Legislature(2013 - 2014)SENATE FINANCE 532
02/19/2014 05:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Natural Gas, Federal Perspective and State Participation | |
| Presentation: Review of Royalty Study and State Equity Position | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 19, 2014
5:07 p.m.
5:07:35 PM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 5:07 p.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Larry Persily, Federal Coordinator, Alaska Natural Gas
Transportation Projects; Deepa Poduval, Principal
Consultant, Natural Gas and Power Fuels Group, Black and
Veatch Management Consulting.
PRESENT VIA TELECONFERENCE
Jason De Stigter, Senior Consultant, Natural Gas and Power
Fuels Group, Black and Veatch Management Consulting.
SUMMARY
PRESENTATION: ALASKA NATURAL GAS, FEDERAL PERSPECTIVE and
STATE PARTICIPATION
PRESENTATION: REVIEW OF ROYALTY STUDY and STATE EQUITY
POSITION
Co-Chair Kelly stated that the presentations were related
to SB 138, which was not currently in committee.
^PRESENTATION: ALASKA NATURAL GAS, FEDERAL PERSPECTIVE and
STATE PARTICIPATION
5:08:49 PM
LARRY PERSILY, FEDERAL COORDINATOR, ALASKA NATURAL GAS
TRANSPORTATION PROJECTS, read verbatim from a prepared
statement (copy on file):
For the record, I am Larry Persily, head of the
federal Alaska gas line project office.
Thank you for the opportunity to testify today. I hope
my comments are useful for your deliberations and
answer some of your questions.
I'd like to explain why this time may turn out
differently than all the other attempts at a North
Slope gas line.
But first, I have two examples of Washington taking
notice of what's happening in Alaska.
I know normally Alaskans don't like to hear that the
federal government is watching our resource
development - but trust me, this time it's OK.
I presented an update on the Alaska LNG project last
week at the Department of Interior, speaking to the
Alaska Interagency Working Group which created by
presidential executive order almost three years ago to
track and help coordinate the work of federal agencies
for onshore and offshore energy projects in Alaska.
As I started talking about the Alaska gas line, people
actually paid attention and asked good questions.
They've heard about Alaska gas many times before. And
their agencies have spent a lot of time on the many
false starts in years past.
But they had heard and read that this time might be
different - and they were eager to know what was
happening.
They had heard that all of the players are working
together on the same project and spending serious
money to determine if Alaska's time finally has come.
Between budget cuts, retirements and other staffing
reductions, however, federal resource management and
regulatory agencies don't have any spare time for
another false start - like they went through a few
years ago with a proposed pipeline from Alaska to
serve North American markets.
Though sponsors of that project tried in good faith to
make it work, shale gas put an end to it - but not
before federal agencies had spent a lot of time on
permitting issues, rights of way, scoping meetings and
reviewing draft resource reports for an environmental
impact statement.
The Federal Energy Regulatory Commission, Department
of Energy, Bureau of Land Management, Army Corps of
Engineers and others have more than enough files on
their desks without the Alaska gas line.
FERC alone has several Lower 48 LNG export terminals
on its work list for environmental review.
The Department of Energy has two dozen LNG export
applications waiting for review, including
applications from the existing ConocoPhillips plant at
Nikiski.
Federal agencies are the same as Alaskans - they don't
want another false start.
But every one of those agencies is ready to work on
the Alaska LNG project just as soon as an application
hits their desk. They would just like to know that
this time it has a real shot at making it.
I told them last week what I am going to tell you --
and this is coming from someone who is generally very
cynical and skeptical.
This time very well may be different. If the markets
perform as expected, if the companies and the state
can keep the costs down, if the financial terms look
good to all parties, you could see gas flowing in the
2020s.
The latest non-skeptic in Washington is Adam
Sieminski, head of the Energy Information
Administration at the Department of Energy.
"We think the economics ultimately will favor
construction of an LNG facility in Alaska," Sieminksi
said in an energy newsletter interview this week.
So why this time?
Global LNG demand is the strongest growth industry for
energy. Between nuclear plant shutdowns in Japan and
Korea; choking coal pollution in China; population and
economic growth in India, China and elsewhere in
Southeast Asia; high oil prices that can make LNG look
affordable by comparison - they all add up to strong
demand build for LNG in the Asian market.
