Legislature(2013 - 2014)SENATE FINANCE 532
02/21/2014 05:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fiscal Analysis by Black and Veatch Management Consulting: the Heads of Agreement and the Memorandum of Understanding | |
| Presentation by Enalytica: Legislative Consultants Presentation on Costs of Momentum Delay. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 21, 2014
5:04 p.m.
5:04:59 PM
CALL TO ORDER
Co-Chair Meyer called the Senate Finance Committee meeting
to order at 5:04 p.m.
MEMBERS PRESENT
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Donny Olson
MEMBERS ABSENT
Co-Chair Kelly
Senator Hoffman
ALSO PRESENT
Deepa Poduval, Principal Consultant, Natural Gas and Power
Fuels Group, Black & Veatch Management Consulting; Janak
Mayer, Partner, Enalytica; Nikos Tsafos, Partner,
Enalytica;
SUMMARY
Fiscal Analysis by Black and Veatch Management Consulting:
The Heads of Agreement and the Memorandum of Understanding
Presentation by Enalytica: Legislative Consultants
Presentation on Costs of Momentum Delay
^Fiscal Analysis by Black and Veatch Management Consulting:
The Heads of Agreement and the Memorandum of Understanding
5:05:20 PM
DEEPA PODUVAL, PRINCIPAL CONSULTANT, NATURAL GAS AND POWER
FUELS GROUP, BLACK & VEATCH MANAGEMENT CONSULTING,
continued to speak to the PowerPoint presentation,
"Building a World of Difference: TransCanada Participation
in AK LNG Project."(Copy on file).
5:05:47 PM
Ms. Poduval turned to Slide 16, which listed the values
TransCanada brought to the Alaska LNG project; the
committee had been going through this exercise by asking 4
questions: What was the economic impact to the state from
TC, could the state go it alone, is TC a good partner, and
does it bear any financial risk. (Slide 6) She shared that
she would be picking up the conversation at question 3: "Is
TC a good partner?"
5:06:50 PM
Co-Chair Meyer noted the committee's attendance.
5:07:07 PM
Ms. Poduval continued to address Slide 16, "Is TransCanada
a good partner for the state of Alaska in the AKLNG
project?" She made the distinction that the state was not
evaluating different financing options for the pipeline;
TransCanada was not acting solely as a bank in the
transaction to reduce the state's upfront capital cost in
exchange for annualized payments from the state over a
period of time. She asserted that TransCanada was a very
experienced pipeline builder, owner, and operator, with
particularly qualified to do business in Alaska because of
their high-level experience with Northern pipelines. She
related that although the Alaska project would be very
challenging given the location and environmental
conditions, TransCanada would bring its northern experience
to benefit the project. She pointed out that TransCanada
had a long history of interest in developing an Alaska
pipeline and had been the only company to submit a
completed application in the Alaska Gasline Inducement Act
(AGIA) process. She discussed the orange box on the slide,
"Facilitates expansion." She stated that TransCanada as an
independent third party would help to facilitate expansion
and access by expanding the pipeline and transport more
volume, because it would increase the volume of their
business and grow their revenues.
5:10:25 PM
Ms. Poduval continued. She related that having TransCanada
as a partner would help retain the momentum of the project.
She cited the body of work and experience that TransCanada
had having already studied the pipeline route while
studying AGIA. She stated that it was not a certainty that
the state would lose time on the project without
TransCanada, but that it was a likelihood. She noted that
relationships were already in place because of the
discussions that had supported the Heads Of Agreement (HOA)
and Memorandum Of Understanding (MOU) between the producers
and TransCanada. She said that if the state wanted to bring
another party into the project it would take time and when
the two terms were examined on which could be approved
upon, the debt/equity structure and the expected return on
equity, TransCanada had offered a 75 percent debt and 25
percent equity capital structure, with a 5 percent cost of
debt and 12 percent return on equity in today's market.
5:13:01 PM
Senator Dunleavy requested that the numbers be repeated.
Ms. Poduval replied 75 percent debt and 25 percent equity;
a 12 percent return on equity, and 5 percent cost of debt.
She pointed out that in the pipeline world those were good
numbers.
5:13:28 PM
Ms. Poduval addressed Slide 17, "Retaining Momentum On
Project Could Be More Valuable Than Securing Better
Commercial Terms", which depicted how the state could
benefit by trying to improve on the already fairly decent
commercial terms. The slide depicted 3 sets of numbers on 3
different panels. The panel on left looked at the debt
equity mix, which was the capital structure of the project.
