Legislature(2005 - 2006)SENATE FINANCE 532
08/04/2006 10:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| Jim Whitaker, Chair, Alaska Gasline Port Authority | |
| Radoslav Shipkoff, Director, Greengate Llc | |
| Bill Walker, Alaska Gasline Port Authority | |
| Mr. Shepler and Mr. Harper, Legislative Consultants | |
| Donald Shepler, Greenberg Traurig, Llp | |
| Edward J. Twomey, Morrison & Foerster, Counsel to the Governor | |
| Jim Clark, Chief Negotiator, Office of the Governor | |
| Dr. Pedro Van Meurs, Consultant to the Governor | |
| SB3002 | |
| Bill Corbus, Commissioner, Department of Revenue | |
| Dennis Bailey, Legislative Legal Services | |
| Alaska Gasline Port Authority Presentation | |
| Jim Whitaker, Bill Walker and Radoslav Shipkoff for Agpa; Dr. Pedro Van Meurs, Consultant to Governor | |
| Roger Marks, Economist, Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3002 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
August 4, 2006
10:18 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Lyda Green
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Senator Thomas Wagoner
Senator Ben Stevens
Senator Kim Elton
Senator Albert Kookesh
MEMBERS ABSENT
All Members present
OTHER LEGISLATORS PRESENT
Senator Gary Stevens
Representative Paul Seaton
Representative Jay Ramras
Representative Kurt Olson
Representative Berta Gardner
Representative Mark Neuman
Representative Ralph Samuels
COMMITTEE CALENDAR
Alaska Gasline Port Authority Presentation
SENATE BILL NO. 3002
"An Act relating to the Alaska Stranded Gas Development Act;
relating to municipal impact money received under the terms of a
stranded gas fiscal contract; relating to determination of full
and true value of property and required contributions for
education in municipalities affected by stranded gas fiscal
contracts; and providing for an effective date."
MOVED CSSB 3002(NGD) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: SB3002
SHORT TITLE: STRANDED GAS AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
07/12/06 (S) READ THE FIRST TIME - REFERRALS
07/12/06 (S) NGD
07/13/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/13/06 (S) Heard & Held
07/13/06 (S) MINUTE(NGD)
07/14/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/14/06 (S) Heard & Held
07/14/06 (S) MINUTE(NGD)
07/24/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
07/24/06 (S) Heard & Held
07/24/06 (S) MINUTE(NGD)
07/25/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/25/06 (S) Heard & Held
07/25/06 (S) MINUTE(NGD)
07/26/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/26/06 (S) Heard & Held
07/26/06 (S) MINUTE(NGD)
07/27/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/27/06 (S) Heard & Held
07/27/06 (S) MINUTE(NGD)
07/28/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/28/06 (S) Heard & Held
07/28/06 (S) MINUTE(NGD)
07/31/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
07/31/06 (S) Heard & Held
07/31/06 (S) MINUTE(NGD)
08/01/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
08/01/06 (S) Heard & Held
08/01/06 (S) MINUTE(NGD)
08/02/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
08/02/06 (S) -- Meeting Canceled --
08/03/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
08/03/06 (S) Failed to Move Out of Committee
08/03/06 (S) MINUTE(NGD)
08/04/06 (S) NGD AT 10:00 AM SENATE FINANCE 532
WITNESS REGISTER
JIM WHITAKER, Chair
Alaska Gasline Port Authority;
Mayor, Fairbanks North Star Borough
PO Box 71267
Fairbanks AK 99707
POSITION STATEMENT: Gave Port Authority Presentation.
RADOSLAV SHIPKOFF, Director, Greengate LLC
Financial Advisor, Alaska Gasline Port Authority
2001 L Street NW, Suite 901
Washington DC 20036
POSITION STATEMENT: Gave Port Authority Presentation.
BILL WALKER, General Counsel and Project Manager
Alaska Gasline Port Authority
411 4th Avenue, Suite 200
Fairbanks AK 99701
POSITION STATEMENT: Commented on Port Authority Presentation.
DONALD SHEPLER
Greenberg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Alaska State Capitol
Juneau AK 99801-1182
POSITION STATEMENT: Commented on the Port Authority's
presentation.
RICK HARPER
Econ One Research, Inc.
Consultant to the Legislative Budget and Audit Committee
Three Allen Center, Suite 2825
333 Clay Street
Houston TX 77002
POSITION STATEMENT: Commented on the Port Authority's
presentation.
EDWARD J. TWOMEY
Morrison & Foerster LLP
Counsel to the Governor
Washington DC
POSITION STATEMENT: Commented on Port Authority issues.
JIM CLARK, Chief Negotiator
Office of the Governor
PO Box 110001
Juneau AK 99811-0001
POSITION STATEMENT: Commented on Port Authority issues.
DR. PEDRO VAN MEURS
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau AK 00911-0001
POSITION STATEMENT: Commented on the gas pipeline and Port
Authority issues.
BILL CORBUS, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on the gas pipeline and SB 3002.
DENNIS BAILEY, Attorney
Legislative Legal Services
Legislative Affairs Agency
Alaska State Capitol
Juneau AK 99801-1182
POSITION STATEMENT: Commented on SB 3002.
ROGER MARKS, Economist
Department of Revenue
PO Box 110400
Juneau AK 99811-0400
POSITION STATEMENT: Commented on SB 3002.
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 10:18:51 AM.
Present at the call to order were Senators Fred Dyson, Bert
Stedman, Gary Wilken, Lyda Green, Kim Elton, Donny Olson, Lyman
Hoffman, Ben Stevens, Thomas Wagoner and Chair Ralph Seekins;
Senators Con Bunde, Al Kookesh, and Thomas Wagoner arrived as
the meeting was in progress. Also in attendance were Senator
Gary Stevens and Representatives Paul Seaton, Jay Ramras, Kurt
Olson, Ralph Samuels, Mark Neuman and Berta Gardner.
^Alaska Gasline Port Authority Presentation
CHAIR SEEKINS announced that the committee would pick up where
they left off yesterday with the Port Authority's presentation.
^Jim Whitaker, Chair, Alaska Gasline Port Authority
JIM WHITAKER, Chair, Alaska Gasline Port Authority (AGPA), said
the overriding mission of the Port Authority was to keep as much
of Alaska's natural resource wealth in Alaska as possible. He
said that goal is consistent with Alaska's laws and with the
legislative mandate that Alaska's constitution requires.
10:21:43 AM
^Radoslav Shipkoff, Director, Greengate LLC
RADOSLAV SHIPKOFF, Director, Greengate LLC, and Financial
Advisor to the Alaska Gasline Port Authority, resumed his
analysis contained in the "Presentation to Senate Special
Committee on Natural Gas Development - AGPA Project Economics,
August 3 - 4, 2006" and recapped that the LNG project was
reviewed on a stand-alone basis. It has a net present value
(NPV) of $1.7 billion, an internal rate of return (IRR) of $27.4
billion and rapidly achieved discounted payback. He reviewed
sensitivities using current prices and what the break even Henry
Hub price was, which is defined as the price necessary to
achieve the minimum required return. He discussed that the LNG
proposal offers an additional value to the producers that
doesn't exist in the pipeline project and that is the ability to
divert gas to the best market available - because it can be put
on ships and delivered anywhere in the world.
10:23:48 AM
He explained that gas is diverted only when the opportunity
arises to do so and the real question is how to quantify that
possibility and that is what he would talk about next. He said
slide 51 was heavy on statistical analysis and he would give
them the overview of that analysis, which underpins the
conclusion.
MR. SHIPKOFF explained his theory that options exist for values
when there is lack of perfect correlation between two variables.
Japanese gas prices tend to be very highly correlated with
Japanese oil prices, which have to do with contractual formulas
contained in their LNG purchase agreements. U.S. gas prices are
not very well correlated with its oil prices. This low
correlation increases the likelihood the U.S. will have periods
when one price is high and the other is low. In Japan, there is
no ability to choose between higher or lower. There have been
periods when Japanese prices create greater value to a potential
LNG supply from Valdez than what Alaska would receive from
southern California.
He explained that he used both a straight algebraic approach and
a Monte Carlo simulation, which used specialized statistical
analysis software that created an expected average value from a
large number of scenarios; the resulting graph was on slide 52.
Both approaches calculated essentially the same number if the
same assumptions are used.
10:30:10 AM
He said that California gas prices are not closely correlated
with oil prices and that creates variability in price, which
creates uncertainty. The graph shows that for any price below
$37 per barrel, one would expect to receive more value from
Japan than from southern California and conversely for any price
above $37 per barrel, one would expect to receive more value
from the U.S. than from Japan. This is only if southern
California prices were perfectly correlated with oil, but that
is not the case. The graph did not show how much more value the
gas would have in Japan, just that it would be more and it would
be different at each oil price (graph on slide 53).
10:33:11 AM
MR. SHIPKOFF reviewed the probability graphs on slides 53 - 58,
which showed the higher the U.S. oil price, the lower the value
of diverting to Japan is and explained, "So, if we were to have
an LNG project today, you would not expect to be diverting to
Japan very often." He said the probability distribution of oil
prices can be plotted based on historical distribution and over
the last five years it has been about $40.
He said that slide 56 graphed historical observations using the
Monte Carlo inputs. The results are almost the same using the
straight algebraic approach. He said the intuitive concept
behind these analyses is very simple and elaborated:
What we're saying is that the lower prices are, the
lower the value is in the U.S. of the net back
generated from selling the gas in the U.S. However,
you would expect to generate higher value from Japan.
The fact that you have the ability to go to Japan as
opposed to the U.S., when going to the U.S. does not
create much value, gives rise to this extra premium,
which could be anywhere from $0 to $1.
10:39:57 AM
SENATOR STEDMAN asked him what kind of volumes he was talking
about in playing this "arbitrage game" and how quick he proposed
the project could respond in dealing with long-term contracts.
MR. SHIPKOFF replied that he didn't know how much volume would
be diverted, but under the loan guarantee, 20 percent could be
diverted and if the U.S. has extremely low oil prices, more than
20 percent could be diverted. How much is diverted does not
change the analysis. The project is profitable without the
ability to divert to Japan. Every project has that ability even
with long-term contracts. They always negotiate diverting cargo;
that is why he is putting value on it.
SENATOR STEDMAN said he was struggling with the relevancy of the
whole concept in the presentation versus just a casual comment
that one might be able to play some pricing arbitrage between
two different markets. The fundamental question he had to answer
is what project is going to give the best value to the citizens
of the State of Alaska - not so much weighing his project
substantially heavier because he has the potential of an
arbitrage play. He said, "To me, that's almost irrelevant."
Showing analysis indicating his project is viable is just one
step of many. He asked how that arbitrage information was
supposed to help him make his decision.
MR. SHIPKOFF mentioned that first there is the ability to
divert, which was ignored before - even though the project is
very profitable without it. He said the producers frequently
divert LNG. He said the LNG project is not an either/or project
and takes nothing away from a potential highway project. "If the
project becomes economic; then it becomes a no-brainer. You have
to do it."
SENATOR STEDMAN replied:
Not necessarily. Without getting into an argument,
clearly there is a decision being made on which
project is going to be going forward and which ones
aren't. Without recognizing that, clearly that's up to
you. But clearly it looks to me like that's what's
going on at the table for the last year and a half.
MR. SHIPKOFF replied that the decision should be that any
project that creates value for the state and the producers
should proceed. So, the highway project should proceed whenever
it wants and so should the Port Authority project.
SENATOR BEN STEVENS said that Mr. Shipkoff offers so much, but
his project has neither upstream fiscal agreements nor approval
from the Federal Energy Regulatory Commission (FERC) - giving
the appearance of trying to subvert the FERC. He also took
offense at the "no-brainer" comment when everything Mr. Shipkoff
presented is hypothetical discussion saying, "I don't think that
it is even worthy of our consideration at this table at the
point we are [at]."
CHAIR SEEKINS stepped in to say that he wanted an orderly debate
and asked speakers to stick to the presentation.
10:48:53 AM
MAYOR WHITAKER disagreed with Senator Ben Stevens' basic precept
that the producers, given a lease agreement and an obligation to
produce, should determine what is in the state's best interests.
10:49:24 AM
MR. SHIPKOFF continued his presentation with slide 59, which
shows what happens to upstream profitability if the optional
arbitrage value is added. The IRR increases to about 31.9
percent; the NPV goes from $0.5 billion up to $2.2 billion. The
breakeven prices are also reduced from $4.30 Mmbtu to $3.74
Mmbtu. He commented that he had seen comparative projects that
were very good at $3.74.
He then talked about the hypothetical of what happens if the
highway project is added to the LNG project assuming it would
come on line by 2016 at the earliest and that it is a 4.3 Bcf
project. The incremental value of a Y-Line increases
significantly for a total of $13.1 billion, he said and, "The
sum of the two is more than the sum of the parts," because both
projects together save on the tariff of the shared line. Slide
61 indicated the highway project's netback improves if the LNG
project goes first, because its transportation costs are reduced
from Prudhoe Bay to Delta Junction. The value to the state
increases from $16.5 billion for a standalone highway project to
a total of $21.8 billion with the LNG project.
10:52:02 AM
MR. SHIPKOFF said that slides 63 - 71 look at what happens if
only Point Thomson gas is used. He assumed the LNG project would
get a combination of gas supply from Prudhoe Bay and Point
Thomson of 1.2 Bcf for 30 years. Using just Point Thomson, there
would be less overall supply and the decline would start sooner;
therefore all of the costs would have to be amortized faster.
His analyses did not take into account the economics of the
liquids and condensates from Point Thomson. He said Slide 64
showed what the netback would look like at the pipeline inlets
and spent a few minutes explaining that. He said the returns are
very good, but the breakeven price is still somewhat high. He
thought a Point Thomson project alone would end up looking very
economic if the liquids and condensates were added.
11:01:07 AM
MR. SHIPKOFF concluded that AGPA's numbers show that an LNG
project creates incremental substantial value both for the state
and for the producers. He asked the committee if a project
creates substantial incremental value for the state and the
producers, why aren't the producers doing it. In a textbook
financial scenario, a company should do every project that
creates positive value, but in reality that is not the case.
Companies have capital and resource constraints and regulatory
and legal constraints. He explained that using the value
maximization strategy, a company would make sure it has the
opportunity to develop all the projects that create value. This
means that all the projects with an expiration date will be
developed first; and Alaska is one of the few jurisdictions that
doesn't have an expiration date and that is why he thought it
would be developed last.