The International Energy Agency predicts global demand
for natural gas to grow more than twice as fast as oil
over the next 20 years. Others predict even stronger
growth rates for gas.
Most of the world's gas trade is by pipeline, but LNG
is building. And building at an even faster pace than
pipeline deliveries.
Many analysts talk of a 5 percent to 6 percent annual
growth rate for LNG demand through 2020, then slowing
down to the 2 percent to 3 percent range through 2035.
That would mean the equivalent of a new, good-sized
LNG export terminal will need to start up almost every
year to meet that demand growth.
And in addition to market growth, older LNG supply
contracts are expiring - and some of those older
export plants are running low on reserves.
Just this week Egypt, an LNG exporter since 2005,
announced it will need to import LNG for the next
several years as gas production has fallen short of
domestic demand.
All of which means export project developers are
chasing not only new demand but replacement contracts
for declining reserves.
Someone is going to win that new business. It will be
the lowest-cost, stable, predictable suppliers.
The potential competitors to Alaska LNG have their own
strengths and weaknesses, as does Alaska.
5:15:53 PM
Australia?
Seven LNG export projects are under construction and
set to open over the next three years. But a majority
of that gas is already sold on long-term contracts.
Those projects are not Alaska's competition for
deliveries to start in the 2020s.
New terminals or expansions in Australia face tough
hurdles. Cost overruns on the current projects have
got companies worried about repeating history.
Domestic consumers are seeing price increases for
natural gas, which is being drawn from the local
market to higher-priced export markets.
Dow Chemical claims it cannot get the new gas supply
contracts it needs for investments in Australia.
Some local jurisdictions have imposed drilling
restrictions on coal-bed gas reserves, which feed
three of the export terminals under construction.
Russia?
The country has just one operating export plant, but
there's talk of expanding it. Russia has another plant
under construction, and thoughts of two more.
The expansion talk at Sakhalin-2, led by Gazprom with
partner Shell, is dependent on sufficient gas reserves
to justify the work.
Gazprom is also talking about building an LNG terminal
at Vladivostok.
Yes, a good location for marketing - it's a short
tanker trip from there to Japan, Korea, China or
Taiwan - four of the biggest LNG buyers.
But it will take a 2,500-mile pipeline to move the gas
from Russia's interior to the coast. The field
development costs and pipeline are estimated at $40
billion - not counting the LNG terminal.
To really make the economics work, Russia will need to
extend the pipeline and sell gas to China.
The two countries have agreed on everything but the
price for the gas. You could say that about a lot of
hopeful projects.
Separately, Rosneft and ExxonMobil are doing their due
diligence for an LNG plant called Sakhalin-I. They
have issued a contract for initial FEED work.
In Russia's distant Arctic, a terminal under
construction is called Yamal LNG. It's about halfway
between Iceland and Nome.
Estimated at $27 billion, the sponsors talk of making
their first deliveries in three or four years.
The tricky part for Yamal is that the Northern Sea
Route to Asia will be passable for LNG tankers only a
few months each year, and even then only with
government-funded nuclear-powered icebreakers as
escorts.
The rest of the year, the plan is to ship the LNG
aboard ice-class tankers to European ports, where the
LNG would be transferred to less expensive standard
tankers for the long voyage down the European coast,
across the Mediterranean Sea, through the Suez Canal,
across the Indian Ocean and into Asia.
Look at the map and you see the economic challenges
Yamal faces. Plus its main sponsor, Novatek, has never
built or operated an LNG terminal.
Canada?
There are multiple proposals; none have all their
government authorizations or a final investment
decision.
None have cleared the consultation process with every
First Nation in the area and along the pipeline route.
The developers that are talking about price are
emphatic that they need oil-linked LNG pricing or
something comparable to cover their sizable
development costs.
There is no Prudhoe Bay production facility in British
Columbia's Horn River and Montney shale gas plays that
would feed the LNG terminals at Kitimat and Prince
Rupert. They have to build it. Gas has to pay for it.
The pipelines that would move that gas to the coast
are as long as 525 miles and must go through two
mountain ranges.
One possible route into Prince Rupert takes the
pipeline offshore for up to 75 miles and across either
an old mine tailings disposal site or mollusk bed
important to First Nations people.
Meanwhile, the British Columbia government is
negotiating a new LNG export tax with project
sponsors. The legislation been delayed until fall,
with companies saying no project decisions until they
know the tax.
