Legislature(2015 - 2016)BUTROVICH 205
10/31/2015 10:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| 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 31, 2015
10:08 a.m.
10:08:11 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 10:08 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair (via teleconference)
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Janak Mayer, Chairman, enalytica; Nikos Tsafos, President,
enalytica; Laura Pierre, Staff, Senator Anna MacKinnon;
Senator Kevin Meyer; Senator Cathy Giessel; Senator Mia
Costello; Senator John Coghill; Senator Gary Stevens;
Representative Liz Vasquez; Representative Lora Reinbold;
Representative Mike Chenault.
SUMMARY
SB 3001 APPROP: LNG PROJECT and FUND/AGDC/SUPP.
SB 3001 was HEARD and HELD in committee for
further consideration.
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."
10:08:11 AM
Co-Chair MacKinnon discussed the bill before the committee.
She relayed that SB 3001 was an appropriation bill for the
AKLNG project. The bill included a work plan increase and
would buy out Alaska's partner TransCanada. Additionally,
the bill included a $13 million supplemental request to
support the Department of Law (DOL), the Department of
Natural Resources (DNR), and the Department of Revenue
(DOR) in advancing a gasline project. She introduced the
legislators present in the room. She relayed that
legislative consultants enalytica would address the
committee and would speak specifically to the Alaska
participation in gas and sales agreements.
10:10:55 AM
JANAK MAYER, CHAIRMAN, ENALYTICA, introduced himself. He
stated that enalytica had been contracted as a consultant
to the legislature through the Legislative Budget and Audit
Committee. The company had been advising the Alaska State
Legislature on oil and gas issues for the past four or more
years.
NIKOS TSAFOS, PRESIDENT, ENALYTICA, introduced himself. He
relayed that his background was as a natural gas
consultant; he had worked with organizations, companies,
and governments around the world on buying and selling gas.
He introduced a PowerPoint presentation titled
"TransCanada's Participation in AKLNG: Key Issues" dated
October 31, 2015 (copy on file). He explained that the
presentation would address the components of the
TransCanada buyout proposal. At the end of the presentation
he planned to address what it would take to sign a sales of
purchase agreement and risks to the state.
Mr. Mayer looked at slide 2, "View from 2014: Why
TransCanada." He relayed intent to frame TransCanada's
participation in the AKLNG project by looking legislative
debate on the Heads of Agreement (HOA) and the Memorandum
of Understanding (MOU) discussed during legislative session
2014, which had ultimately led to the passage of SB 138
[legislation passed in 2014 related to a gas pipeline,
AGDC, and oil and gas production tax]. He noted that in
2014 the Parnell Administration had argued for
TransCanada's involvement in the project based on various
strong points. He believed it would be useful to think
through the prior arguments, the associated strengths and
weaknesses, and what had fundamentally changed. He detailed
it had been argued that TransCanada's participation would
provide substantial strategic and non-financial benefits to
the state. For example, he cited TransCanada's experience
as a large, highly capable and experienced pipeline
company, particularly on northern pipelines and Alaskan
natural gas pipeline projects (especially through the
Alaska Gasline Inducement Act (AGIA) process).
Additionally, there had been a significant emphasis on
questions of continuity and momentum. He elaborated that
TransCanada had conducted work during the AGIA process and
it had a significant amount of intellectual property data
as a result. During the transition period, TransCanada had
been working well with the other AKLNG sponsors, but there
had been a desire to ensure the transition of the work
product over to the new AKLNG team in a seamless way.
10:14:28 AM
Mr. Mayer continued to address slide 2. He spoke to the
state's obligations under AGIA and the question of what
damages may be payable if the state was to terminate AGIA
in a unilateral way (including discussions over treble
damages clauses in the contracts). Given the issues, it had
been determined that a desirable trajectory would be
creating a smooth commercial transition that was agreeable
to all parties. He believed the issue had been influential
for many when thinking through the MOU and everything
proposed in the SB 138 debate. Additionally, there had been
a strong argument made that involving an independent,
highly experienced pipeline company in the project would
provide significant benefits from a governance and
expansion perspective. He noted that the three producing
partners had an interest in achieving the most efficient,
lowest cost means of monetizing the existing resource base
at Prudhoe Bay and Point Thomson. He elaborated that the
state had the same interest, but it also had a broader
interest in opening up the basin and ensuring that new
discoveries would have access to the pipeline, which would
take significant experience and capability. He expounded
that it would take experience and understanding in the
negotiation of the governance agreements to ensure
expansion rights for the state. The Parnell Administration
had believed the negotiation on the state's expansion
principles in the HOA was possible due to TransCanada's
participation. The Parnell Administration had felt that
TransCanada would be beneficial in negotiating the next
round of agreements and doing much of the technical work
product (i.e. the sizing of individual components in a gas
treatment plant (GTP), future development capacity of the
facility, and other).
Mr. Mayer discussed that the Parnell Administration had
pointed to the importance of partnering with a company with
the technical, commercial, and financial capability. He
continued to address the importance the Parnell
Administration had placed on involving a company that the
state could be in touch with once the project was
operational and new discoveries were made. He discussed
that if the work to determine potential commercial terms
and what may be commercialized was not done by an
independent pipeline company, the work would have to be
conducted by the state. He reasoned that many of the items
listed on slide 2 remained valid. He noted the importance
of ensuring the state did have some of the capabilities if
it seemed likely that the roles would be taken on by the
state (i.e. Alaska Gasline Development Corporation (AGDC)).
Mr. Mayer relayed that the Parnell Administration had made
an argument of finance, specifically about the cost of
capital and the state's bonding capability. He remarked
that enalytica had many questions about the argument when
it had been made. He noted that it had been discussed that
the overall cost of capital through the deal with
TransCanada could be higher to the state than the state's
own cost of capital. It had been argued that TransCanada
may relieve the state from a portion of the cash calls
during the project development phase, which could benefit
the state given concerns about its bonding capability. He
added that it had also been discussed that the veracity of
the claim was uncertain because there were many reasons to
think that the impact on the state's credit rating and
balance sheet would be the same either way.
Mr. Mayer stated that given the former administration's
arguments, enalytica believed some of the substantial
scrutiny and skepticism was merited. He referred to
significant discussion about whether the TransCanada tariff
cost was competitive to market norms. He relayed that
enalytica had provided some analysis to show that compared
to tariff costs in the Lower 48, the TransCanada cost was
well within the lower end of the norms. Enalytica had also
considered whether the more relevant comparison was the
state's own cost of debt, given the limited risk borne by
TransCanada. He recalled there had been substantial
discussion about the risk/reward balance for the state
under the deal with TransCanada. He detailed that
TransCanada had taken on very limited risk under the deal.
He elaborated that at numerous times during the project
construction stage up to 90 days after FID [final
investment decision], TransCanada had been given the right
to depart the project and be paid of 7.1 percent interest.
He explained that the risk of an increase in capital cost
was borne by the state through a higher tariff. Most of the
core risks that a true equity partner would bare were
retained by the state. He relayed that TransCanada only
bore one fundamental risk, which pertained to risk that
came from the credit outlook of the state. He elaborated
that TransCanada had agreed to provide financing at a
particular cost of debt and equity, which involved some
judgements on the state's financial health and the ability
to take full faith in credit of the state to market. He
reasoned that even that risk had been limited because
TransCanada had the right to leave the project if it
decided the project no longer made commercial sense.
Mr. Mayer continued to speak to the points on slide 2. He
relayed that there was concern related to the risk/reward
distribution of the deal with TransCanada and a feeling
that it reflected the negotiating leverage of each of the
parties at the time, given the presence of AGIA obligations
as a result. TransCanada had taken on very limited risk and
appeared much more like a debtor to the project than a true
equity holder; however, it possessed much of the control
that an equity holder would have. The organization had been
given the right to exercise the state's vote on the 25
percent of the GTP and pipeline. While there were certain
areas where the state held veto rights, TransCanada could
treat the project as its own investment and exercise its
vote as it saw fit. He noted that there had been testimony
in the past week about occurrences where the state had to
view TransCanada as another commercial participant it had
to negotiate with.