11:05:34 AM
MAYOR WHITAKER remarked that it was unfortunate that some
committee members weren't at the meeting.
CHAIR SEEKINS explained that some members had to attend a
technical session and he said the committee would take a recess.
11:06:02 AM recess 11:25:03 AM
CHAIR SEEKINS called the meeting back to order at 11:25 am.
MR. SHIPKOFF concluded his presentation saying that he didn't
think the producers were serious about any of the projects yet,
but they would do both if they could determine they had maximum
value.
11:29:11 AM
^Bill Walker, Alaska Gasline Port Authority
BILL WALKER, General Counsel and Project Manager, Alaska Gasline
Port Authority (AGPA), stated that it appears the Port Authority
is adversarial to the producers, and in some instances they are,
but that was not their first choice. He briefly recapped the
history of the Port Authority saying was created to benefit the
producers and the beginning idea came from an IRS finding on its
tax-exempt status for financing an all-Alaska project. The
project was presented to the producers and they declined to
participate in it; then the Port Authority decided to continue
on its own.
11:30:29 AM
MR. WALKER picked up his presentation saying that AGPA realized
it needed assistance on the marketing side and entered into an
agreement with Sempra Energy. Sempra was very excited about the
project and offered to participate by investing $5 billion.
However, it withdrew from the AGPA effort following the hostile
attitude of the administration towards the all-Alaska gasline
project and it is not in an agreement with the Port Authority at
this point.
11:31:54 AM
MR. WALKER stated that AGPA submitted an application under the
Stranded Gas Act and a few months after it was submitted, the
Administration suggested that it withdraw. Since there was no
need to negotiate concessions or amend existing tax structure,
the Administration proposed that AGPA sign a protocol agreement,
which was done [slides 19 - 31].
In the later part of March 2005, he said the Administration
requested that AGPA resubmit its Stranded Gas Development Act
(SGDA) application, which he did on the final day of the
deadline. He was disappointed the next day when he saw the press
release from the state saying it was disappointed to receive an
application from the Port Authority and that it couldn't bring
an application to the legislature this session. He said, "Well,
that was most unfortunately - that was never part of the
discussion." The president of Sempra was present at the meeting
in which the Administration requested that AGPA resubmit its
application and he was stunned.
11:34:42 AM
MR. WALKER said that slide 31 listed the eight sister ships
owned by BGT that were built by General Dynamics in the late
70s. They are currently in the trade now. Two fleet life-
expectancy studies were performed by Lloyd's Register, the most
recent one in 2005, giving the ships a life expectancy up to at
least 2020 with the older ships having some inefficiencies
associated with them. He also said the U.S.-built ships would
need to be reflagged, as discussed yesterday, but BGT's legal
counsel in Washington, D.C. assured him that it was a
congressional process with much fewer obstacles than receiving
an exemption from the Jones Act. He said that the maritime
unions had offered him their assistance in this process.
11:36:49 AM
SENATOR WAGONER asked how the capacity of ships built in 1978 or
1979 compared to more modern tankers and if there is a
difference in the capacity, how would that affect transportation
of the LNG.
MR. SHIPKOFF replied that all eight sister ships have identical
capacity of 126,300 cubic meters (m). The standard capacity for
3
LNG tankers used to be between 125,000 m and 138,000 m. The Q-
33
flex ships (Qatar-flex) are around 215,000 m and Q-max ships are
3
up to 260,000 m. This trend is not general for all tankers, but
3
rather project specific for Qatar that needs the extra capacity
because it is so far away from the Gulf of Mexico - about 9,500
nautical miles. He said it's not a good idea to use Q-max sized
tankers, because a reduced number of terminals can accommodate
them. Most Japanese and European terminals cannot accommodate
them. However, using smaller tankers means one must have more
ships to accommodate capacity.
11:39:49 AM
MR. WALKER said the life expectancy study indicated that the BGT
sister ships would go out to 2040 without much difficulty. The
question is if the older ships should be used or be replaced
with newer ones.
SENATOR STEDMAN asked if AGPA had the first right of refusal or
some competitive advantage with BGT when its lease runs out with
them.
MR. WALKER replied that they are currently negotiating that
issue. BGT is anxious to have its ships in the Alaska trade.
MR. SHIPKOFF added that the charters expire in 2011; and many
other suppliers could use them. AGPA does not have an exclusive
arrangement with BGT, but they realize having U.S. built ships
gives them an advantage. The rates he assumed in the graph take
into account what he believes will be the range of values they
could attract from other potential charterers and are set
slightly above them for Alaska.
MR. WALKER noted that AGPA had received a proposal from Totem
Ocean Trailer Express, as well, but it doesn't have any
experience shipping LNG. Burma Gas Transport, 75 percent owned
by Mitsui O.S.K. Lines, already ships LNG shippers and has
experience worldwide.
MR. WALKER's slides 37 and 40 showed 16 North American LNG
facilities on the West Coast that are in various stages of
application that have the potential of receiving Alaska's gas.
Most have contacted AGPA favorably about receiving Alaska gas
and he is working with those that are closest to receiving their
permits. The first one is Kitimat LNG Inc. in British Columbia,
a 2.1-day sailing from Valdez. Sempra Energy has received its
permit and it is furthest south on the Baja Peninsula. He
estimated that three of four facilities would be permitted on
the West Coast.
11:46:35 AM
He said that slide 38 was from the California Energy Commission
and listed the receiving terminals on the West Coast; slide 39
was a picture of the Sempra terminal 1.5 Bcfd expansion.
MR. WALKER said the initial LNG supply opportunity for Sempra
was obtained by BP and Shell at 50 percent each.
MR. SHIPKOFF added that BP's 50 percent is held by Sempra.
MR. WALKER said that Kitimat just signed agreements with the
First Nations and has received all, but one, of its
environmental permits from British Columbia.
11:51:22 AM
SENATOR HOFFMAN asked how long it takes a ship to get from
Valdez to Japan.
MR. SHIPKOFF replied about seven days for 3,500 nautical miles.
11:52:06 AM
MR. WALKER said when the $18 billion loan guarantee was put in
the 2004 energy bill, he found that the Port Authority was not
part of it. He went to Washington, D.C. and with the help of
Senator Ted Stevens, he got it added before it passed.
11:53:50 AM
CHAIR SEEKINS asked what hurdles one must get over to qualify
for a loan guarantee.
MR. WALKER replied that one has to first go through the FERC
process.
MR. SHIPKOFF added the specifics of obtaining the guarantee has
not been set yet by the DOE, but essentially you would have to
convince them to lend you the money.
CHAIR SEEKINS asked if one would have to go through an open
season to get long-term shipping commitments to show a balance
sheet to get a loan guarantee - in essence showing that you
don't really need it.
MR. SHIPKOFF replied yes, that is what the process is all about.
CHAIR SEEKINS asked if he could get a guarantee without shipping
commitments.
MR. SHIPKOFF replied no, a reasonable probability that supply is
there must be present.
CHAIR SEEKINS asked if he could contractually arrange who would
ship through AGPA's pipe.
MR. SHIPKOFF replied that was a possibility.
CHAIR SEEKINS asked how that would work.
MR. SHIPKOFF explained the rationale behind an open season was
to ensure fairness that all possible producers would supply gas
into it. The Port Authority could determine it wants to have an
open season even though it's not required to.
CHAIR SEEKINS asked if he is actively negotiating with DOE to
determine what the qualifications might be.
REPRESENTATIVE SAMUELS interrupted to say the Legislative Budget
and Audit Committee, the Administration, the producers and
Anadarko specifically petitioned the secretary of DOE to not set
the rules up yet - until what mechanisms will be needed for what
projects are known.
12:01:33 PM
MAYOR WHITAKER said that was consistent with the communication
he has had with DOE, as well.
12:01:37 PM
SENATOR STEDMAN asked how he could was going to get certificates
of public convenience and necessity if FERC is not going to
regulate his project.
MR. WALKER replied that was the purpose of the meeting he had
with the DOE's general counsel. Their response was if you're
FERC exempt, you present your project to the DOE. He reasoned:
You know, we're not looking at picking a battle with
any regulatory agency. We're looking at doing a
project. Would we continue to have communications with
FERC? Of course we would. We're not going to just
ignore them. But our read of the law, and many of them
agree, that under the definition and the description
that we have laid out, we are FERC exempt. And if
that's going to save us a couple of years, that means
a lot based on the way we see the marketplace.
SENATOR STEDMAN said that would be a good question for the FERC
attorneys.
12:03:40 PM
MR. WALKER said next issue is YPC permits and data and there is
an entire warehouse of data in Anchorage. AGPA became committed
to it when it wired $1 million for them in 2004 and since then
AGPA has taken over the responsibility of maintaining them. To
determine their value, he said that Bechtel Corporation looked
at them and said there was significant value. Therefore, they
proceeded to put in their 55,000 man-hours of work without
payment from AGPA. The law firm of O'Melveny & Myers LLP did the
same thing and was comfortable with the permits. Sempra Energy
did a very significant due diligence on the permits before
entering into an agreement with the Port Authority. The permits
are current, but they need to be modified. He is comfortable
that the package has great value.
12:06:52 PM
He said they have a 25-year export license that may or may not
be of significant value depending on whether gas gets shipped to
Japan [slide 44]. The Coastal Zone Contingency process took a
year and it found TAGS Phase 1 was consistent with the standards
of the Alaska Coastal Management Program and the North Slope
Borough and City of Valdez coastal management programs. The EIS
served as the National Environmental Policy Act compliance
document on which all federal agencies based their permit
application decisions. In it the agencies adopted a unique
"tiered" permitting process.
12:07:44 PM
He said that the Ahtna Corporation [slide 45] right of way (ROW)
agreement grants YPC the right to designate and acquire
easements, rights of way and other similar agreements for access
across lands for purposes that include gravel rights for a
natural gas pipeline and associated facilities across Ahtna
Native lands.
MR. WALKER said they have both federal and state rights of way
for a gasline and related facilities. He reported that AGPA has
a conditional ROW lease for 21 months that contains the text and
stipulations of the final ROW lease that become effective when
the conditional ROW lease requirements are met. It addresses the
pipeline on state lands from the North Slope to Anderson Bay
within the TAPS corridor in a manner consistent with the federal
ROW grant.
MR. WALKER said the DOE and OFE authorized YPC to export up to
14 million metric tons of LNG annually for 25 years to Japan,
South Korea and Taiwan, and limited FERC's jurisdiction on the
place of export sites to Anderson Bay. He said that FERC Order
350 is exempt. He report that the final EIS on the Anderson Bay
site fulfilled the National Environmental Protection Act
administrative review requirements and allowed FERC to issue
place of export authorization.
MR. WALKER said the air quality permits go for eight years.
Getting the data collected for it was critical because it was
needed to amend the permit.
He reminded them that ANGDA recently received its conditional
right-of-way lease from Glennallen to Palmer, but that the Port
Authority has no rights to it. He applauded them for doing what
they are doing saying it is very compatible with the Port
Authority project. "Again, we sort of look at ANGDA as a related
organization - not legally related, but similar goals and
missions."
He said that slide 48 was a project timeline prepared by
Bechtel, if the Port Authority had gas tomorrow, which it
doesn't. It indicated a six-year process that was driven by a
two-year modification of permits and financing phase followed by
a four-year construction phase. He said an additional year might
be needed for construction of the tanks in Valdez.
12:13:06 PM
MR. WALKER said that gas acquisition strategy is the core of the
Port Authority's issues. He was relying on the fact that an
Alaska gas project is reasonably profitable and that the
producers have a duty to go forward with it. Furthermore, he
stood by the beliefs stated by Spencer Hosie Esq., legal counsel
to the LB&A Committee, that it is not the state's obligation to
go head-to-head with international projects and give concessions
until a project becomes economical. The law is clear that the
producers cannot warehouse hydrocarbons merely because it makes
sense from their perspective.
He related that he has had many meetings with ConocoPhillips,
Exxon, and BP offering to move their gas through their tax-
exempt structure. When those were not successful, AGPA filed an
anti-trust suit, which is on-going. He said that state
administration's enforcement of the terms of the leases is
really important and elaborated:
We follow closely the Point Thomson issue. We think
that is a wonderful opportunity for Alaska to finally
get its gas to market - 8 Tcf of proved reserves in
Point Thomson, the largest undeveloped gas field in
North America. So, we think that's in default
currently and we think it's appropriate that that be
made available to this project. What we've looked at
is gas from Point Thomson and the state's royalty gas
out of Prudhoe Bay combined is very close to what we
need for this project. So, we're very interested in
Point Thomson. We're not saying take Point Thomson
back and make it available to us; that's not what
we're saying - make it available to a project that's
ready to go.
If the state terminated those leases and we should
look at the legal steps necessary to do that - rather
than giving up 87.5 percent of something that you know
is there, the state may look at it a little
differently and look at some of the other countries
that have retained a greater role and have somebody
else come in and be the operator of it without giving
away significant amounts. So, there actually may be an
upside on that.
MR. WALKER said he hadn't figured the upside on removal of the
liquids from Point Thomson, which would be another significant
amount. He said that bringing the liquids out without the gas is
problematic as far as reinjecting the gas back in at Point
Thomson, but the AGPA project would be happy to take the gases.
12:14:36 PM
He said that slide 50 showed competition around the world to
bring gas into the United States. The point of the slide is to
say that the hottest market on the planet right now is the Lower
48.
MR. WALKER remarked that, "We sort of describe our gas in Alaska
as milk with no expiration date, because it never quite gets to
the front of the counter, because there is really no downside to
delay that." Development of other projects is why he is in a
hurry - everybody is trying to their gas into the U.S.;
approximately 15 sites are seeking permits. Other slides he
presented (from a Cheniere presentation) showed gas transmission
systems in the United States as well as targeted gas demand
projections.
SENATOR DYSON interrupted to ask if the committee was going to
take a break because he had some questions.
CHAIR SEEKINS responded that the committee would break after a
few more slides from Mr. Walker. He would take questions when it
reconvenes at 1:30.
12:20:03 PM
MR. WALKER referenced an Anchorage Daily News article by Wesley
Lori that supported AGPA's concern that the Lower 48 could be in
LNG gas balance by 2012 and that Alaska's gas is projected to
get there by 2016 to 2020. He said that BP, ExxonMobil and
ConocoPhillips are all planning other projects in the Lower 48.