The middle data point was the offer by TransCanada with the
75 percent to 25 percent debt to equity ratio. She stated
that one thing to keep in mind, was that as equity in the
structure was increased, the weighted interest cost also
went up. She pointed out that you wanted more debt and less
equity in a project because it lowered the overall interest
cost. The slide showed that a 5 percent change in the
project's capital structure was equivalent to about $200
million in additional net present value (NPV) to the state.
She continued to the second panel which illustrated the
return on equity (ROE). She relayed that TransCanada's
offer was on the farthest right row of the panel. She said
that if the state tried to improve the numbers by bringing
in a third party to bid resulting in the 11 or 10 percent
ROE, impact of each percentage decrease would result in
approximately $100 million in additional NPV to the state.
5:15:37 PM
Ms. Poduval related that if the state found another partner
that was as qualified as TransCanada, that wanted and 80/20
debt equity mix and a 10 percent ROE, it would be an
improvement of the commercial terms on the table from
TransCanada to the tune of approximately $300 million. .
She spoke to the last panel on the right which depicted the
cost to the state if the project were delayed. According to
the slide, a single year's delay of the project would cost
the state $800 million in NPV. She asserted that any
improvement in the commercial terms would be cancelled out
by the cost of delaying the project.
5:16:37 PM
Co-Chair Meyer understood that if the state did not work
with TransCanada there would be a delay and it would be
costly.
Ms. Poduval replied that if the process to replace
TransCanada resulted in a delay in the project, it would
come at a significant cost to the state.
5:17:03 PM
Co-Chair Meyer queried if it was true that any of the oil
companies could build a pipeline.
Ms. Poduval responded in the affirmative; however,
TransCanada had been studying the project since the
inception its license. The state would lose having a third
party participating in the project and the incentives that
accompanied that third party.
5:17:55 PM
Senator Dunleavy queried whether the state had in-house
expertise to negotiate and construct projects of this type
on its own.
Ms. Poduval replied no.
5:18:41 PM
Senator Dunleavy noted that acquiring the expertise would
take time and money.
Ms. Poduval replied yes.
Senator Dunleavy wondered whether acquiring the expertise
would be beneficial to the state or would it be better to
stick with a partner that already had the expertise.
Ms. Poduval replied that the negotiation experience should
be separately weighed from project development and
execution experience. She observed that if the state wanted
to develop the expertise in-house that this was not the
project that the state wanted to "cut its teeth on." She
noted that the project was one of the most complex in the
world and that the learning curve would be steep.
5:20:20 PM
Ms. Poduval discussed Slide 18, "Does TransCanada Bear Any
Financial Risk?" She related that TransCanada had committed
to being involved in the project and had committed to
commercial terms as part of the MOU. She said that the
commercial terms that they had committed to, with the
capital structure and the return on equity and cost of
debt, was meaningful. She stated that given the scale of
the project, the uncertainties associated with it, and how
early it was in the development of the project, the
financing was still far off. She said that locking in the
capital structure before actual financial agreements were
known placed a risk on TransCanada that they might not be
able to match in the market what they had committed to
using on paper as a cost to the state, which could result
in an erosion of their earning from the project, as well as
under earning on their ROE.
5:21:59 PM
Ms. Poduval spoke to Slide 19, "Does TransCanada Bear Any
Financial Risk?" The slide depicted the effective return
on ROE that TransCanada would earn if their actual capital
structure and financing arrangements differed from what
they had committed to in the agreement with the state. The
blue line, at the far left was what TransCanada had
committed to with the state; a 75 debt, 25 percent equity
and 5 percent cost of debt mix. She explained the
TransCanada effective ROE under different financing
arrangements. She pointed out that as that the ROE eroded
the market would not allow TransCanada to borrow 75 percent
of what they would need for the project. She furthered that
the market could limit the percentage of debt that the
state could borrow; if TransCanada had similar constraints
at the time it was trying to borrow for the project, and
were only able to borrow 70 or 65 percent of the project as
debt, their effective ROE dropped.
5:25:24 PM
Ms. Poduval continued. She relayed that the risks faced by
TransCanada were that its financial strength would erode
from where it was today. She said that the MOU technically
listed 12 percent ROE plus a "rate Tracker", which took
away the risk of the general market cost of debt changing.
She asserted that from a historic perspective debt was
currently cheap. She said that the deal that TransCanada
had with the state would not expose the company to the
structural market risk of interest rates generally raising;
however, TransCanada would be exposed to the weakening of
its own financial balance sheet. She said that TransCanada
is taking the risk of the effective ROE changing and
underrunning relative to their expectations.