Tanzania and Mozambique?
An awful lot of gas but minimal infrastructure; still
developing their oil and gas laws and fiscal regimes;
and local poverty could become an issue for developers
and political leaders.
Closer to home, the U.S. Lower 48 states?
It's a tough political battle, pitting oversupply and
low prices at home vs. the free market and exports to
trade partners.
The Department of Energy has approved six export
licenses, totaling 8.5 bcf a day. That's equal to
almost 12 percent of current U.S. gas production.
The unknown is if and when and under what conditions
the department might start to close down or further
delay its export approvals.
And regardless of what government does, the only
terminals to be built will be the ones that have
buyers and can get financing. Just one is under
construction so far, in Louisiana.
5:23:22 PM
Other issues for Lower 48 exports include cost
overruns at the Panama Canal expansion, which is
essential for getting tankers out of the Gulf Coast
and into the Pacific.
One of the Gulf Coast project sponsors said this week
that Asian buyers are putting off new long-term
contracts for U.S. gas because of the delay in knowing
just how much it will cost to use the expanded Panama
Canal.
Local opposition over environmental and safety
concerns is not very noticeable for Gulf Coast
terminals but is extremely visible for terminals
proposed for the Oregon and Maryland coasts.
My point is: Like Alaska, every proposed project, has
its own problems, its own disadvantages, its own
issues to solve.
The winners, the terminals that get built will be the
ones that solve the problems, hold down costs, and
convince buyers that they will start up on time with
competitive prices.
The pre-FEED and FEED work - front-end engineering and
design - is a key part of that effort. The more you do
up front, the better the odds of avoiding surprises
during construction.
And in a brief advertisement for our office's work, we
issued a report today on just what are pre-FEED and
FEED and why they are so important. It's available on
our website arcticgas.gov.
ALASKA LNG ADVANTAGES
These are substantial and meaningful.
Shorter tanker run from Nikiski to Japan; one
week vs. three weeks from the Gulf Coast
Tanker charter rates are running $75,000 to
$100,000 a day. Time is money. Big money at
those rates.
Or less capital tied up in fewer ships if
owner-operated tankers.
Proven gas reserves already being produced. It's
important to buyers to know that the gas they're
committing to buy for 15 or 20 or 25 years
actually exists.
Low production costs compared to greenfield
projects in B.C., Australia, East Africa.
Oil will carry the infrastructure costs.
Almost 40 years experience producing on the North
Slope.
Liquefaction compressors run much more
efficiently at cold temperatures.
Up to 15 percent more efficient (less gas
consumed) than in warm-climate LNG sites
ALASKA LNG DISADVANTAGES
These also are substantial and meaningful.
High construction costs in Alaska.
Seasonal construction limitations (pipeline
trenching during the winter only).
Summer-only sealifts of material to the North
Slope.
Environmental considerations (wetlands, air
quality standards, mitigation expenses).
The cost of an 800-mile pipeline to tidewater
that competing LNG projects don't have.
And the need for fiscal certainty is a hard sell
in the world of Alaska oil and gas politics.
The federal government is ready for the permitting
work, but making the finances work is up to the
project sponsors and the state.
The rewards to the state of a successful project
include public revenues, the lowest cost to move gas
to Alaskans, and an industry commitment to keep North
Slope gas and oil flowing for decades.
The risks of state investment are cost overruns that
require more cash during years of budget deficits, and
the possibility that the project will not make as much
money as projected or as people want.
I can't help you there, other than to say the LNG
world is a competitive market. But it's not an
impossible market.
5:29:04 PM
AT EASE
5:29:58 PM
RECONVENED
Co-Chair Meyer wondered who would oversee the regulations
the gasline. Mr. Persily responded that FERC would oversee
the environmental and safety review. He stated that FERC
would conduct the environmental impact study (EIS), but
that FERC would not regulate the tariffs or the tariff
regulations of the liquefaction plant.
Senator Olson wondered if FERC would still not get involved
in the regulatory issues, even though it is an
international project. Mr. Persily responded that those
issues could not be regulated.
Co-Chair Meyer noted that the cost of gas in the open
market ranged widely. He queried the cost of AKLNG, and
wondered if Alaska would make any money. Mr. Persily
responded that there were some projects in various
countries where gas was sold fairly cheaply. He stressed
that the most dependable buyer would get the best price of
gas.
