discussed
how the margin for error factored in to the curve, and
decreased as the project approached the final phase. He
described how other projects failed after spending too much
money in the initial phases and not completing the
important preparatory work.
10:25:37 AM
Co-Chair MacKinnon discussed recent remarks by the director
of the Office of Management and Budget, which pertained to
the administration's interest in moving items normally done
in the FEED stage back to the Pre-FEED stage. She asked
about the fiscal consequences of altering the staged
project management, and wondered if more discussion would
be needed. Mr. Butt discussed the concept of moving work
forward to diminish uncertainty, and related it back to the
concept of alignment. He outlined that it was a conscious
decision to spend more money and do more work to accomplish
certainty, and emphasized the need for agreement of all
parties since it was not without consequence.
Co-Chair MacKinnon asked if there were instances in which
transitioning work from the FEED to the Pre-FEED stage cost
more money and perhaps had to be re-done. Mr. Butt
responded in the affirmative, and added that it was
especially so in a highly regulated project like AKLNG.
Mr. Butt went back to slide 6, concluding that the project
was on schedule to complete the Pre-FEED phase by mid-year
2016 and would be ready for a FEED decision by mid-year
2017, and the work was being done at cost or below original
estimates. He stated that other than a few items that had
been added to the work scope, the AKLNG spend was
underneath what was forecasted, no contingent monies were
spent, and the project was continuing to liquidate work
effectively.
10:29:50 AM
Senator Dunleavy discussed the different attempts to
monetize gas in the past, and thought that oil was more of
a priority for resource extraction at the time, with gas
being used as a lifter [gas can be injected to lift oil to
the surface of a well]. Mr. Butt agreed.
Senator Dunleavy referred to research on monetizing gas,
and thought AOGCC made a ruling regarding taking a certain
amount of gas from the North Slope. Mr. Butt agreed.
Senator Dunleavy asked if the ruler of Qatar was required
to sign a confidentiality agreement, and wondered if he was
able to access any information he wished. Mr. Butt was
unsure of the answer.
Senator Dunleavy questioned if Mr. Butt worked for the
legislature or worked for the project. Mr. Butt shared that
he worked for the State of Alaska as a participant paying
25 percent of the bills, and viewed the legislature as a
kind of board representing Alaskans. He viewed the project
as working for all Alaskans.
Senator Dunleavy expressed that he had felt confusion as to
who was in command of the project and who was making the
decisions. He asked what concerns Mr. Butt had if
TransCanada were to leave the project. Mr. Butt referred to
the loss of access to TransCanada's experience and
expressed confidence in the experience of the other project
partners. He reiterated that TransCanada had committed to
help finish the Pre-FEED deliverables.
Senator Dunleavy inquired if Mr. Butt was confident that
AKLNG could bridge the experience gap through secondment of
employees. Mr. Butt responded in the affirmative.
Senator Dunleavy queried about research on a larger 48-inch
pipe, and wondered if the state had requested the
information rather than the other project partners. Mr.
Butt answered in the affirmative.
Senator Dunleavy asked if the price for the research was
approximately $30 million. Mr. Butt replied in the
affirmative.
10:33:35 AM
Senator Dunleavy asked how the state could be assured that
there was alignment on the value side (money going out), if
the joint marketing agreements were not in place. Mr. Butt
stated that he was not a marketer, and referred back to
slide 5, pointing out that marketing was included in the
"Other Activities being executed by co-venturers and State
of Alaska" role. He emphasized the need for transparency
throughout the project and assurance that the state's share
of the resource was commensurate with the share it would
get out. He thought there were other individuals more
equipped to assist Senator Dunleavy in his inquiry.
Senator Dunleavy wondered if the current partnership was
the ideal structure for all partners to get what they
wanted, or was there another model that could work better.
Mr. Butt thought there was always room to improve, and
emphasized that the AKLNG project had endeavored to learn
from past projects which were unsuccessful. He discussed
the need for building alignment with the state, in order
for it to have a seat at the table and operate under the
same rules and structures as the other partners. He thought
that AKLNG was pursuing a very effective model that had
been successful for all participants (including sovereigns)
in other places.
Senator Dunleavy requested Mr. Butt to give the committee
parting thoughts or considerations regarding the exit of
TransCanada from the AKLNG partnership. Mr. Butt extended
his thanks to the TransCanada team for the work they had
done in the concept and Pre-FEED stages of the project. He
referred to the succession planning and transition planning
that was in place with TransCanada and thought it was at
the state's discretion to work through the transition
process.
10:37:50 AM
Vice-Chair Micciche discussed FID for AKLNG and asked Mr.
Butt to comment on the eventuality of a negative decision
with partners in disagreement, as well as what financial
decisions were part of FID. Mr. Butt explained that in the
event that partners did not choose to progress into the FID
stage, there would be work products and deliverables that
would help inform what it would take to build and construct
the project. He related that often projects were not
progressed in FID often because of a fundamental change in
the market, and investors viewed it as imprudent to put
resources into a project without a reliable return. He
thought that key decisions in FID included technical
confidence and regulatory certainty. He emphasized trust
and issue resolution and thought that AKLNG had learned
from history and set up a structure through which parties
could work together and use best practices from industry,
while using a disciplined approach.