5:26:54 PM
Ms. Poduval discussed slide 20 (same title). She pointed
out that the slide showed a similar framework to the
previous slide but looked at NPV instead of the return on
equity. She pointed out that TransCanada's NPV would
decrease when the costs of financing project exceeded what
it would recover from the state. She furthered that when
moving across each of the lines on the slide, the NPV
decreased as what the cost of financing the project
exceeded what they would be able to recover from the state.
5:28:21 PM
Ms. Poduval addressed Slide 21, "Summary On 4 Key
Questions." The slide reiterated the 4 core questions and
provided answers. The total economic impact to the state
from TransCanada would be that total cash flows would be
reduced by $4 billion and NPV impact would be marginal. As
to whether the state could go it alone; TransCanada could
reduce the state's investment by $4 to $7 billion and the
state could hit debt limits going at the project alone. She
spoke to whether TransCanada was a good partner, pointing
out that the company had experience in Alaska, comes in as
a third party with incentive to expand the project, and has
helped to keep the momentum going on the project. Finally,
committing to the financing arrangements with the state so
early in the project exposed TransCanada to risks from
eroding the return on equity that they could earn on the
project and in lowering their NPV. She concluded that these
reasons highlighted why it made sense to have TransCanada
involved in the project.
5:31:37 PM
Vice-Chair Fairclough asked if the state were to go forward
alone like a corporation making the same investment, would
the rate of return or lost opportunity cost be taken out
later in the process and the money returned to
shareholders, and would that effect tariff rates or other
components of the project.
Ms. Poduval replied in the affirmative. She said that from
the producer's perspective the entire project had to earn a
certain return. She said that the concept of the project of
allotment supported by future earnings was that each of the
companies involved had an expectation that the up-front
cash flows that were committed to the project would earn
healthy returns.
^Presentation by Enalytica: Legislative Consultants
Presentation on Costs of Momentum Delay.
5:34:37 PM
JANAK MAYER, PARTNER, ENALYTICA, spoke to the PowerPoint
presentation prepared for Senate Finance Committee,
February 21, 2014. Mr. Mayer turned to Slide 2, which
offered a brief biography.
5:36:16 PM
NIKOS TSAFOS, PARTNER, ENALYTICA, addressed Slide 3, which
offered a brief biography.
5:37:01 PM
Mr. Tsafos spoke to Slide 4. He offered 3 large ideas that
would form the foundation of the work that would be
presented to the committee as discussions on AKLNG
continued, those being: competitiveness, project pathway,
and project alignment. He relayed that where Alaska sat in
the world, where Alaska was in the process and what could
be expected over the next 6 years, and the possibility of
switching from an in-value to an in-kind world would all be
areas under discussion.
5:38:26 PM
Mr. Tsafos continued to speak to Slide 4. He and related
that the message of the map was that Alaska was not alone
in the world of oil and gas. He noted that he wanted to
discuss several ideas in particular, specifically that it
was temping to look at all the obstacles that one as
facing, while comparing how well others were doing. He
pointed out that the slide illustrated that each place
looked tempting from afar but that each of the competing
suppliers had a number of challenges that they would have
to overcome before they could get to market. He felt this
was important to note because the project was, without a
doubt, a very expensive project. He noted the general
concern that the project seemed unreal given how expensive
it would be. He reassured the committee that just because a
project was expensive did not mean that it would not get
built.
5:41:00 PM
Mr. Tsafos discussed Slide 5, which illustrated what the
situation looked like in the mid to late 2000s. He said
that at the time, things had looked positive, there were a
lot of options. He detailed the different proposed projects
illustrated on the map and revealed that most of them did
not come to fruition. He stated that all of the action had
happened in Australia and pointed out that it was not a low
cost supplier; the lesson was not to despair because the
costs were high. At the end of the day, the only thing that
mattered was settling on a price that made the seller and
buyer happy. He pointed out that there was more to havening
a successful project than just having a cheap supply.
5:44:18 PM
Mr. Tsafos spoke to Slide 6, which offered an overview on
how the Queensland Curtis (QC) LNG project in Australia.