5:34:52 PM
Co-Chair Meyer wondered what Alaska would need to make the
project economical. Mr. Persily responded that he did not
know the cost of running the gas through a liquefaction
plant. He felt that all of the numbers proved that Alaska
could be competitive in the current market.
Co-Chair Meyer felt that there had been very similar
presentations in the past. He wondered why Mr. Persily was
optimistic about this particular project. Mr. Persily
responded that the current market was in the right place
for this project.
Co-Chair Meyer wondered if the project was different
because it was a partnership with the industry. He felt
that the project was risky, because the oil companies may
discover other options. He stressed that the state did not
have any other options. Mr. Persily agreed, and furthered
that the federal government understood that this project
was different, because the three main oil and gas companies
seemed to be working together. He felt that the companies
could book the natural gas on the North Slope as
"reserves."
5:40:02 PM
Co-Chair Kelly wondered if Mr. Persily felt that Alaska was
"ahead" in the market. Mr. Persily stated that Alaska was
behind because it would take longer to build the gasline.
He felt that there were many different issues that were
encouraging and discouraging for AKLNG development.
Co-Chair Kelly noted that many other projects were
maturing, but may not be considered competitors because of
their current long-term contracts. Mr. Persily stated that
60 percent of Australia's supply was already sold in long-
term contracts. He stated that Alaska's competitors would
be other non-sanctioned projects.
Co-Chair Kelly wondered if there was a possibility that the
Australian projects would not be able to deliver. Mr.
Persily replied in the negative, and explained that those
projects would be extremely profitable. He stated that the
sponsors of those projects would not immediately make a
profit, because there would be more capital to recover.
In response to a question from Co-Chair Kelly, Mr. Persily
replied that Japan purchased more LNG than China. He stated
that China had other options, and received approximately
half of its LNG through a gasline directly.
5:45:03 PM
Co-Chair Kelly queried any insights on how the project may
be financed. Mr. Persily replied that once the contracts
were binding, the financing would be available. He
furthered that no one company would incur the entire risk.
Senator Dunleavy wondered if any Australia and Alaska
customers would overlap. Mr. Persily responded that
Australia and Alaska were competitors, because Alaska may
be providing more gas than Australia. Companies may want to
be a part of the entire market, because they like diversity
in their portfolios.
Senator Dunleavy queried the physical description of
Alaska's gas. Mr. Persily replied that the current gas was
perfectly suited for Japan. He remarked that the methane
and ethane gas was a high BTU, and was higher than the US
market.
Senator Dunleavy wondered if the Australia gas was mainly
coal-bed methane, or a combination. Mr. Persily responded
that, of the six land-based projects in Australia, one-half
were conventional gas and the other half were coal-bed
methane gas. He stressed that the coal-bed methane gas did
not have a high enough BTU content for the Japanese market.
He explained that they would either "spike it" with propane
or other gas liquid to increase the BTU value, or burners
would need to be adjusted.
Mr. Persily remarked that the federal government was immune
to litigation.
5:51:30 PM
AT EASE
5:57:24 PM
RECONVENED
^PRESENTATION: REVIEW OF ROYALTY STUDY and STATE EQUITY
POSITION
5:59:29 PM
Co-Chair Kelly noted that Senator Bishop and Vice-Chair
Fairclough would absent for the second half of the meeting.
DEEPA PODUVAL, PRINCIPAL CONSULTANT, NATURAL GAS AND POWER
FUELS GROUP, BLACK AND VEATCH MANAGEMENT CONSULTING,
discussed the PowerPoint presentation, "Observations on
Heads of Agreement, Presentation to Senate Finance
Committee" (copy on file). She stated that she would be
discussing a royalty study, and incorporating the Heads of
Agreement (HOA) within the context of the study.
Ms. Poduval looked at slide 3, "Long-Term North Slope Oil
and Gas Revenues are Driven by AKLNG Project Success." She
explained that the graph showed forecasted revenues from
North Slope oil gas, both with and without the AKLNG
project. The blue line showed the revenue forecast that was
based on DOR's estimate of oil production. The green line
showed the AKLNG project coming online in 2024, and it
showed that the project would bring in revenue of $4
billion to $4.5 billion above the current forecast based on
North Slope oil production. The slide was intended to put
the opportunity in context.