10:22:34 AM
Mr. Mayer highlighted the concept of back-in-rights (the
final bullet on slide 2). He discussed that the MOU and
original deal contained numerous off-ramps. He noted that
many legislators had observed that some of the off-ramps
appeared to lead straight back to an on-ramp. He elaborated
that the state could terminate [the agreement with
TransCanada] for numerous reasons at various times, but the
MOU included a clause specifying that if the state
proceeded with the project or a substantially similar
project within 5 years of termination, the state had to
offer TransCanada the right to participate. Due to the
areas of concern, the state wanted to ensure there was at
least one solid off-ramp. He explained that TransCanada had
clarified that the back-in-right would be put into an
eventual Firm Transportation Services Agreement (FTSA), but
not into the Precedent Agreement that would govern the
relationship with TransCanada until the end of 2015. He
furthered that the end of 2015 was the key point in the
contractual relationship with TransCanada where there was
one clean off-ramp; it was the one time the state could opt
to sever the relationship without incurring an ongoing
commitment.
Mr. Tsafos relayed that the consultants planned to walk the
committee through their process in approaching the question
[related to the partnership with TransCanada]. The
consultants had worked to develop a report on their
assessment of Governor Walker's proposal and saw their role
as conducting due diligence on behalf of the legislature.
He relayed that they had worked with Black and Veatch
[financial consultant to the state] to understand its model
and assumptions. He relayed that enalytica was very
comfortable with the Black and Veatch numbers. He noted
that enalytica did not try to replicate the numbers given
time constraints. He relayed that enalytica had a number of
conversations and an in person meeting with the Black and
Veatch team to discuss its numbers. Additionally, enalytica
had a good conversation with DNR to understand its concerns
and how the department viewed the proposal. He noted that
he and Mr. Mayer had been present for all of the
legislative hearings on the topic.
10:26:09 AM
Mr. Tsafos communicated that enalytica largely agreed with
substantive case that had been made by the administration.
He relayed the intent to run through all of the different
areas that made sense to enalytica. He noted that the state
did not seem to have many compelling alternatives to
approving the administration's proposal because of the
impact on the December 4 [2015] vote and what it meant for
the budget. The presentation would focus on two things: 1)
offering context and clarification on some of the
statements made by the administration, particularly around
the financial merits of the TransCanada buyout; and 2) to
share some of enalytica's views on who would take on
responsibilities that had been performed by TransCanada.
10:27:37 AM
Mr. Tsafos highlighted slide 3, "Where We Agree with
Administration and Where Not":
Where we agree with administration statements
The State of Alaska (SOA) will pay TransCanada
(TC) no matter what
Under failure case, terminating TC relationship
now much cheaper than terminating later
Mr. Tsafos elaborated that under a project failure scenario
it would be very painful to write a check for hundreds of
millions of dollars (possibly $1 billion) for a failed
project and the state would be paying interest throughout
that time. He continued to address slide 3:
SOA retains risk, but TC retains most decision
making (TC's only risk is deterioration of SOA
credit)
SOA credit rating will be hit regardless of
whether TC is in the project or not
SOA has several financing options-no need to
panic about having higher cash calls
Mr. Tsafos added that it was typical at the current early
stage to not have a detailed financial plan. He noted that
financing typically occurred at the FEED [Front End
Engineering and Design] stage. Sometimes financing was
closed even after FID, provided there had been discussions
with the bank and there was comfort with the financing.
There was nothing about the absence of a detailed financial
plan that was concerning to enalytica at the current time.
He continued to address slide 3:
This is the only clean off-ramp that SOA has;
failure to pass this bill means harder to sever
ties with TC
Mr. Tsafos expounded that the state would no longer have
the opportunity to step away from TransCanada in a clean
way if it signed an FTSA (due to the back-in-rights
provision). He continued to speak to slide 3:
Not having Alaska Gasline Inducement Act (AGIA)
makes a big difference in SOA calculations
Mr. Tsafos recalled that for many legislators, it had been
important to avoid the possibility of treble damages,
litigation, and arguments. In addition to ensuring that the
state could leverage the work that had been done under AGIA
(for which it had paid a substantial portion). He addressed
the last point on which enalytica agreed with the
administration:
Non-alignment in voting and non-visibility of
information undermine original case for TC in
AKLNG
Mr. Tsafos qualified that enalytica was not part of the
project negotiations and could not say how quickly
TransCanada would respond; however, there had been
testimony by the administration that had addressed some of
the issues. He discussed that in theory TransCanada was
supposed to be the state's agent in the project; however,
the original case was undermined if the company was less of
an agent and more like a party the state had to negotiate
with. He addressed two areas where enalytica differed from
the administration (slide 3):
Where we differ from or wish to supplement
administration statements
The strictly financial case for severing
relationship with TC is not as compelling as has
been argued
Decision should focus on strategic, not financial
considerations: expansion plans and AK LNG vision
Mr. Tsafos elaborated that enalytica believed the state
should not limit its considerations to the idea that the
state had two sources of financing (i.e. TransCanada or the
market) and which was cheaper, but it should consider other
tangibles and intangibles that TransCanada brought to the
relationship and how the state may replace the company once
it was gone.
10:31:36 AM
Senator Dunleavy remarked on Mr. Tsafos' testimony that the
financial implications for the state would not be that
significant. He explained that the committee had heard for
the past week that the state would realize a savings up to
$400 million. He asked Mr. Tsafos if he concurred with the
figure.
Mr. Tsafos replied that Mr. Mayer would address the
question in several slides.
Mr. Mayer addressed slide 4 titled "Is the Financial Upside
Truly Compelling?" The slide addressed the first of two
claims in the argument put forward by the administration:
"Under all scenarios of State credit rating downgrade
down to A-A3, the State cost of debt remains below the
TC cost of capital."
Mr. Mayer pointed to the image of a chart presented by the
administration on the left of slide 4. The chart included
two red bars representing the TransCanada interest rate
financing cost and gray bars representing the borrowing
rate the state may achieve under a series of credit ratings
from AAA to A-(based on data from consultant
FirstSouthwest). He planned to address each of the claims
in detail.
10:34:37 AM
Senator Bishop queried the price of gas that had been used
to determine the $400 million in potential savings to the
state. He asked if a benchmark of $100 per barrel or other
had been used.
Mr. Mayer replied that there would be a slide that
addressed the specific question. He stated that the core
variables looked at the cost of debt in different
scenarios, rather than the cost of gas. He explained that
the discussion was primarily related to financing for the
state's infrastructure rather than anything to do with
revenues the project would generate, which were the same in
both cases.
Mr. Tsafos added that Black and Veatch numbers showed a
scenario with and without TransCanada. He noted that all of
the market assumptions were the same for both cases.
Whatever oil and gas price the analysis assumed in the
TransCanada scenario had also been used in the non-
TransCanada scenario. He believed Black and Veatch had used
a long-term oil price assumption of $80 per barrel.
10:36:08 AM
Mr. Mayer considered the state's cost of debt with or
without TransCanada (slide 5). A table on the slide
presented numbers from a FirstSouthwest analysis. He
pointed out that the figures in the interest rate on
taxable bonds column were the same as the gray bars on the
previous slide for each of the credit ratings shown. He
noted that there were some additional details enalytica
believed were pertinent in thinking through the state's
likely cost of debt, particularly if the state opted to
raise most of the capital through debt rather than savings
and equity and if it was primarily done through debt on the
state's balance sheet versus project financing or other
options. The FirstSouthwest analysis assumed that the
primary driver of credit rating was the proportion of
unrestricted general fund (UGF) that would be devoted to
debt service. The analysis had found that the state could
maintain its AAA credit rating up until the point that 5
percent of the state's UGF revenue was spent in debt
service; beyond that threshold the state could begin to see
credit downgrades. He elaborated that at a debt service
limit of up to 8 percent the state could retain a credit
rating of AA+; with a debt service limit of up to 10
percent the state could retain a AA rating; with a 12
percent debt service limit the state could retain a AA-
rating; and with a debt service limit of 20 percent it
could retain an A credit rating. He discussed how the
numbers related to the amount of new debt the state could
issue. He provided a hypothetical scenario where in 2017
the state conducted one enormous bond issuance.