He had a quote from Lee Raymond, CEO of Exxon, that said, "There
isn't going to be an Alaskan gas pipeline before there is a
Canadian gas pipeline." Another quote from Jim Mulva, CEO of
ConocoPhillips, that said basically the same thing.
12:21:38 PM
MR. WALKER stated that AGPA believes that TransCanada's permits
are good, but he thought that was somewhat ignored in the
contract and litigation about how Canada would participate in
the construction of a pipeline could be a potential delay. He
opined that TransCanada holds valid property rights to build and
own the Canadian section of the project and Alaska has no option
but to defend those rights on behalf of Canadian shareholders.
12:23:19 PM
He said that AGPA was also concerned about the impact on the
wellhead value if the liquids were taken off in Alberta. He also
said that an off-take at Delta Junction does not work for their
scenario.
12:26:12 PM
MR. WALKER summarized his presentation saying that AGPA is
concerned about Alaska being shut out of North American markets.
He is not sure what the impact of the Alberta tar sands would
be; for one thing, some of the same companies own gas at Prudhoe
Bay. Other concerns included: any concessions on the Canadian
portion of the project (65 - 80 percent) will be deducted from
the wellhead value, that the 30 - 40 year contract didn't
actually guarantee a pipeline would get built, loss of the
state's ability to manage its resources, and loss of state
sovereignty in the development of its gas and oil. He finished
with a slide labeled "Comparative Benefits to Alaska of Proposed
Projects" and reiterated that AGPA's biggest challenge is that
it doesn't have gas commitments.
The committee took an at-ease from 12:30:27 PM to 1:51:12 PM.
CHAIR SEEKINS called the meeting back to order at 1:51.
MAYOR WHITAKER said AGPA's presentation had been completed and
they would answer questions. He pointed out that they consider
themselves to be a collaborative and cooperative project along
with the highway project.
1:51:51 PM
SENATOR WILKEN said one of the things that make the project
unique is its tax exemption from the federal government. He
asked Mr. Shipkoff to explain how that plays out in his
calculations.
MR. SHIPKOFF answered that the economics he presented today
don't include tax exemption benefits. The reason is because it
is not a constant value and depends on a lot of assumptions.
Whenever they have shown a project that includes the tax
exemption benefit, they have been challenged - either the
magnitude of it or whether they are tax exempt for real. They
wanted to take the issue off the table; and the project works
without it. He pointed out that the original objective of the
Port Authority was to help improve producer economics.
1:55:17 PM
SENATOR WILKEN brought attention to a particularly good
Anchorage Daily News article that challenged the Port Authority
to come forward with five specific areas for the LNG project to
respond to if it is truly a viable alternative to the Highway
gas line; and opined if it isn't a viable alternative, "Let's
end the distraction." He asked Mr. Walker to respond to the
questions in a public manner.
1:57:49 PM
MR. WALKER replied that he didn't carry the ADN editorials with
him and that he would answer the questions one at a time.
SENATOR WILKEN said the first is what the project is today, the
second, is what AGPA's market is for West Coast gas, third, its
financing design and commitments on ships, fourth what are all
of its Memorandums of Understanding, both in place and being
negotiated, and fifth, the meaning of the IRS exemption to the
project.
CHAIR SEEKINS asking if he wanted a response here or in the
Anchorage Daily News.
SENATOR WILKEN replied if he were doing it, he would write a
letter to the editor of the AND or as a compass piece.
1:59:28 PM
MAYOR WHITAKER responded that the questions are fair and
reasonable and the Port Authority was prepared to respond. He
thought all of the questions had already been addressed during
the course of the committee's deliberations and considerations.
CHAIR SEEKINS said he also thought the presentation had
addressed them.
2:00:26 PM
SENATOR DYSON said his packet doesn't have some of slides being
discussed. One of his slides had the potential and plans to
bring gas from the Gulf Coast to the Great Lakes, which he saw
as a major challenge to the Highway project. He asked what the
timeline was for that project and where they were on it.
MR. WALKER replied that AGPA hadn't seen an exact timeline, but
it the project appears to be aggressively getting the permits
for the re-gas terminals on the Gulf Coast to make that plan
work.
MR. SHIPKOFF said that some information is not publicly
available, but currently, at least six projects are going into
the Gulf that will almost certainly start delivering gas between
2009 and 2012. Another 4 Bcf project could come in by 2012 or
2014 with something pretty close to certainty. You can count on
9 to 10 Bcf coming to the Gulf, which is well connected to the
Midwest and Northeast. In addition, a new pipeline proposal will
come in from the Colorado Rockies to the Midwest, an additional
2 Bcf. He said there is a lot of competition for the U.S.
market.
SENATOR DYSON asked if it's right to assume that the existing
pipelines from Gulf Coast to the Great Lakes don't have enough
spare capacity to handle another 4 Bcf.
MR. SHIPKOFF answered that he didn't have the precise figures on
spare capacity, but he could follow up on that adding that those
projects have either obtained financing or are very close to it.
2:04:59 PM
SENATOR DYSON asked if they were thinking of bring AGPA's gas
into Kitimat in Canada.
MR. SHIPKOFF replied that they also have the southern California
option available, but if Alaska continues to wait, that option
may go away. The reason their base case numbers assumed the gas
would go to southern California is because it is of better value
and that option is still available.
SENATOR DYSON asked him to explain why Kitimat might not be
available.
MR. SHIPKOFF replied that it is available, but southern
California is a better value today.
SENATOR DYSON said he was just in Edmonton and Calgary and
talked to most of the Canadian players there. Those folks had no
knowledge of the Port Authority making contact with the industry
there. He asked if he just didn't talk to the right people.
MR. WALKER responded that they met with the chairman of the
board, the president and all the officers of Kitimat LNG. He has
an MOU with them.
SENATOR DYSON said that Kitimat has a 30-inch crude export line
with a 20-inch dilutant import line and asked if there is no
available gasline space between Kitimat and the Alberta Hub at
this time.
MR. WALKER replied there is not sufficient room and they realize
that. That is why Kitimat has entered into a joint venture with
Pacific Northern Gas (PNG) to expand the existing line.
2:08:15 PM
SENATOR DYSON said he attended some seminars that talk about
compressed natural gas (CNG) as opposed to LNG transport for
short distances and asked if he took gas to Kitimat would it be
short enough for him to consider doing CNG as opposed to LNG.
MR. WALKER replied that they looked into that and CNG makes a
lot of sense for short runs, but it's right at the limit of what
makes sense for the AGPA. The problem is that CNG is highly
compressed and it doesn't go through liquifaction and the cost
of CNG vessels is significantly higher. Also, AGPA wanted the
flexibility of going longer distances.
SENATOR DYSON asked if he said CNG vessels were more expensive
than LNG.
MR. WALKER replied that was the estimate they gave. He
elaborated they would need the larger size for coastal Alaska.
2:09:45 PM
SENATOR DYSON said his information on the cost of using CNG
vessels was different than the information Mr. Walker has.
MR. SHIPKOFF clarified that his figures were based on per unit
transported. The CNG boats are smaller, but they are a better
option for smaller projects. So, the relative cost per unit
transported is higher - even though in absolute terms they may
be cheaper.
CHAIR SEEKINS noted there were no further questions and thanked
the Port Authority presenters.
^Mr. Shepler and Mr. Harper, Legislative Consultants
2:10:51 PM
CHAIR SEEKINS welcomed Mr. Shepler and Mr. Harper, legislative
consultants, and asked if they had any comments at this point.
^Donald Shepler, Greenberg Traurig, LLP
MR. SHEPLER, Greenberg & Traurig, and ^Rick Harper, Econ One
Research, Inc.
RICK HARPER, Econ One Research, Inc., introduced themselves as
consultants to the legislature on gasline matters.
MR. SHEPLER began his comments by referring to a handout he'd
provided and the FERC exemption issue. He summarized that the
Port Authority was making this claim was under the Natural Gas
Act (NGA). He said four different sections of the definitional
terms apply to the NGA and stated, "It is my view that as a
technical legal matter, the Port Authority's assertion of being
exempt as a municipality finds support in the FERC case law and
the statute."
Having said that, Mr. Shepler noted that only a handful of cases
interpreting the municipality exception had been decided by the
Commission and none of them were near the magnitude of the
project that the Port Authority is talking about. Secondly, he
said that while they have a credible legal claim, they do not
have any official declaratory order from the FERC that would
confirm that status - even though that is not a requirement. He
thought there might be some value in obtaining one to assure
that standard is satisfied.
2:14:40 PM
MR. SHEPLER explained that the Natural Gas Act (NGA) applies to
persons (page 1 of the handout). "Person" is defined to include
a corporation; corporation is in turn defined to exclude
municipalities. A "municipality" is defined by the statute to
mean "a city, county or other political subdivision or agency of
the State". He said the Port Authority is chartered under the
Alaska Port Authority Act and it would appear to be a
municipality or other political subdivision or agency of a state
government.
He also cited 7(c)(1) of the NGA that talks about who needs to
obtain a certificate of public convenience and necessity for any
project that involves a transportation or sale of natural gas in
interstate commerce.
MR. SHEPLER said the term "municipality" has been construed by
the FERC in less than a dozen cases and for the first time in
1988 by a northwest Alabama gas district, which was basically a
collection of communities that bought gas for resale to their
citizens and engaged in some limited transportation of gas
across their systems. The commission determined that because it
was organized by several municipalities under a statute, there
was a public purpose that was being served and that gas district
would be exempt under the statute. In another case, the FERC was
needed to regulate so-called regulatory gap. Another case
involved one pipeline company bypassing another in order to
serve the city of Decater, Alabama, utilities. FERC found that
they had no discretion in the area and there was no need for
them to try to infer what Congress intended.
2:17:28 PM
He said the last notable case is the most recent in 2004 and
involved a piece of pipe connecting an LNG import terminal to
the southern California Gas Company distribution system. It was
significant between the FERC and the State of California over
who had authority over the citing of import terminals. FERC
originally said a 2 to 3-mile section of LNG pipe needed to file
a certificate. That middle segment was owned by the City of Long
Beach, California, and on rehearing, the Commission acknowledged
that the City of Long Beach was a municipality and no
certificate was required. The significance of this case is that
it was a middle segment, a connector pipe between the import
facility and the further downstream activities as opposed to
being on the delivery end of the transaction.
MR. SHEPLER said that based on those cases and a handful of
others, he had to acknowledge that there is a credible legal
claim, but 2.3 miles of pipeline at the end of an LNG terminal
is not an 800-mile pipeline from the North Slope. There is a
question of scale and scope as to whether the Decatur decision
would be controlling on this project. He thought it was
significant that the Port Authority did not have a declaratory
order confirming its status and that it has said it doesn't
intend to get one.
He said the Port Authority believes it has a FERC exemption, but
it has a slightly different business model than the committee is
used to in dealing with the FERC-regulated environment. For
instance, FERC rules prohibit the owner of the pipeline from
owning the gas in the pipeline and the Port Authority is
initially proposing to actually buy the gas at the North Slope
and then resell it as LNG as it comes out of the LNG terminal.
2:22:09 PM
MR. SHEPLER said that once the gas becomes LNG and is destined
to leave the Port of Valdez, if it heads towards Canada in a
highway route project, it is back in the realm of FERC
jurisdiction. The entity that's buying the LNG and causing it to
be delivered to a port in California or B.C. would need a
certificate to either transport natural gas in interstate
commerce between Alaska and California or to export natural gas
either to Canada or Mexico. So, the downstream transaction away
from the LNG terminal at Delta Junction, if it occurs, will be
subject to normal FERC certificate requirements.
2:23:45 PM
MR. HARPER said that he didn't have a presentation, but he had
been helping members to fully understand the presentation.
2:24:13 PM
REPRESENTATIVE RALPH SAMUELS asked Mr. Shepler to clarify that
upstream from Delta Junction the pipeline is not regulated by
FERC, but from Delta Junction south, it will be FERC regulated.
MR. SHEPLER responded that under the Port Authority proposal,
the pipeline would be FERC-exempt, arguably because it is a
municipality. The exempt line would be regulated by the
Regulatory Commission of Alaska (RCA); a FERC-regulated line
would start from the exempt line under the Governor's proposed
contract.
REPRESENTATIVE SAMUELS asked if the pipeline would be RCA-
regulated before Delta Junction, FERC-regulated after Delta to
the Alaska/Canadian border where it would become NEB-regulated
and then wherever it crosses the border south of Alberta to
Chicago it would become FERC-regulated again.
MR. SHEPLER replied that essentially he thought that was right.
He said the issue has come up as to how far upstream would the
FERC regulation extend - even in the context of the producer
proposal. It's been said the parties certainly expect the FERC
to regulate the gas treatment plant (GTP); however he said that
would not be the case if the GTP is owned by the Port Authority.
The upstream feeder lines to the GTP would appear to be FERC-
regulated in the context of a producer-owned pipeline as well as
a Port Authority context because it has not said it plans to own
anything upstream from the GTP.
2:26:27 PM
SENATOR BEN STEVENS said confusion has recently come up over the
mechanism to settle the basin control issue and who is
regulating what entity.
MR. SHEPLER agreed, but thought that at some point it would
become clear who would regulate what entity.
SENATOR BEN STEVENS asked if the Port Authority owned the GTP
would it be FERC-regulated.
MR. SHEPLER clarified that anything the Port Authority owned
wouldn't be FERC regulated - in its view - because of its status
as a municipality.
2:28:47 PM
SENATOR BEN STEVENS asked if one can go from an interstate
commerce FERC-regulated facility, into a state-regulated
facility and then back out into an interstate-regulated
facility.
MR. SHEPLER answered that that is unprecedented; but at least
initially, based on statute, there appears to be a credible
legal argument for it. "How that gets sorted out, I don't know
and it would depend on how they structure all their commercial
arrangements."
2:30:04 PM
CHAIR SEEKINS asked:
I got eight lanes, two of them are going to Valdez and
six of them are going south across Canada. So because
two of them are instate, the whole section that would
be transporting all eight lanes might not be FERC-
regulated?
MR. SHEPLER answered that it appears to turn on the issue of
ownership. "If the Port Authority owns the eight lanes and the
Port Authority is a municipality, then everything that they own
would be exempt."