Ms. Poduval discussed slide 4, "Putting the HOA Within the
Context of AKLNG Timeline." The timeline for the AKLNG
project was outlined on the slide. The first step of the
timeline was the Pre-FEED. The Pre-FEED was the initial
version of the frontend engineering and design work. The
Pre-FEED phase would get more and better information on the
project's design and cost. She announced that the Pre-FEED
phase would take approximately 18 months. Depending on the
outcome of the legislative session, Pre-FEED could begin
mid-2014 and end 2015. The next phase of the project was
the FEED process, which is when the detailed engineering
would be planned. The FEED process will also determine more
granular cost estimates. The FEED process was anticipated
to take two to three years, including some of the
permitting. She stated that the final investment decision
would occur at the end of the Pre-FEED process. Somewhere
between now and the end of the FEED phase, the parties
would have finalized the commercial agreements, the costs
of the project, and estimated revenue streams. At that
point, the companies will make the investment decision. She
stated that the construction phase could take about five
years. She announced that the Pre-FEED phase saw a very
small proportion of the total project cost was at stake,
because it was only approximately 1 to 2 percent of the
overall cost. The FEED stage only required approximately 3
percent of the totally investment. The largest investment
occurred after FEED, with about 96 percent of the cost. She
explained that the HOA contemplated taking the process
through the Pre-FEED. A staged gated approach was generally
used in project development, and at each stage the parties
made commitments for spending the dollars in the next
phase. The HOA was consistent with that approach, because
it committing each parties to complete certain tasks to
move the project through the Pre-FEED stage.
Co-Chair Kelly wondered if the percentage of investment on
the slide represented the state's investment. Ms. Poduval
replied in the affirmative, and explained that it was also
proportional to the total project's investment.
6:05:32 PM
Ms. Poduval highlighted slide 5, "Royalty Study Highlights
and Recommendations." The slide showed the key findings
from the North Slope Royalty Study for DNR, and its
recommendations. The findings included the following:
Global LNG market is growing and competitive
Government take and cost structure for AKLNG projects
are high
AKLNG is expected to be a large, complex, high cost
project
Project structure is likely to be producer-owned
integrated
Various risks inherent in project and state
participation
Ms. Poduval announced that the recommendations were the
following:
Improve commercial attractiveness of project
Retain value to the state
Create Alignment between state and producers
Recognize and manage risks actively
Ms. Poduval felt that the combination of the study findings
and the recommendations would result in state equity
participation.
Senator Dunleavy wondered if the presentation would include
LNG different models that were currently in the world. Ms.
Poduval responded that the information was included in the
Royalty Study. She stated that there were three main
structures. The integrated structure was a single ownership
through the entire value chain, which was the GDP Pipeline
and LNG plant. The second structure was a merchant
structure, and could work by having the Upstream producers
sell the natural gas to the LNG plant which would be owned
by a third party. The LNG plant would buy the gas, and sell
the LNG. The third structure was a tolling arrangement,
which was similar to what was used in pipeline contracts.
It required a service fee to provide a certain service. It
could be set up to pay the GDP, pipeline, and the LNG plant
a tariff to pass through; but the producers did not
necessarily need ownership of those three points.
Senator Dunleavy asked if he could get a print out of those
three models with various provinces, states, or areas that
utilize the different models. Ms. Poduval agreed to provide
that information.
Senator Dunleavy stated that an integrated model was being
considered in Alaska. Ms. Poduval agreed.
6:11:11 PM
Senator Dunleavy queried why the model best suited Alaska's
particular circumstance. Ms. Poduval announced that project
control was one of the most important reasons why an
integrated project structure worked for large, complex,
high cost projects, because the sponsors were very careful
about managing costs and schedules. The integrated project
structure gave the sponsors the ability to see the project
through to fruition. She also stated that the producers
preferred the integrated project structure.
Co-Chair Kelly queried the definition of "alignment." Ms.
Poduval responded the "alignment" referred to all of the
parties having their incentives lined up similarly. She
remarked that the producers' desires could be different
from the state's desires.