10:39:20 AM
Mr. Mayer remarked that the FirstSouthwest analysis assumed
the DOR forecast on state revenues through the 2020s, which
included a return to oil prices of $110 per barrel by 2020
and revenues returning to around $4.2 billion [per year];
the forecast projected the figures would remain flat for
the 20 years following 2020. He shared that enalytica had
reengineered the model and had come up with the same
figures. Additionally, it had looked at scenarios with
declining revenue out into the future. He explained that in
a scenario with declining revenue the maximum debt the
state could borrow at an A credit rating would decrease
from the $15 billion to between $10 billion to $13 billion.
He stated that broadly speaking, the presentations from the
administration showed the expected capital commitment for
the project at around $14 billion to $15 billion for the
state. He remarked that the cost was effectually true with
or without TransCanada's involvement. He reiterated that if
the state paid for the project with one large general
obligation bond it could have an A credit rating with an
interest rate of 5.34 percent (based on data on slide 5).
Mr. Mayer referred back to the gray bar chart on the left
of slide 4. He stated that the comparison was accurate, but
the lower bars shown on the chart would be much more
relevant if the state opted to pay for the project entirely
on its balance sheet. He noted that cost represented by the
lower bars was less than the cost of capital through
TransCanada, but not substantially lower. For that reason,
enalytica agreed that there was financial upside, but it
may be less compelling than the full range of possibilities
that had been presented.
Co-Chair MacKinnon communicated to the public that the full
report and the meeting documents were online.
Mr. Mayer addressed the second of two claims in the
argument put forward by the administration (the chart on
the right of slide 4):
"The State could potentially achieve up to $400
million incremental annual cash flows, based on the
State's expected lower cost of capital."
Mr. Mayer turned to slide 6 to elaborate on the claim. He
stated that it was important to understand that without
rounding up the cost of annual savings presented by the
administration were actually $360 million instead of $400
million.
10:42:31 AM
AT EASE
10:42:48 AM
RECONVENED
Mr. Mayer continued to look at slide 6, which included two
cash flow charts from a Black and Veatch presentation. He
pointed out that the right hand side of the cash flows
showed an increased benefit of up to $400 million per year.
He explained that the blue line on the left chart
represented the project without TransCanada and was
substantially lower because it assumed the state would
finance the project with 70 percent debt/30 percent equity.
He detailed under the 70/30 scenario the state would be
responsible for 30 percent of the $7 billion that
TransCanada would have paid; 30 percent of $7 billion was
approximately $2 billion. Without TransCanada the state
would be responsible for an additional $2 billion in equity
outlays and a substantial portion of the $360 million in
annual returns would simply be a function of the $2 billion
the state invested up front. He stated that the net present
value (NPV) of the future cash flows depended largely on
the discount rate used. Enalytica strongly suggested
applying a commercial discount rate when the state looked
at any commercial investment. He noted that for the current
discussion there were easier ways of doing the analysis
without getting into discount rates.
Co-Chair Kelly asked Mr. Mayer to clarify his statements
without any qualifiers. Mr. Mayer replied that the $360
million in annual benefits was a result of investing an
extra $2 billion up front. He stated that when thinking
about the overall value, it was not possible to focus on
one leg without thinking about the other leg. One way to
look at the situation was to try to determine an NPV for
the time value of money; it would only be slightly higher
than zero at a commercial rate of return. He believed there
was a better way, which was to think instead about the rest
of the numbers shown on the Black and Veatch graph (slide
6). The baseline was the $360 million, while the other
numbers used a scenario where the entire cost of
TransCanada's participation was replaced with 100 percent
debt. He explained that with 100 percent debt there would
be no additional equity to put in upfront. The chart showed
the assumption on the cost of capital for the state in
raising funds that would lead to each of the numbers. Under
Black and Veatch's numbers if the state could raise all of
the required capital at a 4 percent interest rate it would
save $260 million per year (as opposed to the $360
million); whereas, savings would reduce to $130 million per
year at a 5.5 percent interest rate. He concluded that from
a purely financial standpoint the state would be better off
without TransCanada. However, he recommended being cautious
when thinking about how large the financial benefit would
be. Additionally, he recommended thinking more about the
numbers on the right hand bars (on the chart shown on the
right) than the left hand bars. He noted that it was
particularly the case when digging further into some of the
assumptions.
10:47:22 AM
Mr. Mayer referred back to the left chart on slide 4 titled
"TC Cost of Capital vs. State Debt Interest Rate." He
stated that the red bars represented the TransCanada cost
of capital at 6.1 percent up until a year after
construction, and 5.8 percent from that point forward. He
noted that the shift was a function of the change in the
capital structure from 70/30 debt to equity to 75/25 debt
to equity. The numbers were lower than the previously
presented "headline" numbers of 7.1 percent and 6.75
percent. He explained that the difference was driven by the
variance in the 30-year Treasury rate, which could change
until pinned down at FID. He explained that in the past
year the 30-year Treasury note had dropped by about 95
basis points (almost 1 percent). For example, if the
relative cost of capital to the state without TransCanada
was 5.3 to 5.5 percent compared to a rate of 5.8 percent,
there would only be a half a percentage point spread
regardless of the 30-year Treasury rate.
Co-Chair MacKinnon surmised that the administration had
provided a "best case" scenario, which enalytica believed
may be slightly optimistic; however, it was still fair to
say that there was upside from a financial perspective. She
asked if her statements were fair. Mr. Mayer believed her
statements were very fair.
Co-Chair Kelly asked for verification that if the
transaction was viewed purely as financial, the difference
between using TransCanada as equity and the rates the state
could obtain on its own by financing the entire portion of
TransCanada's participation would be fairly small.
Mr. Mayer agreed, but noted that it depended how the term
"fairly small" was defined.
Co-Chair MacKinnon stressed that $30 million or $130
million was a substantial amount of money, which could fund
the Department of Education and Early Development for many
years.
Co-Chair Kelly made a remark about hundreds of billions of
dollars of sales over years and an amount being somewhat
diminished in comparison [note: beginning of statement
indecipherable].
10:51:22 AM
Vice-Chair Micciche surmised that if the decision was based
purely economically, buying out TransCanada and shifting to
state control over the 25 percent was likely positive. He
assumed that factoring in the benefit of eliminating the
conflict between the state and TransCanada added to the net
positive although in a less financially concrete way.
Mr. Mayer broadly agreed with the statements. He discussed
that the prior administration's argument that had been made
two years earlier was that TransCanada and the state would
be highly aligned, that the state would have an expansion
oriented partner, and there was a strong strategic interest
regardless of the financials. However, if one believed that
in the past two years the state had occasionally been faced
with negotiating against TransCanada as a commercial
partner rather than being truly aligned, it would
substantially change the strategic calculus as to whether
there was significant value to the state in making sure it
had control of its full voting share.
Mr. Mayer returned to slide 6. He referred to the scenario
where the state would pay for the project entirely through
general obligation debt as a more cautionary benchmark. The
TransCanada cost of capital would be 6.75 percent as
indicated in the MOU without taking into account the rate
tracker. He continued that the conversation would not be
about $130 million at a 5.5 rate; it may be necessary to go
up a full percentage point to take into account that the
rate tracker had not been taken into account in terms of
comparing like with like; at that point the savings would
be closer to $90 million. Additionally, it was important to
think about that under the previous TransCanada agreements,
the state had the equity option to buy back in 40 percent
of what had been handed over to TransCanada; if that right
was exercised, the numbers could be close to halved. He
stated that if the state and TransCanada really wanted to
make the relationship work and the state was concerned
about financing costs there were also ways to bring the
numbers down further by executing the equity option
agreement. He noted it was a strategic consideration, but
it appeared there were many reasons why things were not
working out from the strategic standpoint.
10:55:10 AM
Mr. Tsafos remarked that the financial aspects would not be
included in the remainder of the presentation. He
highlighted slide 7 titled "TC Inflection Points Opens up
Broader Questions." He remarked that some of the questions
were directly related to TransCanada and others were more
tangentially related. He explained that the list included
questions to ask as the process moved forward.