He hoped that the slide would make the point that projects
evolved. He opined that there was anxiety over how much the
state should lock itself into a particular pathway, that
the decision that the legislature made in 2014 would
predispose future legislatures onto a specific path. The
slide looked at three different snap shots at different
dates along the project:
FEED (July 2008)
Size
One train: 3-4 mmtpa
Expandable to 12 mmtpa
Upstream
BG owned 9.9% of QGC and 20% of
QGC's coal-bed methane in Surat
Basin
Liquefaction
T1: BG 70%, QGC 30%
Off-take*
BG Group: 100%
FID (October 2010)
Size
Two trains 8.5 mmtpa
Upstream
All BG except CNOOC 5% and Tokyo
Gas 1.25% in parts of Surat Basin
Liquefaction
T1: BG 90%, CNOOC 10%
T2: BG 97.5%, Tokyo Gas 2.5%
Off-take
CNOOC: 3.6 mmtpa*
Tokyo Gas: 1.2 mmtpa*
BG Group: balance
January 2014
Size
Two trains 8.5 mmtpa
Upstream
Gas from AP LNG; Same as FID plus
CNOOC 25% in Surat and Bowen
Basin
Liquefaction
T1: BG 50%, CNOOC 50%
T2: BG 97.5%, Tokyo Gas 2.5%
T3: CNOOC option for 25%
Off-take
CNOOC: 8.6 mmtpa*
Tokyo Gas: 1.2 mmtpa*
Chubu Electric: ~0.6 mmtpa*
External
Financing
JBIC: 175 mn to Tokyo Gas
US EX-IM: $1.8 billion
*Off-take is supplemented by BG's global portfolio-not
all LNG will come from Australia
He said that the first snapshot was at the front end
engineering and design (FEED) stage, which was where the
state would like to be in a year and a half to two years.
He stressed that Alaska was well before the FEED stage. He
relayed that the second column was the final investment
decision (FID), which was when the real money would begin
to be spent. He continued to the last column, January 2014,
and noted that the project was not yet online. He
reiterated that this was a project that had yet to ship its
first cargo. He pointed out that the size, upstream,
liquefaction and off-take all changed from the FEED stage
in 2008 to FID in 2010.
5:47:09 PM
He said that the 2010 column represented what the project
looked like when the BG and CNOOC went to their boards for
funding. He pointed out that the January 2014 represented
what the project looked like today. He relayed that this
was a fairly typical evolution with LNG projects. He
observed that the current discussion was about the state's
equity shares, financing, participation, and off-take. He
voiced that it might seem that the state was making long-
term commitments, but they were not at rigid as they
seemed. He repeated that LNG projects changed, sometimes
quite dramatically.
5:50:52 PM
Ms. Tsafos addressed Slide 7. The slide intended to
illustrate where the state was in the process. He offered
that at this point the state was trying to get to pre-FEED.
He offered that on the marketing level the state was
reaching out to buyers to determine interest, MOUs and HOAs
could have been signed for the sale of gas, the focus was
the marketing plan. He informed the committee that
financing would be under discussion in the early stages. He
said that the state would go into the FEED process with the
goal of getting the final investment decision by
approximately 2018. He furthered that after that
discussions would begin about finalizing deals; who would
the state sell the gas to and for what volume, price, and
term. He stated that at this point discussions about secure
financing and the signing of loans and a potential new
partner search would occur. He continued to emphasize that
the project pathway would be changing and dynamic.
5:54:38 PM
Mr. Tsafos continued to Slide 8. He communicated that the
state had four pathways; the status quo had the state
taking gas in-value and no ownership anywhere. The HOA
potentially changed the first column on the slide from in-
value to in-kind; the upstream remained at zero, but the
GDP&Pipe and the LNG both went up to 25 percent, which made
the state responsible for that capital expenditure. He
added that the state's cash commitments would be principal
in interest for any debt taken and the tariff would matter
only notionally. The bottom two options on the slide
pertained to the MOU and how it changed, which would be
discussed at a later date.
5:57:15 PM
Mr. Mayer turned to Slide 9, which charted the FY15
production tax estimates using income state format from the
Department of Revenue sourcebook, Fall 2013, page 106,
under SB21. He related that alignment was crucial to moving
any massive project like this forward. He said that the
question of how the state derived value as the ultimate
sovereign resource holder of the North Slope gas had
prompted the conversation of alignment as an illustration
as to why the state might want to think about ways of being
better aligned with producers and the way producers
generated value. He thought that it would be a helpful
exercise to bring the world of gad back to the world of oil
and compare them, highlighting the crucial ways that they
are different, and why the question of alignment was
critical.