6:16:28 PM
Co-Chair Kelly asked for information regarding the "black
box." Ms. Poduval responded that Trans-Alaska Pipeline
System (TAPS) was a producer owned oil pipeline, which
created a number of disputes with producers at every step
of the way of how it was values and the tariffs. She
explained that the disputes occurred because it created a
relationship where there is opposition. She stressed that
those disputes created project inefficiencies. Some other
objectives of the state for the project included open
access, allowing third parties to develop oil and gas on
the North Slope to bring more oil and gas revenue to the
state. She announced that those objectives were not
necessarily the same as the producer's objectives. She
stressed that the state would be at the mercy of the
producers, if the state was not a part of the project.
Senator Dunleavy remarked that there were different models
for various reasons. Ms. Poduval agreed.
Senator Dunleavy surmised that the integrated project
structure was appropriate for Alaska, because of the scale
of the project. Ms. Poduval stated that it was appropriate
for the scale and complexity of the project.
Senator Dunleavy remarked that there were other projects in
the world that used the integrated project structure, and
the concept of alignment was imbedded in that structure.
Ms. Poduval responded that his summation was generally
true.
Senator Dunleavy wondered if there were integrated models
that were not in alignment. Ms. Poduval stated that an
integrated model created alignment, but stressed that it
depended on the parties who were a part of that integrated
project. She stated that sometimes the integrated structure
only included the sponsors, with no state involvement.
Co-Chair Kelly stated that Senator Dunleavy's questions
would be part of a very detailed presentation.
6:21:13 PM
Ms. Poduval addressed slide 6, "Criteria Applied for
Evaluation of HOA Tie in to Royalty Study Recommendations."
Improve Commercial Attractiveness
Preserve Value to the State
Manage Associated Risks
Create Alignment Through Equity
Ms. Poduval displayed slide 7, "HOA-Alignment through
Equity Participation." She shared that there were different
ways that the HOA created alignment through equity
participation. She shared the different elements in the HOA
to create alignment:
Royalty Gas and Tax as Gas = State Gas Share
State Gas Share = State Equity Share
State Equity Share Impacts State Investment and State
Revenues
State Holds Equity Along the Entire Supply Chain
Commitments made in a Stage-gated Manner
Current decisions focused on enabling pre-FEED
6:23:21 PM
Ms. Poduval looked at slide 8, "Improve Commercial
Attractiveness of AKLNG Project." The slide showed the
impact on the producer rate of return on the project. The
blue bar represented the producer return under the status
quo. She explained that "modified status quo" assumed that
there would be something that needed to be changed for gas
from a fiscal perspective, before the project had any
chance of progressing. She stated that modified status quo
assumed that the production credit, similar to what was
currently applied on oil, was provided to gas. The blue
portion assumed a $5 per barrel of oil equivalent credit,
and was also applied to gas. She stressed that the modified
status quo was the "watermark" by which the presentation's
measurements were taken.
Ms. Poduval highlighted slide 9, "Preserve Value to State
from Royalty and Taxes."
Obtain value in return for the state's incentives to
the project
Preserve the state's expected revenues from the AKLNG
Project relative to an RIVE world without State equity
participation
Ms. Poduval addressed slide 10, "Preserve Value to State
from Royalty and Taxes." She explained that the slide was a
forecast of the state's revenues from the AKLNG project,
under the modified status quo. It showed SB 21, with a
production credit for gas. She pointed out the total cash
flows on the bottom of the graph. Under the assumptions
that were built into the graph, the state would have made
approximately $70 billion from the LNG project. The right
side of the chart showed the breakdown of the cash flows
and total revenues to the state. She stated that there was
approximately 30 percent of royalty; approximately 40 of
production tax; and the remainder was property tax and
state corporate income tax.
6:29:42 PM
Ms. Poduval discussed slide 11, "Preserve Value to State
from Royalty and Taxes." She stated that the slide was a
model of what the state's revenues would be with equity
participation. She remarked that there was a period of
negative revenues, which was the equity participation. She
stated that the equity participation meant that the state
was investing in the project. She pointed out that the
bottom line showed that the state made approximately $72
billion with the equity participation over the time period.
She announced that the state would make approximately the
same amount that it would without equity participation,
although it was slightly different. She explained that the
make-up of the revenue changed. She remarked that the
royalty value was preserved, and increased. The property
tax decreased, because 25 percent of the project did not
pay property tax. She pointed out that the property tax
decrease was compensated by the project ownership of
midstream revenues, which were the returns that were earned
from the investment in the mid-stream.