Mr. Tsafos stated that the entire process of SB 138 built
around the idea that the project would not work unless the
producers and the state were aligned and there was one area
where the producers and the state would not be aligned. He
explained that the producers wanted to commercialize their
resource; whereas the state had some broader interests in
making sure the infrastructure could be utilized to open up
the basin for new companies to find oil and gas. He
furthered that the area involved a fundamental tension
between the producers and the state, which had been the
area where TransCanada would have the state's back. The
plan had been that TransCanada would sit in the project
meetings and would be thinking how to get more gas flowing
through the pipe. Throughout the negotiations TransCanada
would be on the lookout to ensure the project was not
designed in ways that would limit the ability of expansion
and increased gas flow. He noted that because enalytica had
not been in the negotiations, they did not know how
accurate the theory was. Absent TransCanada, the state
would be on its own and would have to take over the
responsibility; it would have to protect its own interests
in areas where it was inherently misaligned from the
producers.
10:58:37 AM
Senator Bishop asked for verification that AGDC would take
on the responsibility. Mr. Tsafos replied that based on
testimony, enalytica's understanding was that the share
belonging to TransCanada would go to AGDC; however, it was
not fully clear to enalytica who the counter parties were
in all of the agreements. He imagined that the state would
more broadly be looking out for the interests, but in terms
of the party, much of the responsibility would fall to
AGDC.
Mr. Tsafos continued to discuss slide 7. He discussed that
protecting the state's interests would require multiple
people all the way from "the general to the foot soldier."
He explained that it would be necessary for the state to
review every decision to ensure the protection of the
state's interests. One of the things that had concerned
enalytica was that thus far AGDC did not have a presence on
the 135-person project management team, which was making
daily decisions. He stated that the issue was concerning
because the state needed to make sure to match the big-
picture strategic vision with the day-to-day decisions made
at the lower levels that would have an impact on how
expandable the pipe would be and how much more gas the
infrastructure could withstand. He communicated that the
state would best protect its interests if there was a clear
cohesion between the highest level and everything
underneath.
Mr. Tsafos stated that enalytica believed the issue was
crucial specifically related to the expansion capability
and ensuring that the pipe would be full; there were two
ways enalytica thought about the state protecting its
interest in that regard. The first focus was on the present
day; it was necessary for the state to get the engineering
and governance structures correct to ensure that the
pipeline was as expandable as possible. He discussed that
the HOA allowed any party to expand the infrastructure on
its own as long as the action did not adversely impact the
other parties. He observed that while the provision sounded
good, the devil was in the details - specifically, he
questioned what it meant to not adversely impact the other
parties. He questioned how expansions would be governed if
one of the producers made another discovery on the North
Slope, whether the state would have the unilateral right to
take up all of the expansion capacity or not, and how the
additional compression cost and fuel use would be
allocated. There were currently a significant number of
design and governance questions that would determine
whether in 2026 an explorer could put gas in the pipe.
Mr. Tsafos discussed that the second focus was on the
future. He relayed that when gas was flowing in 2026 the
state would need someone to talk to every single company
finding oil and gas in the state to determine whether the
gas could be put through the pipe. The individuals would
need to determine regulatory, commercial, financing, and
tariff components in order to get gas through the pipe. In
theory TransCanada would have held the responsibility
during the operational phase. He was not suggesting the
state needed to hire the individuals in the present day,
but the concept was one of the implications to consider
without TransCanada.
11:03:13 AM
Senator Dunleavy reasoned that there would always be some
misalignment, because the sovereign party wanted a
continual flow of gas sold at a high price. This required
the addition of more gas over time, which may be at odds
with some of the current lease holders. He wondered if the
state was on track, or if there were some "red flags" that
should be considered. He queried a comparison with similar
projects throughout the world. He asked if the project was
headed in the right direction.
Mr. Tsafos replied that comparing the project to other
parts of the world was difficult, because Alaska was
uniquely situated. He addressed maximizing gas through the
pipe. He noted that many locations with long-term LNG
projects had national oil companies serving the role; they
owned the asset and resources and were sometimes
contractually or constitutionally entitled to the gas
regardless of who produced it. He remarked that some of the
questions would be answered throughout the normal business
process. He pointed to Malaysia, Bernai, or Indonesia where
the original gas source had been depleted and there was a
process through which new suppliers had access. He
furthered that Alaska could not necessarily count on the
regulatory structure for protection because the project was
export oriented and it was not clear the state would have
the Federal Energy Regulatory Commission implementing
supporting structures, which would differ than other places
where countries faced the same challenges. He stressed that
the broad structure that Alaska was pursuing made sense in
terms of the governance and the serious exploration about
the cost and benefits of a 48-inch pipe. However, he
emphasized that the devil was in the details. He explained
that the state needed to understand how every decision,
contract, and piece of equipment would impact its ability
to expand the infrastructure in the future (10 to 20 years
out). He remarked that TransCanada had been responsible for
the work on the state's behalf [which would change with the
company's departure from the project]. He noted it would be
useful to understand how the state would backfill the
capacity [previously filled by TransCanada]. He reiterated
that he was not concerned about the big picture, but the
devil was in the details.
Senator Dunleavy referred to discussions about TransCanada
secondees continuing to provide work on the project. He
surmised it would be the expertise the state should have as
it continued through the process.
Mr. Mayer replied that it was important to keep in mind
that current TransCanada secondees would remain on the
project until May 2016. The additional provision of
secondees was a continuity solution for the next 6 months,
but it was not a long-term solution to the problem. There
was a serious need for the state to determine how it would
fill the gap in the future.
Senator Dunleavy surmised that the question would be how
the state obtained the expertise, whether on an individual
basis or by bringing another outfit to fill the role. Mr.
Tsafos replied that the state could either hire internal
capacity directly or through contracting or the state could
find a different partner.
Co-Chair MacKinnon noted that there was a supplemental
request, which would allow DOL to seek some of the early
negotiations through legal contracting. She believed the
work fell under the $10 million request. She noted she was
not certain the funds were for the specific work referred
to by Senator Dunleavy in regards to expansion, but the
administration did see the need to bring on additional
experts at present.
Senator Dunleavy referenced testimony provided to another
legislative committee by enalytica that every now and then
the company saw or heard things that left them scratching
their heads. He asked for further detail on the comment.
Mr. Mayer recalled that the question had been about the
overall progress of the project and whether the original
vision of AKLNG had been maintained. He had responded that
enalytica had developed an increasingly cooperative working
relationship with some of the new administration's
departments (DNR and DOR in particular). He elaborated that
enalytica had steadily become closer and more comfortable
with how the state was progressing, the capacity it was
building up, and the approach it was taking into
negotiations. He relayed that enalytica had less contact
communication with AGDC in terms of how it was building up
its capability. He elaborated that enalytica was working to
build the relationship to understand AGDC's plans and how
it planned to fill some of the gaps. He continued that all
of the interaction with the state gas team at the
departmental level had given enalytica significant faith in
its approach. He stated that every now and then statements
had been made at a higher political level that enalytica
was unsure how they related to the progress being made in
moving forward under the HOA.
Co-Chair MacKinnon asked if a specific example was when
Attorney General Craig Richards had discussed
confidentiality and had asserted to the Senate Finance
Committee that he was able to receive confidential
information and that he had not signed a confidential
agreement, but could not share the information with the
committee. She remarked that she had been scratching her
head [over the statements].
Mr. Tsafos believed the best way to explain was to refer to
slide 7 [Alice in Wonderland image and quote included on
the slide]. He referenced testifying before another
legislative committee in April. He addressed that the state
had been going down one path and then some statements had
been made that made it seem like a different path had been
taken. He believed it was particularly relevant in the
context of TransCanada being out of the project. He
elaborated that a project in which gas was possibly bought
from producers at the wellhead was a very different
project. He relayed that the last two slides of the
presentation would address the issue. He explained that it
was a major adjustment to the structure of the project.