6:00:09 PM
Mr. Mayer explained that the start was a gross value that
was netted back to the well head by subtracting mid-stream
costs, starting with oil at $105 bbl West Coast price. He
said that at the well head on the North Slope the price was
approximately $10 less because of the $6 TAPS tariff as
well as $3.50 for marine transportation and some additional
cost around quality backing and the like. He furthered that
we then had an approximately $95 barrel of oil from which
would need to be subtracted out $46 in lease expenditures.
He observed that the question of credits had not been
included because the focus had been to simply compare oil
and gas.
6:03:14 PM
Mr. Mayer addressed Slide 10, which illustrated that price
for Alaskan gas would be less transparent, less consistent
by destination, likely to link to Japan Crude Oil Cocktail
(JCC), and lower value versus oil. He emphasized that gas
prices varied massively between different regions, they
varied within regions and even varied within countries. He
explained that the price of LNG was dependent entirely on
the specific contract that a specific cargo was sold under,
some was sold under long term contracts signed when the
market was scarce, others when the supply was plentiful,
some on spot prices. He reported that, generally, most LNG
contracts were linked to crude oil. He remarked that a
linkage to oil did not mean that the gas was priced the
same, by and large it was priced at a discount. The
contracts had a pricing formula that stated that the price
of gas would have a certain relationship to oil where the
same heat value of gas costs the same amount of the heat
content of a barrel of oil. He stated that frequently LNG
contracts did not have a steep slope in parity, if we were
selling LNG into Japan on a .13 percent slope contract, the
state would be getting $81 bbl equivalent in terms of the
heat content of out LNG and not the $100 of the crude oil
price even though the sale was happening under a crude oil
liked contract.
Mr. Mayer continued to Slide 11. He relayed that the
biggest difference between oil and gas was that the
midstream for gas was nearly unrecognizable when compared
to oil. He related that the tariffs for the combination of
gas treatment and processing, pipeline and liquefaction,
would be an order of magnitude higher; gas is significantly
more expensive to transport. The tariff would not be
regulated by Federal Energy Regulatory Commission (FERC),
FERC would regulate permitting and not rate-setting. He
pointed out that whatever tariff was applied to the
infrastructure would be highly sensitive to a range of
assumptions used in setting the tariff; the capital
structure and the initial cost of capital could each have
an impact on the tariff paid by the state. The tariff was
highly sensitive to capital structure.
6:06:22 PM
Mr. Mayer turned to Slide 12. He discussed the working of
the tax calculation for gas. He said that if the gas were
thought of in barrels of oil equivalent, instead of the
$100 bbl price we would be getting $81 per barrel of oil
equivalent for the LNG. He remarked that the entire
midstream component would have a $66 per barrel tariff, a
large portion of the total value. He explained that what
that meant was that even at high oil prices, netting back
to the well head, the $66 tariff in a $100 bbl oil world
would leave little value left to tax or as royalties. He
stated that when $6 was removed for lease expenditures
there was only $8.82 oil equivalent LNG left to tax. He
contended that the debate surrounding what the tax rate
should be for a very small number would be an even smaller
number. He warned that small changes in the cost of the
midstream or in the price could completely take away the
states value altogether. He said that if instead of $100
bbl the price dropped to $89 bbl there would be no
production tax value and only marginal gross value, even
for royalties.
6:10:14 PM
Mr. Mayer spoke to Slide 14. He said that if tariffs rose
by 12.2 percent it would wipe out any production tax value
and leave only a sliver of value in terms of value of the
royalty at the wellhead. He believed that the state should
consider what the issues would be with a $66 tariff on the
midstream in order to bring itself into alignment with its
partners.
6:11:34 PM
Mr. Mayer concluded that ensuring a fair market price for
the gas received was critical in the gas world in a way
that was taken for granted in the oil world. He stressed
that the overwhelming majority of the costs in the project
would be in the midstream, which meant that was where the
largest portion of the value would accrue. He contended
that if the state remained a wellhead taxing, wellhead
royalty generating entity, it was cutting itself off from a
huge amount of the value in the project. The wellhead value
would be insufficient to drive state take. He believed that
discussions going forward would lead to understanding why
the administration in what they had negotiated so far was
looking at the question of participating through equity in
a project of taking gas not as a value at the wellhead in
terms of royalty or production tax value, but instead as a
gas share of gas that would be transported through the
state's infrastructure and sold into Asia.
Co-Chair Meyer discussed housekeeping.
ADJOURNMENT
6:15:50 PM
The meeting was adjourned at 6:15 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SFIN enalytica Feb 21.pdf |
SFIN 2/21/2014 5:00:00 PM |
Alaska Natural Gas |