CHAIR SEEKINS summarized, "So, we just don't know."
MR. SHEPLER agreed with that.
CHAIR SEEKINS said by definition, the Port Authority is a
municipality and so it appears it is exempt.
MR. SHEPLER agreed.
2:31:17 PM at ease 2:36:11 PM.
CHAIR SEEKINS called the committee back to order at 2:36.
^Edward J. Twomey, Morrison & Foerster, Counsel to the Governor
EDWARD J. TWOMEY, Morrison & Foerster, Counsel to the Governor,
came forward with Dr. Pedro van Meurs. He had worked closely
with Bob Loeffler over the years and was a "long-term FERC
aficionado." His legal career started with the TAPS rate case in
1977. He said it is interesting to hear the argument on the FERC
jurisdictional matter, because he recalled vividly just before
TAPS started up in June of 1977, when some of the eight oil
companies that owned portions of the trans-Alaska pipeline
floated a trial balloon jurisdictional issue saying that perhaps
the Interstate Commerce Commission, which then regulated TAPS,
did not have jurisdiction because it wasn't interstate commerce.
The reason they said that was because when the oil left Valdez,
it went into international waters and that broke the chain of
interstate commerce. That argument was floated and dropped
pretty quickly because of what was mentioned a few minutes ago -
the size of the project and the idea that the biggest crude oil
pipeline in the United States was not going to be federally
regulated just didn't sit well.
MR. TWOMEY said he thought about that with regard to the Port
Authority project. It seems that it would be very hard to take a
line of that size and say that FERC doesn't have regulation over
it. More particularly, he had some specific points. One is, as
Mr. Shepler said, you could make an argument that a municipality
isn't subject to the Natural Gas Act, but there are a few cases
where FERC decided the other way and he thought it would
ultimately find this project jurisdictional.
He explained that FERC would look at the overriding activity and
what is being done as a municipality. He used an example of the
California Energy crisis five years ago where both investor-
owned utilities and municipality-owned utilities were selling
into and buying out of the so-called California ISO and the PX
markets. Those are short-term markets and the source of all the
Enron discussions. FERC launched a major investigation into the
sales into and buys out of the ISO and PX called the California
Refund Proceeding and ultimately FERC found that a lot of
utilities had overcharged and owed money. A lot of them were
municipal utilities, but they said:
Hey wait a minute, you don't have jurisdiction over
me. I'm a muni and under the Federal Power Act, just
like the Natural Gas Act, 'munis' are exempt. And FERC
says, 'No.' The ISO is a FERC jurisdictional facility
and you chose, you voluntarily chose, to do business
under the FERC rules. Therefore you are subject to our
jurisdiction.
He said this case and several others related to it are on appeal
and the jurisdiction issue is in front of the Ninth Circuit. He
had just heard, however, that one of the cases just ruled that
"munis" were subject to FERC jurisdiction.
MR. TWOMEY gave another example of a municipality in one of the
southwest border-states that decided to take its line and extend
it into the adjacent state, New Mexico. FERC came after it and
said it was interstate commerce. They said no. FERC said they
chose to build an interstate pipeline, therefore it was subject
to FERC jurisdiction. He opined:
Now, I think there's a good chance what FERC will do
is look at this Port Authority project as was
described yesterday and today and say that is a
continuous voyage, if you will, in interstate
commerce, much like TAPS and the fact that you are a
'muni' you're still engaging in a voyage in interstate
commerce and the fact that you happen to be selling at
Valdez, I would presume they're selling just north of
the LNG terminal, the fact that you're selling there
is no excuse for us not regulating this whole
continuous journey. That, I think, is probably the
argument you probably will see from FERC.
MR. TWOMEY read a quotation from Mr. Robert Cupina, one of the
FERC officials who testified before the committee last week,
taken from the September 2005 Petroleum News.
But the Alaska Gas Port Authority project is different
- quote - and this is from Rob Cupina: 'Both the line
and the terminal are for interstate commerce and
therefore, they would both need a certificate.' -
unquote.
He said the idea of no FERC regulation is going to be a slam-
dunk for the Port Authority. FERC doesn't shy away from
jurisdictional issues. He also cleared up a little confusion on
Senator Seekins' six and eight-lane highway example assuming the
highway project goes forward tomorrow and is an eight-lane
highway - two lanes are reserved for intrastate service that
gets off at Delta and goes all the way down. He stated:
There is no question under that fact circumstance,
that the line from Prudhoe Bay down to Delta is FERC-
regulated including the two lanes of the highway. I
don't think anybody would question that. When there's
co-mingling of inter and intra state, FERC is going to
set the tariff from Prudhoe down to Delta. The RCA
will set the tariff from Delta down to Valdez or
wherever. There is no question that is a 100-percent
certainty.
Now what we have here from the Port Authority is a
little play on that - a reversal of it. That is,
they're saying that they're going to own this eight-
lane pipeline down to Delta. They're only going to use
two of those lanes for X-number of years and the idea
that after those X-number of years and the other six
lanes get filled up, the idea that that would preclude
FERC-jurisdiction, which is now the exact fact
situation of the line initially being built by the
producers, the idea that, the fact that, the Port
Authority got there and reserved two lanes to begin
with and happen to own an eight-lane highway that then
becomes used, six lanes of which for interstate
commerce, I cannot conceive of FERC not coming in and
taking control.
2:43:51 PM
CHAIR SEEKINS thanked Mr. Twomey for his testimony and invited
Mr. Clark to testify.
2:44:06 PM
^Jim Clark, Chief Negotiator, Office of the Governor
JIM CLARK, Chief Negotiator, Office of the Governor, said it was
important for this dialogue to continue. In that regard, he sent
the mayor of Fairbanks a letter suggesting a roundtable
discussion next week with the Port Authority that the public
could attend.
CHAIR SEEKINS offered to help facilitate it.
MR. CLARK thanked him and emphasized again how helpful he felt
the roundtable discussions were.
2:46:39 PM
MR. CLARK said the Governor asked him to emphasize a point that
he feels gets lost in the shuffle - that when the main line is
built, there will be an open season and with that will come an
opportunity for an off-take line to Valdez.
It's just a question of coming during the open season,
bidding "ft" for a portion of the gas. Remember, we've
said that for purposes of instate use, we are prepared
to make Alaska's share, the 900 Mcf/d available for
projects that we think are needed in-state. And
obviously, our priority right now is looking at an
off-take in Fairbanks to help gasify that community.
We think that could really lower homeowners' costs in
Fairbanks. With respect to getting gas to Kenai, that
is a very, very high priority of the Governor's in
order to find a way to keep the Agrium and LNG plant
down there open. And an off-take to Valdez to allow
this project to go forward on a smaller LNG project is
something that is really open here and that we would
assist.
But the place where we seem to not be able to connect
with our friends from AGPA is on the notion of doing
the line to Valdez to the exclusion of or first or
instead of doing the project that we have in mind. I
wanted to just preface the remarks from Roger and
Pedro to say we're not antagonistic to what they're
trying to do; we just don't believe it can be done the
way they want to do it. With that, Mr. Chairman, our
presentation will come from Pedro and Roger who have
spent quite a bit of time working on this. And thank
you, again, for having these roundtables.
2:48:55 PM
^Dr. Pedro van Meurs, Consultant to the Governor
DR. PEDRO VAN MEURS gave a slide presentation with accompanying
handout. He said when he interacted with the Port Authority, the
concept was precisely as he illustrated - to see whether there
is some way, through beneficial taxation methods and through the
help of the communities in Alaska, that maybe a producer project
could be made more attractive. That was so important at that
point in time when the Stranded Gas Act was passed in the hopes
that the LNG project to Asia would succeed - and that project,
then, fell apart. The project to Alberta by the producers didn't
exist, yet.
He emphasized that in the year 2000, the Port Authority was the
only project that Alaska had and it was important to realize
that Alaskans kept the flame alive of trying to find innovative
ways to make export of Alaska gas possible at that time. That is
where his comments are coming from.
2:51:22 PM
DR. VAN MEURS said he would first comment on slides 2 - 5 on
"Tax Comments". He explained that the source of the Port
Authority's initial inspiration was finding out it had a tax
exemption. The slide indicated that the U.S. federal government
would receive almost $50 billion in tax revenues on the upstream
and $2 billion in the mid-stream - federal taxation is a very
big slice and therefore, trying to think creatively as to what
can be done to minimize these taxes and maximize the possibility
that the project goes forward is all very helpful. This is where
he started working with the Port Authority six or seven years
ago.
DR. VAN MEURS said the Stranded Gas contract took inspiration
from the work that was done at that time and it includes a 20-
percent participation by the State of Alaska, which results in a
federal income tax savings of $.5 billion. Hypothetically, if
the state owned 100 percent of the pipeline system in Alaska, he
estimated the total tax savings would be about $2.5 billion.
This doesn't make or break the project, but it demonstrates how
important these tax matters are. For the Port Authority to come
up with creative ideas on how its tax-exempt status could be
used to push an Alaskan project forward should be recognized as
a good idea by Alaskans.
2:55:16 PM
DR. VAN MEURS said a reference was made to his "Aide Memoir" to
the Port Authority in which he reiterated that he believed
reducing taxes is very important in finding a commercial project
along with finding a way of lowering the overall cost by finding
a cooperative configuration with other parties so that the
project can proceed. Conditions need to be created where this
tax exemption can be effectively used for the project.
2:56:27 PM
DR. VAN MEURS said he enjoyed the Port Authority's analysis of
the North American gas markets. It showed excellently something
that he had been trying to impress on the legislature - the
extreme volatility and risk of the North American gas market
where gas price one day could be 60 percent of crude oil on a
Btu equivalent basis and the next day it could be 100 percent.
Just recently, there wasn't even a day when the gas prices were
only 50 percent of the equivalent of crude prices. He showed his
slide 6 labeled, "High Risk Nature of the Project." He also
emphasized that the cost estimates made in 2001 have escalated
enormously over the last five years. This is why the stranded
gas contract and the related fiscal stability are so important.
2:58:38 PM
He said the Port Authority's presentation illustrated that the
project to Alberta greatly benefits its project and he was
somewhat surprised about its opposition to the stranded gas
contract.
3:00:11 PM
SENATOR ELTON recalled that the Port Authority didn't say it
opposed the other project, but that its project enhanced it.
DR. VAN MEURS supposed that perhaps he read about the Port
Authority's opposition through the press, but he did think their
remarks today were positive about the two projects. However, he
wanted to comment on their timeline that claims their project
can deliver first gas in 2012 if it starts by January 1, 2006.
The sponsor plan provides for first gas in 2016 and has a
starting date of January 1, 2007. If a correction is made for
those two starting dates, it is fair to say that there seems to
be only a three-year difference rather than four between the two
timelines [slide 8].
3:02:19 PM
DR. VAN MEURS showed slides 9 - 10 where the Port Authority
suggests that the gas treatment plant (GTP) would be constructed
by the producers, but that they would be willing to do it
themselves, if necessary. He said the main function of a GTP is
to eliminate the carbon dioxide from the gas and it's important
to realize that the CO can't be released into the atmosphere; it
2
must be reinjected. It can only be reinjected into existing oil
and gas reservoirs. Consequently, it is imminently logical that
the GTP would be a facility that would be operated and
constructed by the producers, because it has to interact with
the removal of the CO and its re-injection. So, in his mind, the
2
Port Authority project depends on the GTP being constructed by
the producers. It also needs to be stated that it's not the same
GTP they are talking about now but one that is more costly,
because all the CO would have to be removed in order to meet LNG
2
specifications.
3:04:14 PM
DR. VAN MEURS said the producers provided a very detailed
timeline (slides 11 -12). It indicated that the engineering and
FERC permitting would take about four years. In their timeline
they contemplate that the GTP certificate would actually be
granted by January 2011. So, he found it difficult to see, if
one assumes that the FERC certificate for the GTP would be
granted in January 2011 and if the Port Authority contract
illustrates that you need four years for construction, how there
could be a startup date of 2013.
Alternatively, he said, the Port Authority said they could build
the GTP themselves. But he found it difficult to believe it
would be able to do all the project engineering, have the open
season, do the regulatory processes, prepare somehow with the
producers for the injection of CO or acquire their own leases
2
for the injection of COand then negotiate the financing in two
2
years to meet the deadline - assuming it started in 2007. It is
more likely that first gas would be achieved by 2015 or 2016.
3:06:44 PM
DR. VAN MEURS discussed slide 13 "Gas Sales in California" next
and remarked that the Port Authority had very good information
on the California market, various alternatives and competitors.
However, he missed really conclusive evidence that they would be
able to offer the lowest price in California compared to other
LNG exporters. He saw good evidence that transportation
distances from other sources were much longer, but he remained
of the view that most of the LNG export facilities in the
Pacific are on tidewater, like Australia, Indonesia, Malaysia,
and Brunei. Sakhalin's facility is connected to a short pipeline
on Sakhalin Island. He said that all these countries have LNG
expansion plants on their way and most of the projects relate to
fields that have relatively low production costs. He agreed with
Mr. Shipkoff, that if Alaska had its own LNG facility in Valdez
and if there is more demand, it is not so difficult to put in
another train, but it is also easy for all of our competitors,
who are already in business [slides 14 - 15]. Just to get to
tidewater, Alaska needs a $5.3 billion pipeline, plus a GTP
aimed at removing all the COGiven these conditions, it seems
2.
that it would extremely difficult for the Port Authority to
undercut possible prices of their competitors.
3:09:31 PM
SENATOR DYSON said he raised the same question and the answer he
got was that gas tankered to California wouldn't need to
undercut. He got the impression it's not a spot market for every
ship that pulls up to sell its gas.
DR. VAN MEURS agreed saying:
The situation is this. Gas is bought by buyers and
buyers always want the best deal. Consequently, it is
not automatic that a buyer has to pay, say, a so-
called price. No, on large contracts buyers, whether
they are electric facilities or if there are other gas
distribution systems, always try to negotiate the best
possible price. Consequently, if you have to go head
to head with other suppliers, it is very important to
have the latitude that if things get bad, that you can
fight off your competitors.
So, consequently...there is no regulated price. There
is a free market and in a free market, buyers have the
right to acquire the lowest cost gas. And so,
consequently, how the California market will evolve
over the years is difficult to see. But we have a free
market and marketers buy the lowest-cost gas. And
therefore I have some concern if you make all these
investments and if you have to pay all of these
tariffs, that you will be in a somewhat difficult
position to effectively compete.