Even though there were parts of the structure that seemed
to be going ahead in a clear direction there were
occasional statements that seemed to suggest a different
endpoint or a slight variation to the endpoint. He
explained that it was not necessarily good or bad if the
project reached a point where two parties withdrew and
suddenly the state was buying gas at the wellhead and had a
much bigger share of the infrastructure, but it would no
longer be the same project. He believed it was important to
think about the end points and how they affect decisions at
present. He noted that the comment referred to by Senator
Dunleavy and Co-Chair MacKinnon was not specifically
attributed to confidentiality.
11:13:44 AM
Co-Chair MacKinnon wondered how the structure worked within
confidentiality for transparency and an effective business
environment.
Vice-Chair Micciche stated that considering the royalty in
kind (RIK) principles associated with the project, there
was no value in production taxes and royalty. He observed
that as a 25 percent owner, the value was likely in
specified AKLNG volumes. He saw a potential financial
conflict for the state. He wondered how careful the state
had to be to ensure the expansion commercial case did not
directly compete with the value of foundational RIK export
volumes.
Co-Chair Kelly asked Vice-Chair Micciche to rephrase the
question.
Mr. Mayer restated the question and responded. He addressed
that the state had two sets of interests: 1) making a
commercial assessment of the project that was similar to
the assessment made by the producers in terms of wanting
the greatest possible rate of return on the investment; 2)
expanding and opening the basin. The question was related
to how to compare the two objectives to ensure that the
state was not sacrificing one objective by pursuing the
other.
Vice-Chair Micciche agreed with Mr. Mayer's rephrasing of
the question.
Co-Chair Kelly asked for further clarification on the
question.
Mr. Mayer explained that the question was about how to make
sure the state did not sacrifice commerciality of the
project as a result of its concerns about expansion
capability in the future.
Co-Chair MacKinnon remarked that the question was about a
tradeoff of benefits.
11:16:50 AM
Vice-Chair Micciche rephrased his question. He stated that
in the rush to increase production, he wanted to know the
most careful points for the state to consider to ensure
that expansion did not directly compete against maximum
value to the state in the AKLNG project.
Mr. Mayer replied that the decision around a 42-inch pipe
versus a 48-inch pipe was a useful way of thinking about
the project. He detailed that there were many solid reasons
why the state's project partners had made an initial
assessment that the 42-inch pipe was the way to go based on
where the steel could come from and how many loads of steel
were required. He noted that the items had led to the
decision, especially in the context of the realization that
there was an additional Point Thomson of spare capacity
after 16 years of production that would need to be brought
online at some point. Additionally, there was some fairly
substantial Point Thomson expansion capacity within the 42-
inch pipe. He elaborated that the administration's idea to
look further at the 48-inch option acknowledged that there
was a tradeoff between capital expenditures upfront versus
future operating expenditures related to achieving an
expansion. He continued that if the ultimate goal was to
secure an extra billion cubic feet per day of expansion, it
could be done under both pipe options; however, the 48-inch
pipe would use much less fuel because it required fewer
compressor stations. There was a clear cost-benefit
tradeoff to be made about the value placed on the expansion
option. He furthered that it needed to be a deeply
commercial and economically rational decision, but it may
be one in which the payoffs were different for the state
and the producers. How the items were weighted depended
enormously on one's assessment of the future resource base
on the North Slope (not only looking at resources, but what
was potentially commercial, and what probabilities were
assigned to the items).
Mr. Mayer stated that ultimately all of the items needed to
be taken into account in deciding what value the state
would place on the expansion capacity and to look at the
breakeven point in the value of fuel. He elaborated that if
more fuel was used to drive more compressors it would be
necessary to determine the price of gas that would make
everything equal. He noted that the state would be in a
much better position to make the decision when the full
work the project was proposing to do on the 48-inch option
came back. He believed it was very reasonable for the state
to have different objectives from the producers on the
issue. He remarked that if the state had different
objectives, the objectives could be met potentially through
a larger pipe or through the state's negotiation on
expansion terms. In either of the cases the decision needed
to be driven by economics and the value of the different
cases.
11:21:04 AM
Vice-Chair Micciche voiced his concern about ensuring that
the project had the skillset to make sure that expansion
principles did not put the state in a position of working
against itself.
Co-Chair MacKinnon remarked that the Senate Finance
Committee greatly appreciated that Governor Bill Walker had
removed the issue of a reserves tax from the special
session agenda. She believed it appeared that the
administration was moving forward to enter into gas sales
agreements at present. She remarked that unfortunately no
one from the administration was available during the
current meeting. She wondered what analysis should be done
from a financial perspective and on what time line. She
referred to enalytica's response to Vice-Chair Micciche's
question that more information was better so that the
analysis was economically driven. She wondered what
analysis should have been done in order for the state to be
asking for gas sales agreements from its partners. She used
a marathon analogy related to pacing oneself throughout the
race and sprinting at the end to cross the finish line.
Mr. Tsafos replied that he would address slides 8 and 9 and
could then follow up on any remaining questions. He
addressed the following question on slide 8: "What's in a
Sales and Purchase Agreement (SPA)?" He relayed that most
LNG SPAs were about 100 pages with. Enalytica had printed
off an SPA as an example, which had been fully executed for
about 2 million tons of LNG. He noted that if a buyer was
purchasing gas at the North Slope they would not have to
worry about the tanker sizes.
11:25:15 AM
Co-Chair MacKinnon asked if it was an accurate that the
state should not care about the issue addressed by Mr.
Tsafos. She wondered if not knowing the tanker cost would
impact the decision unless someone else was picking up 100
percent of the cost. She surmised that if someone else
picked up the tanker cost, they could build luxury liners
to haul LNG that the state would have no influence over and
would have to pay a tariff for. She thought the state
should care about the entire process and cost of the entire
transport of its product to a potential buyer.
Mr. Tsafos agreed that the state should care about the
entire process. He noted that the agreements were
complicated. The state would outline specifics related to
approaching ports to receive the gas, who paid for tugs,
and other. He stated that when a transaction happened at
the port, significant information would be outlined related
to the specifics of the transaction point. He stressed that
the state absolutely had to think about the economics and
related aspects, but there would be some technical things
it could skip.
Mr. Mayer furthered that it was important to distinguish
between what needed to be specified in the contract versus
the commercial case and everything that needed to be taken
into consideration when entering into the negotiation and
agreeing to the terms.
Co-Chair MacKinnon asked if it was fair to say that
enalytica's presentation included contracts within
contracts or separate rounds of negotiation with different
levels of detail for the final agreement. She asked for
verification that the state may not need all of the details
to make an economic decision for Alaska on gas sales and
marketing.
Mr. Mayer replied in the affirmative. He noted that there
were two key challenges associated with issue under
discussion. The first related to the volume of the
agreement and all of the things that needed specification,
which was a set of challenges of itself. He expounded that
the issue related to the quality of the legal team and how
long it took to nail all of the items down. The second
related to understanding commercial terms and determining
the state's best interest. He furthered that one of the
large challenges associated with executing the agreement
was understanding the value of the gas, the cost of
bringing the gas to market, and what price made sense. He
noted that Mr. Tsafos would elaborate on the topic
momentarily.
Co-Chair MacKinnon referred to slide 7 and asked the
presenters to go through TransCanada's inflection point.
She asked for a further explanation of the items enalytica
had proposed for the committee's consideration.
11:29:00 AM
AT EASE
11:39:36 AM
RECONVENED
Co-Chair MacKinnon looked at slide 7, and asked for an
explanation of each bullet. Mr. Mayer addressed the bullets
on slide 7. He addressed that enalytica's first concern in
terms of how the state could best protect its interests in
the project was ensuring the state was participating at
every stage of the project (related to both big picture and
daily decisions). He referred to the 135-person project
management team that currently had no secondees from AGDC.
When it came to matters of expansion, some of the concern
related to the governance level, which translated to minute
details such as the sizing of particular infrastructure
components. He stressed the importance of ensuring the
state was well represented on the project management team
by people with a combination of clear lines of
communication and accountability and who possess technical
and commercial insight and understanding. He addressed that
AKLNG could back-fill TransCanada's exit, but enalytica
wanted to ensure that the state had its own capacity to
backfill some of the positions.