Ms. Poduval highlighted slide 12, "Preserve Value to State
from Royalty and Taxes." She stated that the slide
represented what might be a good range for the state to
discuss equity participation in the project: where it makes
sense for the producers and the state. She pointed out that
there were so many uncertainties associated with the
project, so it was difficult to determine the number that
should be met. She remarked that capital cost of the
project and the market prices impacted the royalty and
production tax earnings to the state. The point of the
chart was to establish a "ballpark" of the percentage of
earnings to the state. This was a representation of how
much equity and how much gas was needed to have an
arrangement with the producers where the state was not
losing value. She stated that the slide had different
scenarios of capital costs and market prices. The graph
tried to solve for the equity participation level where the
revenues the state would make without equity participation
would match the revenues that the state would make with
equity participation. She pointed out the 24 percent at the
center of the graph. She remarked that the previous slide
assumed 25 percent equity participation, and the number at
the bottom was slightly better than the status quo number
of $68 billion. If there was a model of 24 percent equity
participation, those numbers should have been equal. She
stressed that the chart of slide 12 reflected the
percentage of equity where the status quo and revenues were
equal. She stressed that 20 to 30 percent seemed like the
right area for the state to participate with equity in the
project.
6:35:49 PM
Ms. Poduval displayed slide 13, "Gross Tax Rate Sets the
Total State Gas Share and Equity Participation." The level
of equity participation would be determined by the gross
tax that the legislature would decide. She stressed that
the royalty was somewhat fixed at or around 13 percent. The
share of the gas was equal to the share of equity, so the
variable was how much tax gas was taken. The different
levels of gas tax determined the percentages of share of
equity in the project. The gross gas share must be 14
percent to achieve a 25 percent equity share in the
project.
Ms. Poduval looked at slide 14, "Manage Risks - Equity
Investment Helps to Hedge Price Exposure." The first
highlighted risk was price exposure. She stressed that
price was the first and biggest risk factor to the project.
It was a main driver of the revenues that the project would
incur. The graph showed the different levels of market
variables and uncertainties. She stated that the slide was
intended to understand the total cash flows to the state.
She pointed out the far left bars corresponded to a low
price environment. She stressed that the state would earn
more with equity participation than without equity
participation under a low price scenario. She stressed that
equity participation dampened the state's risk exposure
under a low price environment. She stressed that, under a
high price environment, the state's revenues would be lower
with state participation than without state participation.
She announced that, in general, equity participation
flattened the state's revenue profile. It was driven by the
fact that part of the state's revenues were dependent on
what was earned in the midstream, and the return on the
investment. She stressed that those driving factors were
not price sensitive.
6:40:31 PM
Ms. Poduval displayed slide 15, "Manage Risks - Capital
Cost Exposure Reduced through TC Participation."
Highest risk exposure is prior to project start when
cash calls are not supported by project revenues
TransCanada (TC) participation allows State to retain
20 to 25 percent of gas share while being responsible
for only 13 to 18 percent of the upfront costs
This is especially important if cost overruns occur on
project
Ms. Poduval addressed slide 16, "Manage Risks - Capital
Cost Exposure Reduced through TC Participation." The slide
showed what the state's total investment in the project
would be, if it went alone and partnered with TransCanada.
She stated that the left side showed the midway estimate of
the project at $45 million. She stated that participation
with TransCanada reduced the deal upfront cash investment
by approximately $3 billion. The right side of the graph
assumed a cost overrun, and showed that it would reduce the
state's investment in the project by $4 billion.
Ms. Poduval discussed slide 17, "Manage Risks - Reduce
Potential Loss of Value through RIK."
HOA includes intent of producers to offer to negotiate
separately to market State's share of gas -
proportional to each producer's share of producer
capacity
SOA only obligated to elect RIK if the producers make
"satisfactory arrangements for disposition of the
state's share of LNG"
SOA would benefit from producers marketing expertise
rather than competing with them
Could recreate marketing benefit of RIV
6:46:54 PM
Ms. Poduval looked at slide 18, "Manage Risks - Structure
of Participation." She stressed that, in theory, it seems
like a good idea for the state to have equity
participation, because everyone has an equal share of the
gas and equity. She remarked that the details of the terms
could either help the state achieve its various objectives
or not. She stated that the state's objectives included
enabling access, enabling project expansion, and having
access to information. The HOA included different elements
that focus on how to achieve the objectives. The HOA
contemplated a framework of a project within a project,
where the state's share of the project could be a
considered a separate project. The state, through its
negotiations with TransCanada, can set its own tariff for
that part of the project. The state can expand its part of
the project, and the pro-expansion principles outlined in
the HOA state that any party can expand the project, as
long as it's not to the detriment of what the other parties
achieve from the project. She announced that the
combination of the state and TransCanada can solicit an
expansion in the project.