3:12:23 PM
DR. VAN MEURS paraphrased slide 16 - Gas Sales in California -
saying the Port Authority claimed one of the benefits of its
project is that it would diversify Alaska's access to the East
Coast as well as the West Coast markets and he took some issue
with that. He said the great advantage of bringing gas to the
Alberta Hub is that it actually has access to both the East
Coast and the West Coast. The benefit of trying to get the
highest price for Alaska gas either in the West Coast or the
East Coast markets is possible with the Alberta Hub, depending
on pipeline constraints.
3:13:32 PM
DR. VAN MEURS showed slides 17 - 18 - Financing of the Project
- saying that in his mind more fundamental issues relate with
respect to the financing of the project. The Port Authority
indicated it would initially use 1.2 Bcf in a 48-inch line. The
Administration's FERC advisors indicate that if one builds a 48-
inch line and uses far less gas to fill it, it is very unlikely
those extra costs will be permitted in the rate base.
Consequently, the pipeline tariff that would be approved by
FERC, or maybe by the RCA, is unlikely to include the total cost
of this huge pipeline. It is only likely to include the portion
of it that seems really justified for the transportation of 1.2
Bcf.
DR. VAN MEURS said that guestimating from the Port Authority's
data, actually $2.3 billion would have to be invested on pure
speculation. There would be no income stream attached to it. It
seems to him, if one does not receive an income stream from FERC
or the RCA that allows one to recover the cost of the $4.3 Bcf
line, that somehow has to come out of your own pocket. You have
to invest equity to build that large of a line - a 100-percent
equity situation. While there could be other options, that seems
to be the situation at first glance.
3:16:26 PM
DR. VAN MEURS showed slide 19 on federal loan guarantees. He
said the deal at this point doesn't have specific obligations. A
very important reason that the Department of Energy (DOE) is in
charge of the federal loan guarantees is because the U.S.
Congress wanted to express that this should not be just a normal
treasury concept. It wanted this federal loan guarantee to
consider wider interests of national importance.
He explained the way loan guarantees typically work is first of
all it is not a loan to the borrowers of the project. It is a
guarantee that if the lenders to the project have a default,
then the federal loan guarantee would click in. But what is very
important to realize is that a typical loan guarantee
arrangement doesn't get the Port Authority off the hook. The
federal government would still try to recover the monies - say
from the person that defaulted. Clearly, he agreed with Mr.
Shipkoff that these loan guarantee negotiations could sometimes
take a year and a very important point is precisely what happens
if one defaults on a loan and what the assets are. It was
difficult for him to envision that the federal government would
come to the conclusion that there would be significant assets
attached to the Port Authority that they could go to if it would
default. However, that being said, the DOE has said it would
bend over backwards to make a gas project work.
3:19:33 PM
DR. VAN MEURS showed slide 20 on completion risk and asserted:
What is absolutely certain is that the federal loan
guarantee would not cover the completion risk and it
is absolutely certain that the lenders to the Port
Authority or to the project would not assume this
completion risk.
DR. VAN MEURS explained that completion risk means that you have
invested money, say $7 billion, in a project and you have
borrowed, say $5 billion, from your lenders and now something
occurs like an earthquake, a court case, a huge environmental
problem, or something nobody thought about and the project
cannot be completed. "What happens in that case?" Then the
lenders will want their money back - that is a completion
guarantee. So, the person financing the project from its own
assets must be able to provide this guarantee; otherwise no
lender will lend on a project-financing basis.
DR. VAN MEURS asked:
How is the Port Authority going to provide a $7
billion or $8 billion completion guarantee? Now, they
can maybe go to their construction firms and go to
Bechtel and say we'd like you to take a large part of
this.... It is however, very unlikely that you can
spread your completion guarantee completely around.
So, consequently, somebody has to provide a completion
guarantee. And the Port Authority has not explained to
us how they are going to do that. And unless they
explain that to us, nobody will lend them any money -
not even with a federal loan guarantee.
3:22:33 PM
DR. VAN MEURS went on to slide 21 - Financing of the Project:
Conclusion - and said:
So, it seems to me that the project is difficult to
finance. Firstly, we may have $2 billion or $3 billion
of excess capacity in a 48-inch line for which there
is no revenue stream. Secondly, without a federal loan
guarantee, although the federal government may provide
that, but definitely not without a completion
guarantee, it seems to me that the Port Authority will
be unable to finance this project - even if they have
ship or pay contracts from all the parties that have
strong balance sheets. So, I think the capability of
financing this project is very much in doubt.
3:23:28 PM
DR. VAN MEURS paraphrased slides 22-23 - Ship or Pay Commitment
- saying no matter what you do, there have to be ship or pay
commitments for the part between Prudhoe Bay and the LNG export
point. So, the Port Authority needs contracts with a number of
parties that want to ship their gas. This could be a producer
interested in using the project or a buyer. A contract could be
$10 billion to $20 billion over 20-years depending on the
tariff.
"Who would be interested in concluding such a contract?" he
asked. The information provided by the Port Authority indicates
that it is likely that producers' netback through its project is
lower than the netback from their own project. If that's the
case, he asked why they would be interested in selling into this
project. The Port Authority, by concluding such a ship or pay
agreement, would actually be increasing the risk of their own
project, because it would become more costly because it would
have a higher reserve risk. It again seemed to him that it's
highly unlikely that such a deal would actually come together.
3:25:37 PM
DR. VAN MEURS showed slide 24 - Stranded Gas Contract - and
supposed what would happen if the Asian market conditions
change. The Port Authority explained well how the Asian market
and the North American market are two different markets and over
the coming years Asian markets might become more attractive
again compared to North American markets. "So, who knows," he
asked.
He said under a stranded gas contract whether one sells through
Valdez or directly to Canada is essential, particularly if on
average the producer would expect to have a lower netback. This
makes the LNG project even higher risk.
3:28:00 PM
SENATOR DYSON thought he understood from Port Authority's
presentation that it would buy gas from the producers rather
than shipping gas that the producers own. He asked what
difference it makes.
DR. VAN MEURS replied for the pipeline to be financed, someone
must conclude a contract against which the financing can take
place. The Port Authority talked about Sempra and it is
theoretically possible to say that Sempra buys the gas right at
the end of the pipeline and would take care of the ship-or-pay
agreement - and the producers don't have to. This would be a
very attractive arrangement for the producers.
SENATOR DYSON asked if that were the case, would the producers
want a guarantee that the pipeline company would buy a specific
or minimum amount and what if one producer says it didn't want
to sell.
DR. VAN MEURS replied that in this society people are free to
buy and sell as they wish. So, if a buyer makes an attractive
proposal to buy gas at the Inlet of the Port Authority project
and if that price is higher than the seller believes he can get
himself, if there are less ship or pay commitments attached,
yes, the producers have said they would look at it.
3:31:01 PM
SENATOR DYSON asked if a prospective financer of the project
believes the producers will sell at either flange, would the
risk of not having gas to put in the pipe be diminished.
DR. VAN MEURS clarified yes, the person constructing the line
and the lenders like to see a commitment either from the
producers or from a buyer to pay the tariffs on the line - so
the lenders can see an income stream.
SENATOR DYSON asked if only one pipeline will be built from
Prudhoe Bay and the Port Authority builds it, did he foresee any
circumstances under which the producers wouldn't sell gas that
day.
DR. VAN MEURS replied the problem is that before you even get to
the point of putting up the sign, the line has to be financed
and you cannot do so without the contractual arrangements that
are necessary to finance it.
3:33:23 PM
DR. VAN MEURS [slide 25 - Stranded Gas Contract] said it is
important to realize no matter what happens, the first step,
whether you have a Port Authority project or a gas line to
Alberta or any combination, you always need to have a stranded
gas contract first. Otherwise producers cannot even decide about
the offers that would be made to them, because they don't know
what the fiscal package is that would be attached to it.
SENATOR DYSON said he was tempted to say "phooey" because lots
of gas lines get built without fiscal certainty. Others have
represented to the legislature that this is a very attractive
project with some risks, but a very good rate of return. He
asked why he continues to say in today's market, a stranded gas
contract has to provide fiscal certainty.
DR. VAN MEURS answered that Senator Dyson was right, a number of
large projects around the world have been built without fiscal
certainty and he had highlighted that fact in his Centennial
Hall presentations. However, he said:
The reason that I believe fiscal certainty on this
particular contract is important is because of the
risk profile of this particular contract. In this risk
profile we took into consideration that as of today we
haven't seen a buyer come forward for the 4.3 Bcf that
is willing to make the commitments that we just talked
about - which means that the producers will be stuck
with the commitments to make the ship or pay
arrangements. If they are stuck with the commitments
to make the ship or pay contracts, they take that into
consideration in the risk assessment and consequently,
because of that, this pipeline has an extreme risk
profile that is quite different from your average
pipeline, say, in the North Sea or in Southeast Asia
or in some other parts of the world. This is a
monster-mega project of a size that is well beyond all
the projects in the world, as I mentioned, in total
size except maybe the Kazhegam project. So, that is
why under this particular case a stranded gas contract
is justified.
3:37:08 PM
DR. VAN MEURS elaborated on slide 26:
It seems to me that from an economic perspective it
doesn't seem sensible to consider the Alberta project
incremental to the Port Authority project, because we
believed such an option is very difficult to finance
in reality. What seems rational is to consider the
Port Authority project incremental to a project to
Alberta. And this is precisely the option that is
already included in the stranded gas contract. That is
why the stranded gas contract contemplates that, yes,
if during an open season a [1] Bcf can be taken from,
say, Delta Junction, or another tie-in point to
Valdez, then and if that is a viable situation and if
because of changes in market conditions the producers
are anxious to sell or maybe it proves that
incremental explorationists belief that that option is
viable to them, then that is immensely welcome - that
there absolutely has never been any doubt about that.
3:38:41 PM
DR. VAN MEURS discussed slide 27 - Upstream Economics - and
referenced the Port Authority slide showing a high rate of
return. He said if there would be a buyer at the inlet of the
pipeline, such rates of return cannot hurt. However, if the
producers have to make the ship or pay commitments, then
typically their capitalized value has to be taken into
consideration in the economics, which makes their project not as
attractive as presented.
He next commented on the revenues that the state would earn
under various options - slide 71. It seemed to him that the Y-
line plus the Port Authority option is a 5 Bcf case versus a 4
Bcf case. Offhand, it seemed to him that the difference between
the highway project and the Y-line project is just the
difference in the extra 1 Bcf. He took exception to the
presentation where the revenues under the contract are much less
than the revenues under the status quo. He said he had shown a
very detailed presentation in Centennial Hall illustrating
income from various sources item-by-item providing his model to
all economists that were interested; and he had never heard any
specific criticism about his assumptions or any errors noted. He
therefore maintained that his own analysis is the correct one.
3:42:03 PM
CHAIR SEEKINS thanked Dr. Van Meurs for his comments and
announced that the committee would take an at-ease from 3:42:42
PM to 3:50:07 PM.
SB 3002-STRANDED GAS AMENDMENTS
CHAIR SEEKINS called the meeting back to order at 3:50 and
announced SB 3002 to be up for consideration. He reminded
committee members that the proposed committee substitute (CS),
Version F as amended, had failed to move from the committee
yesterday. He emphasized the importance of allowing the
commissioner enough time to prepare a summary of the public
comments he received in response to the proposed contract and
the preliminary findings and determinations and to accomplish
the rest of the tasks in AS 43.82.430(a).
3:53:00 PM
CHAIR SEEKINS said he wanted to give the commissioner enough
time to gather the aforementioned information and respond to the
comments, prepare a list of amendments, and to make his final
findings and determinations as to whether the proposed contract
and any proposed amendments meet the requirements and purposes
of the chapter. He then moved to adopt CSSB 3002(NGD), Version
Y, as the working document. There being no objection, it was so
ordered.
3:53:28 PM
SENATOR DYSON asked if his implication was that last night's
bill failed because it gave the commissioner 60 days.
CHAIR SEEKINS answered no, that was just a part of the bill that
failed.
SENATOR DYSON asked him to explain the rationale for using 120
days.
CHAIR SEEKINS replied that he didn't think there was a hurry and
wanted an adequate job. This allows a maximum timeframe for the
commissioner to do that. They know that 30 days isn't enough; 60
days is questionable and 120 days is a maximum.
3:55:45 PM
SENATOR DYSON expressed concern about getting the results back
in time for the legislature to ratify it.
SENATOR BEN STEVENS asked Senator Dyson if he was ready to
ratify a contract.
SENATOR DYSON responded that he was if he could see it.
SENATOR BEN STEVENS asked how they could complete a contract if
they won't pass the amendments to enable it to be completed.
SENATOR DYSON replied, "I guess under the same regime that's
allowed it to be negotiated over the last year and a half - not
having the amendments hasn't stopped that process. "
SENATOR BEN STEVENS said he was encouraged to hear Senator Dyson
was ready to ratify a contract when it was presented to the
legislature.
SENATOR DYSON replied that it wouldn't be a rubber stamp and not
being able to see it is part of what's holding it up. He was
also interested in seeing the LLC and the fiscal interest
finding.
SENATOR BEN STEVENS noted that they all are interested in seeing
those.
3:57:16 PM
CHAIR SEEKINS said they had attempted to address other issues in
terms of fiscal certainty, work commitments, and Alaska hire and
had chosen not to give the Administration any direction on that
in terms of the law. So, he wanted to give them the extra time
to be able to work on those issues.
3:57:38 PM
^Bill Corbus, Commissioner, Department of Revenue
BILL CORBUS, Commissioner, Department of Revenue, noted the
public comment period had closed July 24 with a little over
2,000 comments; they were in the form of written comments,
emails, verbal comments made at the public hearings. About 25
written comments were very scholarly and well-prepared,
including a 50-page document. He received comments from
legislators, public interest groups, and people with direct
commercial association with the project other than producers. He
was in the process of analyzing them and putting together a
response. Certainly, he said 30 days is unrealistic to do
justice to the public comments. He said the Administration
supports the chairman's proposed amendment.
4:00:13 PM
SENATOR STEDMAN asked what direction the legislature is giving
the Administration. Was it going to renegotiate anything it
wanted and then come back and find it doesn't have support for
some of it?