Mr. Mayer addressed the question of how the state would
ensure expansions. The slide included a bullet stating that
the AGDC plan to pursue expansions was unclear. He detailed
that the question had been asked during testimony and the
answer given at the time was that the situation would be
similar to Trans-Alaska Pipeline System (TAPS) with a
project company like the Alyeska Services Company. He
reminded the committee of the original ideas behind the
HOA. He stated it was a project within a project. He
furthered that under the HOA any of the parties could
initiate and pursue an expansion provided it did not
negatively impact the other parties. The parties were not
in a position where everyone needed to approve an
expansion; the state had the right to pursue an expansion
as long as it did not negatively impact the other partners.
He noted that in addition to the right, the state also
needed to have the capability for expansion including the
technical and commercial agreements and understanding that
would make it possible.
Mr. Mayer addressed the cost of TransCanada's involvement
compared to fully replacing the company with 100 percent
debt. Enalytica did not yet believe there had been
sufficient focus on the overall capital structure the state
would use to finance its share. He spoke to the idea of
financial leverage. He explained that financial leverage
would reduce the amount of money needed upfront, but it
would increase the risk and volatility of the state's
investment. He furthered that the concept could be compared
to either buying a mortgage entirely with cash of a bank
account, using 20 percent equity, or using 100 percent
financing. He relayed that a small portion of equity took
very small movements in the price of real estate to provide
either a very high return or a very low return. He stated
that the same principles applied in world of using leverage
to finance the AKLNG investment. He discussed that the
administration had spoken about its concerns that in
pursuing the RIK structure, the state was potentially
exposed to negative net-back. He elaborated on the idea
that under very low LNG price scenarios the state could
potentially not have enough revenue from selling LNG to
cover all of its fixed costs of transportation. He agreed
that it was true in an environment with substantial
leverage involved in financing the share; however, it was
no longer a concern if the state had the equity on hand and
the desire to finance its participation with the equity. At
that point the concern would be about the rate of return
the investment would achieve. He stated that in the very
worst case scenario the state would not be under water. The
same was true with LNG; if the state had built the entire
facility with its own equity, prices could drop and it may
not make the money it had hoped; however, there would never
be a point where the state would have to pay over money to
sell the LNG.
11:46:36 AM
Mr. Mayer continued to detail slide 7. He stated that as
long as the entire structure was built heavily on debt, the
risk became greater that there would be times when the
state made an abundance of money and times when it went
into the negative. Enalytica believed it was time that
people began thinking about the dynamics in terms of the
state's required capital commitment and about the
appropriate amount of equity versus debt in trying to
reduce the volatility of cash flows and risk to the state.
Co-Chair MacKinnon communicated that she and Senator
Dunleavy had recently attended a meeting in Palmer where
Rigdon Boykin [South Carolina-based attorney serving as the
state's lead negotiator on the AKLNG project] had proposed
that the project and its partners could all come together
to finance the project. She wondered if that was typical.
She believed that some of the partners were surprised by
the assertion.
Mr. Tsafos replied that there were two ways to think about
the financing of LNG projects. One was to think about the
financing happening at the project level where everyone was
in it together. Alternatively, the financing could happen
differently for each of the partners. He provided a recent
project in Israel as an example. He detailed that project
was very simple; developers wanted to develop gas to sell
to the Israeli market. One of the partners had financed the
project entirely through equity; whereas the other partner
raised project specific debt. He explained that the
partners under the example had different financing
approaches for the same project. He noted that the same
dynamic existed for LNG projects in general. He detailed
that there would be times with the project took on project-
level debt, and other cases when the project partners
borrowed against their original claim to the project. He
addressed the concept of the project within the project
(the idea of each participant holding a share of the gas
and the infrastructure) seemed to be leading towards a
structure where each partner would have its own financing.
He elaborated that the partners could all finance their
portion with their own equity, which would not be dependent
on another party. To get to a level where the project
itself took debt, some changes to the project structure
would be required. Currently, AKLNG essentially housed four
projects that were all sharing the same infrastructure, but
for everyone to financing the project together there would
need to be some changes to the structure.
11:51:28 AM
Mr. Mayer completed detailing slide 7. The last points on
the slide pertained to the state's vision for AKLNG. He
read a quote from the Lewis Carroll novel "Alice's
Adventures in Wonderland":
"Would you tell me, please, which way I ought to go
from here?" "That depends a good deal on where you
want to get to," said the Cat.
Mr. Mayer believed that a clearly articulated strategic
endpoint was currently missing from making the large
decisions. He elaborated that if the strategic endpoint was
firmly rooted in the HOA that had been established in 2014,
it made it clear to think about what was in the state's
interest. He furthered that the scenario was all about
equal shares of all of the partners and getting as close as
possible to perfect alignment between the partners. He
stated that under the scenario TransCanada had looked like
an anomaly in many ways. On the other hand, the strategic
picture began to change under a scenario that included
withdrawal agreements, the idea that the state may be
buying gas at the wellhead through a tolling or gas sale
and purchase agreements that did not originally come from a
partner with an infrastructure ownership. He continued that
under the second scenario there may be many cases in which
it would be desirable for an additional investor (e.g. an
independent midstream company) wanted to undertake the
financial commitment and risk to move gas through the
pipeline (if the state did not want to be on the hook to
move the gas through the infrastructure). He concluded that
having a clear, strategic perspective on where the project
was going made it much easier to make some of the
decisions.
11:53:48 AM
Senator Bishop stressed that there was a substantial amount
of information for individual lawmakers to comprehend
associated with the project. He listed various areas of the
project that lawmakers needed to understand including
finance, legal instruments, gas sales agreements, marketing
agreements, and project management agreements. He pointed
to the project management team that was made up of best
players in addition to AGDC's team that he hoped was also
made up of the best players. He remarked that there was an
overwhelming amount of information to absorb to make the
best decision for the state. He asked if the presenters
agreed.
Mr. Tsafos replied that the project was immensely
complicated. He referred to a project management team
(headed by Steve Butts) chart listing the regulatory bodies
(50 to 60) that were required to sign off on decisions. He
stated that AKLNG was one of the most complicated projects
in history. He stressed that one of the pros and cons was
that there were extremely capable partners. He explained
that the state would always have to look out for its
interests and defending those interests would require
substantial money, capabilities, and expertise. He stressed
the importance of continuing to examine whether the state
was looking at all of the items at the highest and best
possible level. Additionally, the state needed to consider
whether there was coordination and alignment between each
of the pieces so the state could field the best team during
negotiations with some of the world's most experienced
companies.
11:56:46 AM
Senator Bishop remarked that Mr. Butts had one team with
the best player on gas. He stressed that the team only
dealt with the world of gas. Meanwhile, he was working to
get his head wrapped around every aspect of the project at
a high level in order to make the best decision for the
state. He communicated that it was challenging.
Co-Chair MacKinnon directed attention back to slide 7. She
pointed to the final point on the slide: "How much do
withdrawal agreements raise risks for SOA."
Mr. Mayer replied that they would address slides 8 and 9.
Mr. Tsafos turned to slide 8. He noted that slides 8 and 9
had been included in response to a request by Co-Chair
MacKinnon. Slide 8 included a "textbook" sales and purchase
agreement, which listed all of the items that should go
into a fully executed sales and purchase agreement. He
remarked that the items were not all necessarily needed at
the present moment. He discussed how long it would take to
talk through the items based on standard industry practice.
He shared that he had personally worked with a number of
companies that had done due diligence on buying or selling
gas through a pipeline or LNG. For example, a company may
seek advice about buying gas in the Lower 48. He relayed
that it would probably take enalytica a couple of months to
work through the numbers and scenarios to provide a good
image on what the investment may look like. After providing
the data there would be a number of other layers of due
diligence. He explained that due diligence usually happened
before commercial negotiations occurred. In his experience,
it often took 1.5 to 2 years to conduct the due diligence
on a project. He explained that intermediate agreements may
be signed - in the same way that AKLNG signed the HOA or
MOU. He noted that the legislature had signed an MOU in
December 2013, a Precedent Agreement in June 2013, and it
had been preparing to sign an FTSA at the current time. He
stressed that it had taken two years from the execution of
the first agreement.