Vice-Chair Micciche discussed the necessity of learning the
best way to move forward with the project, and stated that
he did not have a "project at all costs" mentality. He
thought the entire legislature was excited about the
potential for AKLNG.
10:42:27 AM
Senator Bishop commented on the engagement information on
slide 7, which included community outreach events and
meetings with Alaska Native regional and village
corporations, and stated that he would like to have an
expanded discussion with Mr. Butt at a later time. He
referred to a labor study done by a third party, and asked
for Mr. Butt to provide him with a copy. He wondered what
percentage of the AKLNG project had been factored in for
labor cost.
Mr. Butt spoke to the positive relationships that had been
created with the Native corporations, and pointed out that
one of the Native corporations was directly working with
AKLNG on the gas treatment plant and LNG plant designs. He
furthered that there were multiple Native corporations
supporting the AKLNG summer field work. He stated that the
labor studies were being done in conjunction with the
Department of Labor and Workforce Development and
Commissioner Drygas, and agreed to share them with Senator
Bishop. He specified that he was unsure of the percentage
of labor cost in the AKLNG project until the labor studies
were completed.
Co-Chair MacKinnon thanked Mr. Butt for appearing before
the committee. Mr. Butt stressed the importance of having
differences of opinion within the state and producer
parties; it meant partners were engaged and trying to
resolve issues. He emphasized the importance of resolving
issues in an aligned manner and in a constructive way that
worked for all parties to move through the project phases.
10:46:22 AM
Co-Chair MacKinnon applauded the administration for
withdrawing the proposed oil reserves tax from the special
session agenda, and for helping to place some additional
certainty in the project with regard to the financial
structure. She referred to three letters, two of which were
mentioned by the governor in a press conference and
included information about gas agreements. The mention of
gas agreements had included a date of December 4, 2015. She
wondered why the governor had not referred to a letter from
Exxon Mobile in the press conference, which had mentioned a
confidentiality agreement that had been submitted to the
administration. Mr. Butt confirmed that he had read the
letter in question, and that it did contain reference to a
confidentiality agreement. He furthered that the letter was
sent by a marketer, on behalf of trying to come up with a
marketing structure.
Co-Chair MacKinnon discussed the attorney general and the
aforementioned confidentiality agreement. She stated that
in the same letter there was reference to a gas sales and
purchase agreement, and expressed concern regarding an
"artificial deadline." She asked if Mr. Butt could convey
information regarding what was required to negotiate a gas
sales agreement. She wondered if the negotiations required
the presence of attorneys. Mr. Butt reiterated that his
area of expertise was the project itself, but offered to
give a general industry perspective. He advised that gas
marketing agreements were complex, as they dealt with a
large quantity of gas over a long period of time. He
asserted that the expediency with which the agreements were
negotiated depended upon whom was participating, and the
skill they employed. He felt that it would be inappropriate
to offer the committee a construct around dates or
complexities. He summarized that the agreements were part
of the gated project structure, and it was important to
ensure that all parties had what they needed to move
forward and make decisions.
Co-Chair MacKinnon wondered if the committee was interested
in hearing more information about the complexity of a gas
sales agreement. She expressed her interest in furthering
her own knowledge on the subject. She suggested that, with
the support of the committee, she would reach out to
enalytica [legislative contractors advising on AKLNG] with
a request for information. She referred to the December 4,
2015 date in the letters and thought expediency was
important in order to support the governor and his team on
the proposed buyout.
Vice-Chair Micciche expressed interest in obtaining more
information regarding gas sales agreements.
10:51:11 AM
Co-Chair Kelly asked for a rough approximation of the
amount of a potential gas sales agreement. Mr. Butt stated
that for 32 trillion to 35 trillion cubic feet of gas, the
number of dollars involved would be determined by those
determining the values of the product.
Co-Chair Kelly asked if the amount would be potentially
hundreds of billions. Mr. Butt said yes.
Co-Chair Kelly asked if the agreements needed to be
negotiated with each project partner. Mr. Butt responded in
the affirmative, and stated that the three letters Co-Chair
MacKinnon had mentioned were part of bilateral discussions
on how the agreements would be worked.
Co-Chair Kelly asked if the discussions and agreements had
to be completed by December 4th.
Co-Chair MacKinnon clarified that two of the three letters
in question referred to parties that had committed to try
and reach an agreement by December 4, 2015; but she was
unclear if the task was possible. She thought a high-level
overview of the potential agreements and financial
consequences to the state (both positive and negative)
would be helpful to the committee. She discussed having a
one to two-hour informational session as soon as possible
in order to understand the gas agreement and how it might
be affected by the letters that were mentioned in the press
conference.
Co-Chair Kelly stated that he would also like to get more
information on gas sales agreements, and stated he would
encourage enalytica to keep any prepared information as a
high-level overview, to understand the scope of the project
rather than the smaller details.
Co-Chair MacKinnon commented that the state was new to
partnership participation, and reminded Mr. Butt that there
were 60 legislators trying to understand the project on
behalf of their different constituents. She remarked that
the governor was leading the state forward and the
committee wanted his team to be as prepared and supported
by the legislative body as possible.
ADJOURNMENT
10:54:44 AM
The meeting was adjourned at 10:54 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 3001 103015 AKLNG Legislative Update 30Oct15 v1 2xBU.pdf |
SFIN 10/30/2015 9:00:00 AM |
SB3001 |