CHAIR SEEKINS replied he wasn't sure. He thought the committee
did some good work last night and its only alternative now is to
wait and see. "It's a trust me deal."
SENATOR STEDMAN asked if he was right to infer that this
extension would put it in to the end of November so they would
be dealing with this next January and February.
CHAIR SEEKINS replied that it wasn't his intent to do that, but
he didn't want to give the Administration an artificial boundary
that would hinder or delay or force it into a premature effort.
4:03:11 PM
SENATOR ELTON asked to hear what the commissioner considers his
duties are under AS 43.82.430(a)(2) and (a)(3). He asked if this
authorizes an extended period of time for the commissioner to
work on proposed amendments to the contract and to the Stranded
Gas Act, as well.
COMMISSIONER CORBUS replied yes; he would interpret it that way.
CHAIR SEEKINS added that in this timeframe, he and the other
parties would be renegotiating changes to what he would propose
as a final contract.
COMMISSIONER CORBUS replied that was correct. They have learned
that negotiations always take longer than they expect. He said
they badly need the extra time and commented that once
negotiations are consummated, they must incorporate the changes
in the fiscal interest finding.
CHAIR SEEKINS asked whether it is his opinion that negotiations
that take place inside a tight timeframe might put one party or
the other at a disadvantage.
COMMISSIONER CORBUS replied yes, particularly the state.
4:06:12 PM at ease 4:08:06 PM
CHAIR SEEKINS asked if there was any objection to adopting work
draft CSSB 3003(NGC), Version Y. There were no objections and it
was so ordered.
4:08:19 PM
SENATOR BEN STEVENS moved to adopt Amendment 6 and objected for
discussion purposes. He mentioned that it was drafted to Version
G, but he asked that members give the latitude to insert it in
the new Version Y.
OFFERED IN THE SENATE BY: SENATOR BEN STEVENS
TO: CSSB 3002(NGD) (24-GS2095\G)
Page 1, line 3, following "terms;":
Insert "providing for an advisory vote,treatment of
certain laws, and approval and ratification regarding
a stranded gas fiscal contract;"
Page 8, following line 8:
Insert new bill sections to read:
"*Sec. 14. AS 43.82.430(b) is amended to read:
(b)After considering the material described in
(a) of this section and securing the agreement of
the other parties to the proposed contract regarding
any proposed amendments prepared under (a) of this
section, if the commissioner determines that the
contract is in the long-term fiscal interests of the
state, the commissioner may execute [SHALL SUBMIT]
the contract [TO THE GOVERNOR].
Sec. 15. AS 43.82.430(c) is amended to read:
(c) The commissioner's final findings and
determination under (a) of this section and decision
regarding whether to execute the contract under (b)
of this section are final agency decisions under
this chapter.
Sec. 16. AS 43.82.440 is amended to read:
Sec. 43.82.330. Judicial review. An [A PERSON MAY
NOT BRING AN] action challenging the constitutionality
of a law authorizing a contract developed under this
chapter [ENACTED UNDER AS 43.82.435] or the
enforceability of a contract executed under a process
authorized by [A] law may not be brought [AUTHORIZING
A CONTRACT ENACTED UNDER AS 43.82.435] unless the
action is commenced within 120 days after the date
that the contract was executed by the state and the
other parties to the contract."
Renumber the following bill sections accordingly.
Page 11, line 30:
Delete all material and insert the following:
"*Sec.23. (a) AS 43.82.435 is repealed.
(b) AS 43.82.445 is repealed. "
Page 11, following line 30:
Insert new bill sections to read:
"*Sec. 24. The uncodified law of the State of
Alaska is amended by adding a new section to
read:
APPROVAL AND RATIFICATION. Notwithstanding
AS 43.82.435, repealed by sec.23(a) of this Act,
the provisions of the Alaska Stranded Gas Fiscal
Contract between the State of Alaska and BP
Exploration (Alaska) Incorporated, ConocoPhillips
Alaska, Incorporated, and ExxonMobil Alaska
Production, Incorporated, as amended to conform
to the provisions of the Act, are approved, and
the process and procedures followed in
formulating that contract are ratified.
*Sec. 25. The uncodified law of the State of
Alaska is amended by adding a new section to
read:
SUSPENSION OF OTHER LAW. The provisions of
the Alaska Stranded Gas Fiscal Contract between
the State of Alaska and BP Exploration (Alaska)
Incorporated, ConocoPhillips Alaska,
Incorporated, and ExxonMobil Alaska Production,
Incorporated, as amended to conform with the
provisions of the Act, are effective
notwithstanding the provisions of any other law,
including AS 43.82.200-43.82.270. Any
inconsistency between the Alaska Stranded Gas
Development Act (AS 43.82) and the fiscal
contract executed under AS 43.82 are cured and
authorized by this section.
*Sec. 26. The uncodified law of the State of
Alaska is amended by adding a new section to
read:
ADVISORY VOTE. At the 2006 general election
to be held on November 7, 2006, in substantial
compliance with the election laws of the state,
the lieutenant governor shall place before the
qualified voters of the state a question advisory
to the governor and the commissioner of revenue.
Notwithstanding other laws relating to
preparation of the ballot proposition, the
question shall appear on the ballot in the
following form:
QUESTION
Shall the commissioner of revenue sign and make
binding upon the State of Alaska the Alaska
Stranded Gas Fiscal Contract between the State of
Alaska and BP Exploration (Alaska) Incorporated,
ConocoPhillips Alaska, Incorporated, and
ExxonMobil Alaska Production, Incorporated?
Yes [ ] No [ ]"
Renumber the following bill sections accordingly.
Page 12, line 7:
Delete "Sections 2-14 and 17-20"
Insert "Sections 2-13, 17, 20-22, and 23(b)"
Page 12, following line 9:
Insert new bill sections to read:
"*Sec. 29. CONDITIONAL EFFECT. Sections 14-16,
23(a), and 24 of this Act take effect only if a
majority of the votes cast in the 2006 general
election on the ballot proposition in sec. 26 of
the Act favor execution by the commissioner of
revenue and binding effect on the State of Alaska
of the Stranded Gas Fiscal Contract between the
State of Alaska and BP Exploration(Alaska)
Incorporated, ConocoPhillips Alaska,
Incorporated, and ExxonMobil Alaska Production,
Incorporated.
*Sec. 30. If secs. 14-16, 23(a), and 24 of this
Act take effect under sec. 29 of this Act, they
take effect on the date that the director of
elections certifies the results of the 2006
general election."
Page 12, line 10:
Delete "This"
Insert "Except as provided in sec. 30 of the
Act, this"
SENATOR BEN STEVENS said he agreed with the Chair's and Senator
Stedman's comments about the work that was completed on the
issues before the committee. He said he wouldn't reoffer the
amendments they had already voted on, but if any other member
offered those amendments, he would vote for them again. He was
offering this amendment that hadn't been voted on. He explained:
It puts the ability to execute the contract at the
discretion of the commissioner, it would remove
legislative approval upon a vote of the general
public, and the sections that have a meaningful change
to the Stranded Gas Act are all contingent on a
conditional effect in Section 29.
Mr. Chairman, I think that the actions that we have
taken previously on these subjects to address work
commitments, to address fiscal certainty on oil, to
address fiscal certainty on gas, to address public
project labor agreements, to address sovereignty
agreements, to address collateral and arbitration
clauses, to address calculation of educational
funding, to address payment in lieu of taxes to
municipalities, all the issues that we've done for the
last two special sessions are without any standing
now. And so, from my position the only standing we
have for those to be incorporated in the contract is
to give the commissioner - empower the commissioner -
to get those enacted.
We heard comment that there's concern that 120 days
may be too long for the public period before the
contract comes before us, but if we don't give the
commissioner the authority to negotiate, we'll never
get what we expect to see from the product of the
negotiation. This is a simple amendment that says one
thing: the legislature can't make a decision on
changing the Stranded Gas Act to enable negotiation to
go forward; let the public make the decision.
4:11:29 PM
SENATOR DYSON asked if this amendment passes and the people vote
and the Governor executes the contract, what would be the
provisions for modifying the Stranded Gas Act to come into
conformity with the contract.
SENATOR BEN STEVENS replied that those provisions would be
included in Section 25 of the amendment, the enabling
legislation.
SENATOR DYSON asked if the contract would supercede state law on
any difference between it and the conditions of the contract.
SENATOR BEN STEVENS replied that is correct.
4:12:48 PM
CHAIR SEEKINS said no matter what pathway they take, if the
legislature ever authorizes the execution of the contract under
the current law, the authorizing bill would more than likely
read "notwithstanding any other provision in law," which is
often put in statute to keep lawsuits from happening.
4:14:24 PM
SENATOR BEN STEVENS responded that there had been a lot of
discussion about the concept of whether the negotiators have
been working within the bounds of the law and as a result the
state has lost standing in the contract.
It's my opinion that the people that have been
negotiating this contract, the commissioner of
revenue, the members of the DNR staff, the members of
the Administration staff, have one thing in common and
that is to get a project that's in the best interest
of the state. And we continually are saying to the
Administration and saying to our lead negotiators,
'You're going outside of the law and you're giving
away the state's assets.' And I have yet to see that
come to reality. We in the legislature have done
nothing but criticize the negotiation in terms of what
they've produced and I think that the fact that a
project is before us for ratification - granted it's
not ready for ratification - we still haven't seen key
components of it - but because of the fact that they
have produced something that is to the benefit of the
state, which is a project to move forward, is an
example of the work that they've done. I've had it to
the point where I can't listen to it anymore about the
fact that the legislature or the Administration has
given away state's rights. I just don't think it's
justified any longer! And we can continue to sit as a
legislature and say, 'We need more. Why did you give
this away; why did you give that away.' And we're not
making progress. So, the amendment does one thing. If
we can't make progress, let the general public take
the progress. By the way, this doesn't take away the
fact that we can do it before the November 7 election.
The other thing that this doesn't do - it's
irregardless of who is in control after the elections.
It lays all the responsibility on the general public
to say if nothing is done by November 7, should we
vote to ratify or not.
4:17:13 PM
SENATOR DYSON said the Administration has always been very clear
with the legislature that if there were changes to be made to
the Stranded Gas Act, they would deal with them at the
appropriate time after they negotiate the contract. "That's the
process we've been in. At no point have I ever said that they
were operating outside of the law and an intimation that I was
saying so is unfathomable."
CHAIR SEEKINS said he didn't interpret it that way.
SENATOR BEN STEVENS said he could interpret his comments any way
he wants, but that's not what he intended to say.
4:18:51 PM
CHAIR SEEKINS invited Dennis Bailey to sit with the committee.
SENATOR STEDMAN said he comes from a district that is as far
from this gas line project as one can get, but the people there
are very interested in monetizing the resource and moving the
state forward. They are not afraid of deciphering complex issues
and making the correct decision. He supported Amendment 6 and
was glad it was before them today because the people he had
talked to in his district about it didn't want to vote. "They
want a gas contract and if there's inaction in the legislature,
that can be taken care of in the ballot box."
4:20:53 PM
SENATOR ELTON diverted attention to Sections 23 and on and
Sections 14, 15, and 16. He had asked for someone to be
available from Legislative Affairs [Mr. Bailey] to see if his
view of those sections is correct. He thought it read as
follows: "Section 14 authorizes the commissioner to execute the
contract." He asked if this bill passes with this amendment,
would that authorize the commissioner to execute the contract
the day it is signed.
SENATOR BEN STEVENS said that was not correct. Section 23(a),
which removes legislative ratification until after a vote of the
people, doesn't go into effect.
CHAIR SEEKINS said the entire process of Section AS 43.82.430
with fiscal findings and final determinations would become an
agency decision, which are challengeable under the
Administrative Procedures Act, as the Judiciary Committee
discussed. Then it would not become effective until it was
ratified by a vote of the people. He asked Senator Stevens if he
was correct.
SENATOR BEN STEVENS responded it was most important to first
understand Section 29 [Amendment 6] on page 3, which lay out the
dates the sections take effect. Sections 14, 15, 16, 23, and 24
are all conditional on a positive vote on a general ballot.
Nothing is significantly altered until that point.
4:23:52 PM
SENATOR ELTON agreed with the sponsor that Section 29 provides a
conditional effect, but that doesn't necessarily allay his
concern. He asked, assuming SB 3002 is passed as amended in this
manner, and that the commissioner recognizes that he can execute
a contract, but it may not take effect because of the
conditional dates in Section 29, what the need was for Sections
14, 15, and 16.
4:25:57 PM
^Dennis Bailey, Legislative Legal Services
CHAIR SEEKINS asked for an explanation of Section 43.82.440 -
Judicial review.
SENATOR BEN STEVENS deferred to Mr. Dennis Bailey.
DENNIS BAILEY, Attorney, Legislative Legal Services, agreed with
the understanding expressed by Senator Ben Stevens that Sections
14, 15, 16 don't take effect until after a public vote. In
Section 30, after the director of elections certifies the
results, the commissioner has the authority to sign the
contract. The timing there is currently 30 days after the public
comment period, which has already occurred. So, his reading is
if there was a positive vote, Section 29 would make Sections 14,
15, and 16 effective; Sections 14 and 16 would become effective
after the certification and then the commissioner could sign the
contract. He thought the 120 days referred to after the date the
contract was executed by the commissioner.
SENATOR ELTON asked if the commissioner could not sign the
contract until after the certification of the election.
MR. BAILEY replied that was right - that is what Section 30
says.
CHAIR SEEKINS added that was 120 days after final execution by
all parties.
MR. BAILEY replied yes.
4:29:01 PM
SENATOR BEN STEVENS removed his objection to the amendment.
SENATOR ELTON objected saying he was going to vote no, because
he disagreed with any assertion that the legislature has been
dilatory. He, personally, had started with a minimal amount of
knowledge, and while he wouldn't say he is an expert in
petroleum economics, he has greatly increased his knowledge from
there. He was now prepared to make a decision on what is good
for state after seeing the contract and the LLC and he wouldn't
vote against the contract just because it contains some elements
he didn't like.
4:32:56 PM
CHAIR SEEKINS recognized Senator Elton's attendance and
participation as having been stellar.
SENATOR STEDMAN said he had no hesitation in taking the contract
to the voters.