12:00:57 PM
Mr. Tsafos discussed slide 9 titled "Withdrawal-Sales
Carries Major Risks for SOA." He prefaced the slide as
their "Halloween special" as there were some items on the
slide that could be quite significant and impactful. He
shared a quote by Mr. Mayer "There's two kind of agreements
that you may be able to sign before December 4th: one is a
very high level agreement that probably isn't very binding;
and the second is an agreement that probably isn't in the
best interest of the state." He explained that in order for
the state to close all of the possible commercial gaps in
one month, it may need to make some very serious
concessions.
Mr. Tsafos addressed a question posed by Co-Chair Kelly
from the prior day related to how much the project would
cost. He pointed slide 9 titled "Withdrawal/Sales Carries
Major Risks for SOA" and addressed the first line:
Economics: Buying 75 percent of AK LNG gas could cost
$1.4-$7.4 bn/yr (1995-2014 Henry Hub prices)
Mr. Tsafos elaborated that under the scenario the state
would buy the producers' (ExxonMobil, ConocoPhillips, and
BP) gas at the wellhead. He furthered that under the
scenario the producers were no longer interested in the
project and opted to sell the gas to the state.
Additionally, the scenario depicted the state purchasing
the gas from 1995 to 2014 at the price of Henry Hub (a hub
in Louisiana that set the price for North American gas). He
expounded that the gas would have cost the state anywhere
from $1.4 billion to $7.4 billion per year (with an average
of about $3 billion per year, the total for 20 years would
be $60 billion). He explained that if the state bought gas
for the next 20 years at the historical prices and it
invested another $60 billion to build the infrastructure on
its own, it would be -$120 billion by the time the project
became operational in 2025 or 2026. He qualified that the
scenario was a simplistic example that did not include
discount rates and a multitude of other items; however, it
did illustrate that the project was a major commitment. He
reasoned that when the state thought about entering into
the commitment, it would want to ensure it understood
exactly what it was getting into.
Mr. Tsafos continued to address slide 9 that included a
list of items the state would need to sort out before
executing something resembling a binding agreement. He
addressed the second line, which was related to liability:
Liability: Right to purchase could mean obligation to
buy; major contingent liability; options costly
Mr. Tsafos elaborated that if the state agreed to purchase
the gas it would be a major contingent liability. He stated
that if the state did not have the liability and a Sales
and Purchase Agreement, it would have an option. He
explained an option was the right, but not the obligation,
which would cost more than the right and the obligation. He
addressed pricing on the third line:
Pricing: Does SOA have a thorough and detailed
understand of pricing/volume risk?
Mr. Tsafos expounded that even from his perspective as a
natural gas analyst it was not possible to predict what a
good price for the state would be. He emphasized that how
much the project would cost, the timeline, and the market
appetite for the project were all unknown. He stressed that
at the current point it was very difficult to come up with
a price that the state could have some certainty around. He
addressed the concept of asymmetry on the fourth line:
Asymmetry: If producers are willing to commit to a set
price, does SOA really want to buy?
Mr. Tsafos furthered that the only reason the producers
would exercise the option was if they thought it would be
better than building AKLNG. The only way the state would
have title to the gas was if the producers thought the
project would not make them money. He reasoned that it was
not a very good position for the state to be in. He moved
to the fifth line:
Title: If gas has an "option" attached to it, legal
title become less clear
Mr. Tsafos provided a hypothetical example related to
trying to sell the gas in Japan. The gas could be entitled
by a party in Prudhoe Bay, but the state may have an option
to the gas. He questioned under what conditions the option
would be triggered. He addressed activation and questioned
if a deadline would be imposed. For example, the gas could
be lost by December 31, 2018 if something had not been
done. He continued that if he was in commercial
negotiations and was trying to get the other side to
commit, the other side understood there was a big risk
because they may commit, but if other things did not happen
by the date, the gas would be lost. He reasoned that it
became very murky commercially.
12:07:22 PM
Mr. Tsafos addressed gas transfer on the sixth line (slide
9):
Transfer: Where is gas transferred? In what condition
(e.g. what happens to CO2)?
Mr. Tsafos queried what would happen to the CO2. He noted
that Mr. Butts had stated there was 12 percent CO2. He
questioned whether the state would buy the CO2. He wondered
if the state would have to agree with the Prudhoe Bay
operator to sell the CO2 back. He asked how the CO2 of the
gas would be priced. Additionally, he asked if the state
buy the gas clean from CO2, in which case it would not be a
wellhead sale. He stressed that there were many things to
think about. He pointed to "fiscals" on the eighth line:
Fiscals: What kind of fiscal certainty would producers
want to offer binding agreement?
Mr. Tsafos elaborated that the state's 25 percent [share]
was part of royalty and part of tax as gas. He asked if the
other side would agree to sell to the state based on
current or some other fiscal arrangements (the state would
want to know how much tax it would pay). The last two
statements on slide 9 took a step back. He pointed to the
ninth line:
Focus: Overly focused on failure; lower commitment;
opt out rather than work issues
Mr. Tsafos elaborated on the topic of focus. He stated that
there were only 24 hours in a day and the question was
about how the hours were spent. He reasoned that if the
entire day was spent trying to determine what to do if the
project failed, time was not being spent trying to
determine how to make the project succeed. He provided a
puzzle analogy. The scenario included four people who were
tasked with figuring out a puzzle and the winner was told
they would receive a free cruise. In the scenario one party
realized it could just take another party's place by
offering its spot on the cruise. He explained that one
party could chose to sell the gas and have someone else
figure the "puzzle" out. He stated that at that point the
issues were not really being solved when half a person's
thoughts went to figuring out how to get on the cruise
without solving the puzzle. He explained that it created
misalignment when all of the parties were not working
together to resolve the issues.
Mr. Tsafos agreed that Governor Walker had a point. The
major risk for the project was getting to a gate that some
people wanted to go through and others did not. Enalytica
argued that it was not clear that dealing with the issue at
present instead of in the future would make the risk easier
to handle. He continued that there were two options if a
project reached a stage gate where one party did not want
to proceed: either to work the issues to determine a
solution or to determine what it would take to buy the
party out. He stated that the scenario occurred in LNG
projects. He stressed that later on in the project a party
would have much more information on which to wisely base a
decision on. For instance, if the issue arose at the pre-
FEED to FEED stage, the state would probably know if the
cost would be closer to $45 billion or $65 billion. For
example, there may have been discussions with the market
and the Lazard report on financing would be completed. He
emphasized that there would be much more information
available on which to make a decision; whereas, trying to
sort the issue out at present would raise a host of risk
the state would have to think through and comprehend before
it could make a decision that it would not really regret
later on.
12:11:39 PM
Co-Chair Kelly communicated his concern related to the gas
sales and withdrawal agreements. He asked if the gas sales
agreements had to be complete by the December 4, 2015
deadline. He asked if Mr. Tsafos believed the agreements
could be done later on.
Mr. Tsafos replied that what was required and what the
administration wanted were two different things. He noted
that in order to safeguard the state's interest the
agreements could also be done later. He clarified that he
was not making a statement on how the administration viewed
the need to have the agreement prior to December 4. He
noted that only the administration could answer how it
viewed the issue. He reiterated that the state could still
safeguard the interest even if it did not have a deal by
December 4.
Co-Chair Kelly surmised that the administration was
insisting on the completion of the sales agreement by
December 4, 2015. Mr. Tsafos believed the administration
would like to see the agreements completed prior to
December 4, but he did not know how important it was to
them. He added that the agreements could still be
negotiated towards the end of pre-FEED.
Co-Chair Kelly referred to the presenters' testimony that
it could take two years to develop a sales agreement for a
project like AKLNG. He asked for verification that a sales
agreement had to be negotiated with each of the partners
involved in the project.
Mr. Tsafos agreed, but qualified that he was not certain
what the level of understanding was at present and how far
apart the two sides were. He referred to due diligence
companies did in negotiating agreements. He noted that he
did not believe ExxonMobil needed to do a political risk
analysis of Alaska.
12:14:16 PM
Co-Chair Kelly interjected his understanding that many of
the assumptions would be done at the same time. Mr. Tsafos
agreed. Co-Chair Kelly asked for verification that three
sales agreements would need to be completed. Mr. Tsafos
replied "that's our understanding."