Senator Dunleavy looked at slide 4, and remarked that there
was capital commitment at various steps of the project. Ms.
Poduval agreed.
6:50:56 PM
Senator Dunleavy stressed that each step costs money to
keep the project going. Ms. Poduval explained that it was
consistent with how these types of large projects develop.
The state's investment was part of what made the project
attractive to producers. She pointed out that the
producers' participation was significant, and would be
contributing 75 to 80 percent of the project cost through
each stage of the process. She stressed that all of the
elements of the HOA should be considered principles, so the
project was currently a work in progress.
Senator Dunleavy wondered if there were four partners or
five partners in the project. He specifically wondered if
TransCanada and the state were sharing a singular
partnership. Ms. Poduval replied that the parties in the
HOA were ConocoPhillips, ExxonMobil, BP, the state, AGDC,
and TransCanada.
Senator Dunleavy asked for her to restate that answer. Ms.
Poduval responded with ConocoPhillips, ExxonMobil, BP, the
state, AGDC, and TransCanada.
Senator Dunleavy surmised that there were six separate
partners in the arrangement. Ms. Poduval agreed.
Co-Chair Kelly wondered if the state, AGDC, and TransCanada
were considered a collective partner. Ms. Poduval replied
that the six parties that she mentioned were the
signatories to the HOA. She stated that the arrangement was
that each producer would have their own share of the gas
and midstream; the state would have its own share through
AGDC; and TransCanada would participate through the state's
equity participation. The state would bequeath to
TransCanada a portion of its equity in GDP and pipeline.
Senator Bishop felt that the participation of TransCanada
should be considered a "joint venture." Ms. Poduval
responded that she did not want to misrepresent the legal
terms that were used for the project.
Senator Dunleavy surmised that there were four
participants, but possibly six entities. Ms. Poduval
agreed.
Vice-Chair Fairclough asked for more information regarding
the use of the word "bequeath." Ms. Poduval responded that
the state will assign a portion of the equity through
TransCanada.
Vice-Chair Fairclough asked for more information regarding
the value to the state.
6:56:27 PM
Ms. Poduval highlighted slide 19, "HOA Score Card Relative
to Criteria."
Alignment Through Equity
Equity Participation Along Supply Chain; Royalty
and tax as share of gas
Improve Commercial Attractiveness
Increases Producer IRR Shares/Reduces Producer
Risk
Preserve Value to the State
State could be Cash Flow Neutral relative to
status quo depending on final equity share
Manage Risks
Price Exposure: Equity Participation in midstream
dampens exposure to prices
Capital Costs: TC participation lowers State's
cash calls prior to commercial operation
RIK Marketing: HOA reflects intent of Producers
to negotiate to market State's share of gas
Structure of Participation: Project within a
project, Stage gated commitments, Access & pro-
expansion principles, Access to information
JASON DE STIGTER, SENIOR CONSULTANT, NATURAL GAS AND POWER
FUELS GROUP, BLACK AND VEATCH MANAGEMENT CONSULTING (via
teleconference), stated that he had nothing more to
contribute to the conversation, and was only available for
questions.
Co-Chair Kelly discussed housekeeping.
ADJOURNMENT
7:01:50 PM
The meeting was adjourned at 7:01 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021914 Bill White - Early planningArcticGasGov.docx |
SFIN 2/19/2014 5:00:00 PM |
Alaska Natural Gas |
| 021914 BV Presentation to Senate Finance Committee 021914V1.pdf |
SFIN 2/19/2014 5:00:00 PM |
Alaska Natural Gas |
| 021914 Senate Finance testimony February 19 2014 - Larry Persily.pdf |
SFIN 2/19/2014 5:00:00 PM |
Alaska Natural Gas |