4:33:57 PM
SENATOR WAGONER said it's a matter of having the background and
knowledge to be able to vote. His constituents have said they
don't want to vote on this issue; it's a matter for the
legislature to decide.
4:34:37 PM
SENATOR DYSON said he identified with Senator Elton's remarks.
He said our founding fathers set up our government as a
constitutional republic in which elders are elected to take care
of the people's business and the time and resources were set up
to allow them to do that. He was a "strong no vote on this."
4:36:41 PM
SENATOR HOFFMAN said Alaskans want a gas line; it's a financial
key to our future and our children's future. He was sent to
Juneau to make those decisions; that is why he supported the
Stranded Gas amendments. They haven't done their job here and he
doubted that they would this session. He still wanted to get the
job done, but it seemed that they were being placed in a box and
they would let the window of opportunity slip by. He was glad
the Governor had kept legislature here to get its work done. He
said this issue is critical to the financial well-being of the
state and if this is the best chance to get a gasline built, if
the legislature can't do the work in one regular session and
three special sessions, maybe they should adopt the amendment
and send it to the people to vote on. "I believe they will make
the right decision and get the gasline built."
4:40:50 PM
SENATOR OLSON spoke against the amendment and in support of
letting the legislature make the decisions.
4:43:09 PM
CHAIR SEEKINS said he didn't know if this was the right time to
put it to a vote before the people and he would vote no on the
amendment.
4:45:58 PM
SENATOR BEN STEVENS provided closing comments on Amendment 6
saying there are 89 days until November 7 and it doesn't remove
the legislature's authority then. He stated that the project
needed to move to the next phase.
4:48:30 PM
SENATOR ELTON maintained his objection.
A roll call vote was taken. Senators Hoffman, Senator Ben
Stevens, and Stedman voted yea; Senators Kookesh, Olson, Wilken,
Elton, Wagoner, and Seekins voted nay; so, Amendment 6 failed by
a vote of 3 yeas and 7 nays.
SENATOR WILKEN moved to adopt Amendment 13.
AMENDMENT 13
TO SB 3002
BY SENATOR GARY WILKEN
"An Act amending the time allowed under the Alaska
Stranded Gas Development Act, for the commissioner of
revenue to summarize public comments, propose
amendments, if any, and make findings; and providing
for an effective date."
CHAIR SEEKINS objected for a discussion.
SENATOR WILKEN said he thought Version Y was good, but he was a
little concerned that the title didn't define what the bill
does, which could lead to delays over the next six days as this
takes what could be a tortured path through the legislature.
4:50:24 PM
MR. BAILEY said he had no difficulty with this amendment since
it was similar to the title on the original CS.
4:51:17 PM
CHAIR SEEKINS removed his objection and asked if there was
further objection.
SENATOR STEDMAN objected and said he would prefer to leave the
title the way it is.
CHAIR SEEKINS declared that as the introducer of this particular
CS, he didn't intend it to have an open title nor was there any
discussion with any other person in the other body about the
title.
4:52:35 PM
SENATOR STEDMAN maintained his objection.
A roll call vote was taken. Senators Kookesh, Dyson, Wilken,
Elton, and Wagoner voted yea; Senators Ben Stevens, Stedman,
Hoffman and Seekins voted nay; so, by a vote of 5 yeas and 4
nays, Amendment 13 was adopted.
4:53:32 PM
SENATOR WILKEN asked Commissioner Corbus if this would allow him
to collect and synthesize information for after the election. He
asked if that was his intent.
COMMISSIONER CORBUS replied that it was their intent to get all
this work done before the election.
4:54:15 PM
SENATOR BEN STEVENS moved to report CSSB 3002(NGD) Version Y as
amended out of committee with individual recommendations. There
were no objections and it was so ordered.
The committee took an at-ease from 4:54:55 PM to 4:56:37 PM.
^Alaska Gasline Port Authority Presentation
CHAIR SEEKINS returned to the Alaska Gasline Port Authority
presentation. He informed members that he would take rebuttal
and continue the roundtable discussions in future meetings.
4:58:40 PM
^Jim Whitaker, Bill Walker and Radoslav Shipkoff for AGPA; Dr.
Pedro van Meurs, Consultant to Governor
MAYOR WHITAKER continued his Port Authority presentation. He
said the legislature had cooperated with the Port Authority, but
he couldn't say the same about the Administration. "We have
found that the Administration has been anything but
cooperative." And while they were willing to put up with that,
other participants in the project were not. Sempra left saying,
"You've got the best economics that we can find, but you've got
the worst politics." It was that kind of an attitude that it
would be very difficult for the project to move forward. He
stated:
I'm going to editorialize just a bit. Our results have
been put on the board today and the commitments that
we have made are clear. We're dedicated to moving a
project forward. Are there roadblocks? Certainly. Can
we overcome those roadblocks? We certainly think we
can.
On the other hand, what you have in front of you is a
contract that is essentially a hold harmless
agreement; it's a hold harmless agreement for the
producers given that if they choose not to build a
project, there will be no penalty for it. And that
hold harmless agreement is for 30 years and 45 years.
I'll stop now. Those are the results that I see thus
far.
5:01:25 PM
MR. SHIPKOFF said he disagreed with Dr. Van Meurs' slide 3 that
listed the distribution of the take between the various state
components and the producers. Mr. Shipkoff said that while he
didn't disagree with any specifics, that according to his
numbers there is a $2 billion federal tax cost to the midstream,
which the Port Authority's structure allows to be saved - a
savings that can be shared between the state and the producers.
5:03:01 PM at ease 5:03:17 PM
MR. SHIPKOFF referred to Dr. Van Meurs' slide 4 that discussed
state ownership in the pipeline and indicated a certain portion
of the federal tax cost could be alleviated, and he does not
disagree; but what AGPA offers is that the entire amount of
federal tax can be alleviated without the state having to take
any ownership.
On Dr. Van Meurs' slide 5, Mr. Shipkoff said that likewise,
there was nothing he disagreed with. The purpose of the Port
Authority was to accomplish all of these goals. But the
connection between the high-risk nature of the project and the
need for fiscal stability is an area where he disagreed. AGPA
doesn't see the need to give fiscal concessions. His concern
with slide 7 was the same in that supporting the stranded gas
contract, the West Coast market and the LNG project might never
happen.
MR. WALKER noted that the LNG may be lost to Alaska, but the
producers have other projects elsewhere.
MR. SHIPKOFF agreed. He went on to slide 8 that discussed the
timeline. He agreed that they were now past the startup date of
January 1, 2006, but even if the LNG project started now, he
believed that the benefits of having some engineering work
already done and using existing permits would allow it to have
first gas sometime late in 2012. He agreed with Dr. Van Meurs
that every day waiting is a day lost.
MR. WALKER interjected that their offer to the producers
included discussion on returning CO back into the leases where
2
it came from as miscible injectant (MI). In early meetings, the
producers wanted to retain ethane as part of the MI stream;
subsequently it appears that is not the case.
MR. SHIPKOFF added that they have never suggested that AGPA
would do anything not in concert with the producers. "Obviously,
everything has to be done in coordination with the producers.
That's very clear."
5:07:58 PM
MR. SHIPKOFF went on to slide 10 and pointed out his argument
that the LNG project is exempt from FERC regulation, thus
compressing its timeframe for everyone including the producers.
5:08:29 PM
SENATOR ELTON said this point struck him during Dr. Van Meurs'
presentation. He asked if he was suggesting that because the
Port Authority already holds permits, that a GTP is possible in
2011 rather than in 2013.
MR. SHIPKOFF responded that his timeline takes into account work
that has already been done on permits and, if the project is
FERC-exempt, it does not have to go through the FERC process.
The highway project that assumes first gas at 2016 includes the
time needed to obtain permits and FERC approval, but he said,
"We can eliminate that - for whoever and whichever project."
CHAIR SEEKINS asked if they anticipated owning the GTP.
MR. SHIPKOFF replied "We have said that we are prepared to own
it if that benefits the state and the producers...."
CHAIR SEEKINS asked if the Port Authority didn't own it, would
the producers still have to go through that process.
MR. SHIPKOFF replied no; he thought that would be a benefit the
Port Authority could bring to them.
CHAIR SEEKINS asked if there was some indication that the
downstream shippers out of Valdez would have to go through that
process.
5:10:30 PM
MR. SHIPKOFF replied, of course; he did not dispute that for the
downstream re-gas terminal and takeaway pipelines that bring the
gas to market. As an example, Costa Azul in Mexico, regulated by
the CRE, has already applied to FERC for a certificate of public
convenience and necessity for its takeaway pipelines. He
reasoned, "It's not us who has to obtain those permits."
CHAIR SEEKINS asked about the ships and the shippers.
MR. SHIPKOFF replied that he is not an expert on shipping
regulations.
CHAIR SEEKINS said he thought Mr. Twomey said that the boats
used downstream from the pipeline are FERC regulated.
An unidentified person in the audience indicated the he wouldn't
say that.
5:11:46 PM
SENATOR ELTON asked if the Port Authority owned the GTP, 2011 is
realistic for first gas, but if the producers own it, it could
be as late as 2013.
MR. SHIPKOFF replied that 2011 may not be realistic, but 2012
may be; he thought AGPA could help compress the timeframe for
everyone.
SENATOR ELTON said he thought Mr. Shipkoff said 2011 is when
their project could start delivering gas.
MR. SHIPKOFF clarified that it was 2012. He went on to slide 13
on gas sales in California and countered that while he has not
provided any evidence that the LNG project could offer the
lowest price in California compared to other LNG exporters, he
disagreed with Dr. Van Meurs that the LNG project had to provide
the lowest price. One must look at where the project fits on a
cost-supply curve and compare oneself against all potential
suppliers. The fact that Qatar is not the lowest cost supplier
into the Gulf has not prevented them from having very successful
projects. He said:
We do not expect to be the lowest cost supplier into
the West Coast.... The lowest cost supplier into the
West Coast is going to be indigenous California
production that is non-conventional or something like
that.
5:15:06 PM
DR. VAN MEURS commented that while there are things like supply
and demand curves, one needs to always compare the strengths in
a project relative to the strengths of other projects in the
market.
MR. SHIPKOFF agreed with Dr. Van Meurs' comments that one needs
to compare oneself against all the suppliers into the market one
is selling into, not just LNG and stated, "We certainly are
going to have a lower break-even price than many of the other
suppliers who are going there...."
Mr. SHIPKOFF said slide 15 tied in to the same idea that their
competitors are not just other LNG projects, but all suppliers
into a market. He pointed out that the highway project faces the
same situation going into the Midwest stating:
If all the projects that have break-even prices below
the marginal cost and below the expected price in the
market, it will proceed. We believe that both
projects, the LNG project and the highway project, are
well below the threshold and they both are economic.
Regarding slide 16, Mr. Shipkoff couldn't recall ever claiming
that the LNG project brings the benefit of diversifying between
the East and West Coast, but rather he talked about the benefit
of diversifying between the West Coast and Japan. The highway
project cannot bring the gas to Japan.
MR. WALKER added that regarding the last paragraph about the
Alberta Hub and East Coast/West Coast markets, he has seen
nothing in the contract that guarantees the gas leaves Alberta
and stated, "We strongly believe that it will most likely stay
in Alberta for the tar sands feed stock."
CHAIR SEEKINS commented that he was just in Alberta with the
Pacific Northwest Economic Region (PNWER) and was told that by
Alberta's oil and gas people that its tar sands were not a
competitor for Alaska's gas. Their information is that by the
time Alaska gas gets to Alberta there will be enough downstream
capacity to accommodate all of it, because all the Mackenzie
Delta gas would be used in the tar sands area.
MR. WALKER said the last report he saw indicated that the tar
sands would require as much as 3.7 Bcf of gas and MacKenzie has
about 1.2 Bcf. An official at ConocoPhillips said they're
building their oil line out of the tar sands to St Louis for the
refinery specifically because they plan to put the Alaska gas
into the tar sands.
CHAIR SEEKINS admitted they could, but that is information he
received within the last 30 days. It is a point for discussion.
5:21:54 PM
MR. SHIPKOFF went on to slides 17 and 18, the issue of over-
sizing the pipeline. He has assumed they would have a negotiated
rate and over sizing is for the benefit of the producers who
also want to do the highway line. He saw no problem with that,
putting aside the FERC-regulated issue.
He agreed, regarding slide 19, that you have to convince the
provider of guarantee that a project is sound, but the Port
Authority was confident that that case could be made.
CHAIR SEEKINS said his question was based on the fact that he's
never gotten a loan guaranteed for him unless he already had
enough capital that they didn't need to guarantee it for him.
MR. SHIPKOFF responded that went to the point of slide 20, which
concerned whether the lenders (by extension the guarantors)
would look at AGPA's assets as insurance that the loan would be
repaid. If this was a full-recourse corporate type of financing,
that would the case, but most large capital projects aren't
financed on that basis. They are financed on a limited-recourse
basis - in which case the lender does not look to the assets of
the borrower, but to the ability of a project to generate a
specific revenue stream.
CHAIR SEEKINS asked if he didn't think the state would have to
put up full faith and credit of people of Alaska as part of the
guarantee.
MR. SHIPKOFF replied that he wouldn't recommend that and didn't
expect it.
CHAIR SEEKINS commented that since there are no regulations yet,
it is hard for him to form an opinion on it.
SENATOR BEN STEVENS commented that he disagreed with Mr.
Shipkoff that his project wouldn't need the full faith and
credit of the state behind it in a financial market. He related
that last week, the Wyoming Port Authority's participation in
the Rocky Mountain Express project was pulled by the FERC and
reallocated amongst the remaining owners. The reason the
Authority didn't get credit worthiness for the firm
transportation commitment was because the Wyoming legislature
would not exceed a $3-billion backing for their 200-
decatherm/day capacity. He exclaimed:
So, the comments that you don't have to have the full
faith and credit of the state in the financial
markets, I don't agree with that because there is an
example that just happened last week.... You know, you
continually put things in front of us that say it
doesn't work, it doesn't work, we don't need that, we
don't this, we don't need FERC, we don't need firm
transportation commitments, we don't need upstream
agreements, we don't firm financial agreements. I
mean, what it's amazing to me that everything you say,
you don't need it. Everything we've heard from every
other project presenter that these are requirements
that have to be in place for any project to be put
forward; you say you don't need it. It's just a
phenomenal presentation that you've given us in the
last 24-hours.