Co-Chair Kelly assumed each agreement would not take a full
two years, but he surmised that they would take significant
time. He had heard that the administration had not begun
the agreements. He asked for the accuracy of the statement.
Mr. Tsafos replied that he could not speak exactly to the
status of the agreements. However, he believed recent
letters from each of the producers appeared to be something
that would be seen at the start of a negotiation. He
relayed that he did not know how much back and forth there
had been between the producers and the administration.
Co-Chair Kelly had heard "they're nowhere in the
neighborhood." He commented on the complexity of sales
agreements and believed the administration seemed to be
insisting on establishing the agreements by December 4. He
asked if there was a risk that the administration would
vote against moving forward if the sales agreements were
not complete by that time. Mr. Tsafos deferred the question
to the administration.
Co-Chair Kelly wondered if the situation was a possibility.
Mr. Mayer replied that they had all heard the same
testimony from the administration. He believed it was safe
to say that a definitive answer had not been provided. He
stated that it was clear that a vote on the work plan and
budget was set to occur on December 4 and thus far there
had been no testimony on whether a yes vote would occur
regardless of the negotiation.
Co-Chair Kelly questioned whether the state should be
"freaked out." He noted he did not need a response.
Co-Chair MacKinnon remarked that AGDC had asserted that Mr.
Joe Dubler [vice president and chief financial officer,
AGDC] would cast the vote on its behalf on December 4. She
wondered if it was a fair assumption. Mr. Tsafos replied
that the state's seat on the AKLNG Management Committee was
held by AGDC; its employee Mr. Dubler sat on the committee
and was responsible for voting. He recalled Mr. Dubler's
testimony that his vote was directed by the board of AGDC.
12:17:56 PM
Co-Chair MacKinnon shared that the legislature was awaiting
a blueprint on how the administration viewed the structure
of the project moving forward. She asked if it was fair to
say that if ExxonMobil, BP, or ConocoPhillips were willing
to sell the state's gas that the legislature should be
highly interested in why the producers believed selling the
gas would be a good thing to do at the current point in the
project. Mr. Tsafos agreed.
Senator Bishop believed Mr. Tsafos had stated that if the
producers were willing to sell that the state probably
should not buy at this time. Mr. Tsafos agreed.
Senator Bishop asked for verification that Mr. Tsafos had
sold gas before. Mr. Tsafos answered that he had helped
companies conduct due diligence to sell gas. He had not
personally bought or sold gas.
Senator Bishop remarked that the presenters had provided
clarity on how long it took to conduct due diligence on a
purchase sales agreement. He queried the number of
individuals needed to execute and conduct thorough due
diligence. Mr. Tsafos replied that the question was
difficult to answer precisely. He stated that the work
would not all be full-time; there could be four or five
people doing the economics and commercial aspects.
Additionally, lawyers were needed. He relayed that it was
not a "one man" job, but it was not a 20 or 30 people job
either. There were items that would probably not be done
under the current situation such as conducting political
risk analyses because the items were known. He believed it
could take 5 to 10 people.
Senator Bishop wondered if that response was based on per
participant. Mr. Mayer replied that the numbers put forward
by Mr. Tsafos assumed a high level of preexisting
understanding of all of the commercial parameters of the
transaction. Particularly, about what the cost to bring the
gas to market actually was. He noted that the information
was not currently known.
12:21:53 PM
Co-Chair MacKinnon thanked the presenters. She referred to
a question she had asked at a press conference the day
before related to the governor's assertion that SB 138 had
some fundamental flaws. She addressed a response she had
received from Mr. Darwin Peterson dated October 31, 2015
(copy on file):
Dear Senator MacKinnon,
In response to the question you posed to me in Senate
Finance during the hearing on October 30th, I offer
the following response:
When the Governor stated that SB 138 was fundamentally
flawed, he was speaking primarily about the issue of
project certainty. He has spoken many times about the
need for adequate provisions to ensure a partner who
withdraws from the project will still commit the gas
they control...
Co-Chair MacKinnon noted that the letter continued on to
say that the governor's administrative team was complying
with the constraints that SB 138 had provided in statute.
She appreciated the quick response. She noted that the
Senate Finance Committee was still in search of further
information on the state's end goal and what it was trying
to accomplish outside of the transaction to purchase
TransCanada and approve the work plan.
Co-Chair MacKinnon made a correction for the record. She
explained that she had received comments the previous day
that she thought were from Mr. Butt regarding "bumps in the
road" at a Palmer hearing. She relayed that the comments
had actually been made by Dave Van Tuyl with BP.
12:24:06 PM
AT EASE
12:25:46 PM
RECONVENED
Co-Chair Kelly MOVED to ADOPT the committee substitute for
SB 3001 Work Draft 29-GS3812\P (Martin, 10/31/15).
Co-Chair MacKinnon OBJECTED for discussion.
LAURA PIERRE, STAFF, SENATOR ANNA MACKINNON, explained the
sectional analysis (copy on file):
Sec. 1
Legislative Intent
(a) that the supplemental appropriations for the
Departments of Law, Natural Resources, and
Revenue be accounted for separately
(b) that the administration carry out the
TransCanada interest acquisition in an expedited
manner
Ms. Pierre elaborated that the goal was to have the
transfer made prior to December 4, 2015. She continued to
read the sectional analysis:
Sec. 2
Supplemental appropriation request for the Department
of Law for $10,100,000 for outside legal counsel
contracts and internal agency costs
Sec. 3
Supplemental appropriation request for the Department
of Natural Resources for $2,126,000 for marketing,
contractual services, and personal services
Sec. 4
Supplemental appropriation request for the Department
of Revenue for $1,381,000 for personal services and
travel and contractual services
Ms. Pierre detailed that the amounts were the same as the
amount presented by Pat Pitney, Director, Office of
Management and Budget, Office of the Governor. She read the
remainder of the sectional analysis:
Sec. 5
Fund Capitalization
(a) $68,455,000 is appropriated from the General
Fund to the Alaska Liquefied Natural Gas (AK LNG)
Project Fund to acquire the interest currently
held by TransCanada Alaska Development Inc.
(b) $75,600,000 is appropriated from the General
Fund to the Alaska Liquefied Natural Gas Project
Fund for the state's share of Preliminary Front-
End Engineering and Design (Pre-FEED) work for
the AK LNG Project
(c) Statutory designated program receipts
received for reimbursement for costs of field
work from the AK LNG Project Fund are
appropriated to the AK LNG Project Fund
(d) Statutory designated program receipts
received for reimbursement for costs of field
work from the In-State Natural Gas Pipeline Fund
are appropriated to the In-State Natural Gas
Pipeline Fund
Sec. 6
Lapse of Appropriations
The appropriations made in Section 5 do not lapse
Sec. 7
Retroactivity
If sections 2-5 take effect after November 15, 2015,
sections 2-5 are retroactive to November 15, 2015
Sec. 8 Contingency
The appropriation made in section 5 (b) for Pre-FEED
work, is contingent on adoption of a work plan and
budget for the AK LNG Project by December 31, 2015
Sec. 9 Immediate effective date
Co-Chair MacKinnon WITHDREW her OBJECTION. There being NO
further OBJECTION, Work Draft 29-GS3812\P was ADOPTED.
SB 3001 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
12:30:39 PM
The meeting was adjourned at 12:30 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 3001 103115 SFC,enalytica, TC in AK LNG.pdf |
SFIN 10/31/2015 10:00:00 AM |
SB3001 |
| SB 3001 CS SB 3001 Version -P.pdf |
SFIN 10/31/2015 10:00:00 AM |
SB3001 |
| SB 3001 CSSB 3001 Version - P Sectional Analysis.pdf |
SFIN 10/31/2015 10:00:00 AM |
SB3001 |
| SB 3001 103115 Response from Darwin Peterson.pdf |
SFIN 10/31/2015 10:00:00 AM |
SB3001 |
| SB 3001 10 25 15 Senate Finance Questions - Answers.pdf |
SFIN 10/31/2015 10:00:00 AM |
SB3001 |