MAYOR WHITAKER responded:
We've never said that we don't need a number of things
that any other project would need. There are some
things we do need, some things we don't need. Mr.
Chairman, if it's okay with you, I would like Mr.
Shipkoff also to reply.
CHAIR SEEKINS responded, "Absolutely."
5:29:28 PM
MR. SHIPKOFF responded that he couldn't speak to what the
Wyoming Authority proposed, but what they offered was obviously
not sufficient to satisfy financial markets. Based on the Port
Authority's experience, they believe they can put a structure in
place with proper gas supply agreements, proper mitigation of
risks through a combination of contractor guarantees to
demonstrate that the project has robust viability to where the
lenders will lend on a limited recourse basis. This is done all
the time; it's not innovative or new.
5:31:03 PM
CHAIR SEEKINS directed that the discussion move on.
MR. SHIPKOFF said he didn't agree with slide 20 that said the
Federal Loan Guarantee wouldn't cover completion risk. Nothing
in the guarantee requires the secretary of DOE to ask for
completion guaranties, but he could decide to. He agreed that
non-guaranteed lenders generally don't take completion risk and
that has been anticipated in his economic analysis. If Sempra
invests in and operates the LNG plant, which it has proposed to
do, that is their risk and it has the financial resources to
back it. Completion guarantees can be provided for portions of
the project that are not privately owned and he said financial
instruments are available that can provide mitigation for
completion risk and cover lenders.
CHAIR SEEKINS asked if he had any hard plan as to who will own
what in the LNG project.
MR. SHIPKOFF replied that they are not in the position to
negotiate final commercial agreements, but he pointed out the
highway project is not in that position either.
CHAIR SEEKINS asked, "All we really can count on at this point
would be that you would own the pipe?"
MR. SHIPKOFF replied, "It's very likely that we will, yes."
5:35:04 PM
DR. VAN MEURS remarked that Senator Elton had been requesting
the LLC agreement and the reason it takes so long to negotiate
it is precisely to deal with very complex questions like
completion risk. In fact, the state has looked very hard at its
ability to take on certain forms of completion risk as a
partner. "So, I think the seriousness of completion risk at this
point in time, I think is being understated by the Port
Authority."
CHAIR SEEKINS said that was a point well taken.
MR. SHIPKOFF went on to slides 22 and 23 and said the point
appears to be who is going to give you ship or pay commitments
that are needed for financing if the netback the project
provides is so low. He did not agree with this premise. He said
the netback for the LNG project is low because it is using over-
sized pipe in preparation for a highway project. He said the
only issue is whether the project can support itself or not,
because it provides a netback greater than no netback at all.
5:38:12 PM
He said the stranded gas contract - slide 24 - goes back to his
initial remarks about whether either project requires a stranded
gas contract and whether the gas is stranded in the first place
is a separate issue from whether the LNG project is viable. He
stated, "We think that neither the LNG project nor the highway
project are stranded gas and, therefore, neither of them require
support...."
Relating this to the previous point he made that they will be
successful in obtaining financing, Mr. Shipkoff said their tax-
exempt financing and possible lower cost of capital is often
rebutted by the idea that one can't evaluate projects on a post-
financing basis, but purely on a pre-financed basis.
MR. WALKER said he had very significant concerns about slide 26
that said the LNG project could be the incremental piece of a
highway project rather than adding the highway to the LNG
project. They don't know when the line would come through Delta
Junction because it's only a study at this point and he was
concerned that they would lose the market by becoming an
incremental addition a highway project.
MR. SHIPKOFF went to slide 27 that assumed a buyer would buy gas
at the inlet of the pipeline. The Port Authority assumed the
same thing, but it is also willing to act as transporter to a
North Slope shipper. If producers have to assume ship or pay
commitments, they are financial obligations of a sort and don't
have to be capitalized on a balance sheet. He disagreed that
capitalization of these commitments needs to be included in
evaluating the upstream economics. There are many instances in
which the upstream producer transports its gas via a third-party
pipeline and clearly he said you evaluate upstream economics
based on the value you get upstream.
MR. SHIPKOFF countered Dr. Van Meurs' slides that compared of
state revenues making the point that the Y-line is a bigger
project. And Mr. Shipkoff said that was his point exactly; the
Port Authority brings incremental value to the state by
providing the opportunity for both the state and producers to
capture a larger share of the Lower 48 market with Alaska gas,
not with somebody else's gas.
5:44:29 PM at ease 5:46:11 PM
CHAIR SEEKINS called the meeting back to order at 5:46 pm.
^Roger Marks, Economist, Department of Revenue
ROGER MARKS, Economist, Department of Revenue, informed members
that he'd prepared a detailed presentation, but he would be
brief. He referenced the Administration's perceived antagonism
toward the LNG project. He stated this project is all about
maximizing the benefits of the state's resources to the Alaskan
people and the Administration takes that very seriously. "We
believe maximizing the value means three things: the most gas at
the highest price at the lowest cost."
MR. MARKS explained his view of the LNG project.
This is how we see LNG project. I'll talk about the
West Coast market demand and supply real briefly and
the price. The West Coast demand for gas is not
growing very fast; this is from Wood McKenzie. Over
between now and 2020, it's growing maybe 2 Bcf a day.
It's just growing slowly with the population growth.
The West Coast has large supplies of nuclear and
hydropower, and oil, as well, to run power plants. In
addition on supply side, what the West Coast has
access to is, and what is going gangbusters is, the
Rocky Mountains. You know, people talk about the North
Slope has a lot of gas - 35 Tcf; the Rockies have over
300 Tcf of conventional and unconventional gas. It
costs about $.50 - the tariff from the Rocky Mountains
to the West Coast about $.50.
People have talked about the last couple of days, the
Rockies Express Pipeline. There is so much gas in the
Rockies that the producers in the Rockies cannot ship
any more to the West Coast because the price would
just crater. The Rockies Express Pipeline is something
like 1,500 miles from the Rockies - you know the
Powder River Basin, Wyoming, all the way to Ohio at a
tariff of $1. They're going to build a project that
big and pay that much tariff because all the gas they
can get into the West Coast is there without crashing
the market.
In addition, if you look at, you know, if is there
room for LNG on the West Coast? Yeah, there is room
for a little bit. This is a forecast from Wood
Mackenzie. Their forecast, you know, by 2020 - and
they have it all going into the Baja, which they
believe is the only site that can be sited on the West
Coast. This is the same opinion that PFC Energy had.
They say that by 2020, there might be 1.8 Bcf of LNG
coming into the Baja terminal.
Right now the Baja plant, the Sempra plant, is going
to open in 2008; they have 1 Bcf a day committed. They
recently had an open season to try to get another 1.5
Bs and more than that was subscribed. So, if you
believe this forecast, there is about 2.8 Bcf a day
already subscribed into the Baja plant. So, I think an
argument can be made that there may not be any more
room for any more LNG including our project, or if it
does, it will suffer on the price side.
As Noel stated yesterday, West Coast prices are about
$.50 less than Chicago prices. So, on the price side,
again if we believe we maximize the benefit of the
project to the people by maximizing the value, just on
the price side alone going to the West Coast, we lose
$.50.
Now on the cost side, LNG is an expensive process. In
general, you know, people do LNG when they have no
other options and the reason they do when they have no
other is it's so expensive. You have to compress it
about 600 times so it fits in a ship; it's 260 degrees
below zero. It costs a lot!
In addition, this concept of the Y-line - you know,
pipelines live and die by economies of scale. If you
look at the option of shipping 4 Bcf a day to the
upper Midwest and split that out between 3 and 1, you
kill a lot of economies of scale. And so what happens
is the costs go up a lot. You know, our estimate is
just if you were to take the difference between 4 Bcf
a day and 3 Bcf a day, it is an additional $.40 per
million Btu to get it to Chicago. So what you do by
taking a Y-line is you dilute the economics on both
portions, because you just killed the economics of
scale.
You know, you said yesterday that the Y-line option or
the LNG option, the 1 B, doesn't take anything away
from the Alcan project. Well, it certainly does; it
takes gas away from the Alcan project. If it's
economic to commercialize 4 Bcf a day, the state will
realize more value doing all 4 Bcf to Chicago rather
than 3 and 1. If it makes sense to commercialize 6 Bcf
a day, it makes more sense to ship 6 Bcf a day to
Chicago rather than 5 and 1.
Could the LNG project possibly pay for itself? Yes, it
might but the issue is where do we get the most value.
Well, Mr. Chairman, I just - what's been perceived
again as the Administration's antagonism is really
nothing but our reverence for the directive in the
Constitution, the same directive that Mayor Whitaker
stated yesterday. So, that's what I was going to say
in half an hour down in about five minutes.
CHAIR SEEKINS called for questions.
REPRESENTATIVE SEATON asked Dr. Van Meurs or Mr. Marks if the
Stranded Gas Act is needed for both projects and if it is needed
for a 1.2 Bcf LNG project without over-sizing the pipeline.
DR. VAN MEURS answered that the Stranded Gas Act was actually
created for an LNG project when the state was hopeful that the 2
Bcf Yukon Pacific project could be realized to the Asian market.
Further he said:
Obviously, the same price volatility and the same cost
overrun problems that face a project to Alberta face
an LNG project. Consequently, if the producers, in the
hypothetical case, that they would make a decision to
sell gas to this LNG project, yes, they would like to
know what the fiscal terms are; they would like to see
some stability on the fiscal terms and consequently
that is the same for either project.
REPRESENTATIVE SEATON asked if this is no longer a major
project, was it his opinion that the Stranded Gas Act,
concessions, credits, the fiscal certainty are necessary for
this project to go forward as a stand-alone project.
DR. VAN MEURS answered that the situation is, as Roger Marks
described, that the state has an obligation to maximize the
benefits back to the state and he believed that this highway
project did that. He sees the Port Authority project as a
potentially valuable addition to the highway project. So, he
can't see how they could have partial fiscal stability.
REPRESENTATIVE SEATON said in looking at the maximum value for
the State of Alaska, he concluded that the Stranded Gas Act
looked for the maximum value for the producers and concessions
were needed for a stand-alone project.
5:59:00 PM
DR. VAN MEURS replied that he hadn't studied the details enough,
but previous extensive analysis of the LNG project to Asia
showed the clear need for fiscal stability, the Stranded Gas Act
concessions, and at that time it authorized them to have far
more extensive lowering of the fiscal terms than what has been
agreed to currently. He disagreed with Representative Seaton
that the stranded gas contract was done with the view of
maximizing the benefits to the producers. He had hoped to
explain over the last few months that there is an important
balance between risk and reward. He elaborated:
Consequently, we believe that the reward to the
investors can be lowered and it is important to lower
the reward to the investors if you can lower the risk.
And consequently, that is a concept that is true
universally. The great advantage, the great innovation
of the Stranded Gas Act was that for the conditions in
Alaska where you are so far removed from markets, no
matter what - and that was well-explained in the Port
Authority presentation and I think in our
presentation. No matter what you do, you are very far
- or whether you go to Asia - you are very far from
markets. Under those kinds of conditions it is very
useful to consider the balance between risk and
reward. And by reducing the risk through the Stranded
Gas contract, we can reduce the reward and increase
the benefits to the state. And that is precisely what
Mr. Marks has also emphasized.
REPRESENTATIVE SEATON said that when the LNG analysis was made
earlier, the highway project would have been uneconomic also.
Economics have to be talked about as they exist on the two
projects now. He thought they should be comparing the very large
supply of revenue the state would get from this LNG project and
keep all the PPT oil money to subsidizing the gas project.
MAYOR WHITAKER said Representative Seaton was correct. When the
YPC discussion was ongoing, there was an incredibly different
price regime. With regard to the most gas, highest price, lowest
cost comment, he has read the contract that is before the
legislature and he didn't see anything that would take them
there. He saw an indemnity for the producers to hold them
harmless if they choose not to produce any gas. Therefore, he
said if the state is looking for certainty, it should seriously
look at the LNG project. He thanked the Chairman for the
opportunity to come before the committee.
MR. WALKER suggested that if the goal of the Administration is
to maximize the value of the wellhead at the lowest cost, they
should look at the over the top option, which accomplishes that.
The Port Authority thinks that Alaska can have as high a
wellhead as any other project and keep gas in Alaska for the use
of Alaskans as well. Perhaps, this is where they disagree.
CHAIR SEEKINS inserted that this legislature will not allow an
over the top route under any circumstances; federal legislation
won't allow it either.
6:06:19 PM
MR. WALKER said the PFC report, a slide that wasn't shown in the
Administration's presentation, did the Port Authority a lot of
damage because the people who did the analysis were instructed
not to contact the Port Authority.
If they had contacted us, they would have had updated
information. We would have gone to see them just like
we went to see Econ One within six hours of our
conversation the other day, Mr. Chairman, when you
were going to utilize them to evaluate us. That was
just a blindside that was indicative of driving the
final stakes through the heart of the Port Authority
project when you do an analysis. Then you do your best
interest findings - all this stuff - based upon a
study that we were never even contacted. So, we spent
tons of money with Lukens, with Econ One, with anybody
else doing an analysis and yet the Administration
chose to go with PFC and that's just indicative of
what we've lived with in this administration.
CHAIR SEEKINS noted that the legislature was doing its own
independent analysis of the economics of the deal. When that
comes out, it would be released even if it hadn't been discussed
in public forum to the Port Authority.
We will do everything we can to make sure that our
discussions are full, fair, and complete and balanced
as we go forward in trying to make this determination
for ourselves. We'll take everyone's input as you can
see today.
MR. MARKS said he was the project director on the PFC study and
the project description was absolutely consistent with the
project description the Port Authority had on its website and
continued to update even after the draft report was released.
With regards some comments made yesterday about whether that
study put the costs on an apples to apples basis with the Port
Authority's estimates, he said PFC went to painstaking lengths
to make them consistent in terms of inflation, steel costs, 2005
prices, profit margins, and contingencies, and the cost
estimates, as well.
MAYOR WHITAKER said, "We absolutely disagree with those
statements."
MR. WALKER said, "Not a single phone call to us."
6:10:06 PM
CHAIR SEEKINS found there were no further questions and
commented that the conversation had been stimulating and he
looked forward to continuing it as they go forward. There being
no further business to come before the committee, he adjourned
the meeting at 6:11:44 PM.
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