Legislature(2005 - 2006)FAIRBANKS
08/25/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| Roundtable Discussion of Port Authority Plan | |
| David Van Tuyl, Commercial Manager, Alaska Gas Group, Bp | |
| Bill Walker, General Counsel and Project Manager, Alaska Gasline Port Authority | |
| Radoslav Shipkoff, Director, Greengate Llc | |
| Mayor Jim Whitaker, Chairman, Alaska Gasline Port Authority | |
| Steven B. Porter, Deputy Commissioner, Department of Revenue | |
| Roger Marks, Economist, Department of Revenue | |
| Dan Dickinson, Cpa, Consultant to the Governor | |
| Dr. Anthony Finizza, Consultant, Econ One Research, Inc. | |
| Michael Menge, Commissioner, Department of Natural Resources | |
| Ken Griffin, Deputy Commissioner, Department of Natural Resources | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
Fairbanks, Alaska
August 25, 2006
9:08 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Thomas Wagoner
Senator Kim Elton
MEMBERS ABSENT
Senator Lyda Green
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Senator Ben Stevens
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Senator Gene Therriault
Representative David Guttenberg
Representative Bill Stolz
Representative Ralph Samuels
Representative Michael Kelly
Representative Paul Seaton
COMMITTEE CALENDAR
Round table discussion of Port Authority Plan.
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAVID VAN TUYL, Commercial Manager
Alaska Gas Group
BP
POSITION STATEMENT: Commented on Port Authority project.
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 998811-0001
POSITION STATEMENT: Commented on Port Authority project.
Michael Menge, Commissioner
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on Port Authority project.
KEN GRIFFIN, Deputy Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on Port Authority project.
DR. ANTHONY FINIZZA, Consultant
Econ One Research, Inc.
Suite 2825
Three Allen Center
333 Clay Street
Houston, TX 77002
POSITION STATEMENT: Commented on Port Authority project.
ROGER MARKS, Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on Port Authority project.
STEVEN B. PORTER, Deputy Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on Port Authority project.
JIM WHITAKER, Chairman
Alaska Gasline Port Authority;
Mayor, Fairbanks North Star Borough
PO Box 71267
Fairbanks, AK 99707
POSITION STATEMENT: Commented on Port Authority project.
BILL WALKER, General Counsel and Project Manager
Alaska Gasline Port Authority
411 4th Avenue, Suite 200
Fairbanks, Alaska 99701
POSITION STATEMENT: Commented on Port Authority project.
RADOSLAV SHIPKOFF, Director
Greengate LLC
2001 L Street NW, Suite 901
Washington, DC 20036
POSITION STATEMENT: Commented on Port Authority project.
EDWARD J. TWOMEY
Morrison & Foerster
Counsel to the Governor
Washington, DC
POSITION STATEMENT: Commented on FERC issues.
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 9:08:27 AM. Present
at the call to order were Senators Thomas Wagoner, Kim Elton,
and Chair Ralph Seekins.
^ROUNDTABLE DISCUSSION OF PORT AUTHORITY PLAN
9:08:27 AM
CHAIR SEEKINS recapitulated the question under discussion at the
close of Thursday's meeting. The issue was whether FERC would
allow construction costs to be rolled into the tariff if the
state builds a gas line larger than the capacity it has
commitments for. They discussed building a larger line to Delta
Junction with the idea that it would eventually connect to the
Lower 48, until which time it would carry only 1.2 Bcf/d to the
LNG plant there.
^EDWARD J. TWOMEY, Morrison & Foerster, Counsel to the Governor
EDWARD J. TWOMEY, Morrison & Foerster, Counsel to the Governor,
said that 20 years ago he would have said that FERC would
probably refuse the application, or say to come back when the
line is full; but today FERC is less insistent that applicants
be able to show the line will be 90-100 percent full. If an
applicant wants to build a pipeline twice as big as he has FT
commitments for, FERC would likely allow it, but require him to
bear the cost of the excess capacity. That could be done two
ways:
1. If a 12" line would have been appropriate for existing Bcf,
one could get experts to calculate the cost differential of
a 48" pipe vs. 12" and back that cost out of the rate base.
2. Alternatively, and probably how FERC would do it, one could
look at the pipeline as if it would be full. For example,
if the total cost of service is calculated to be $100
(including operating cost, income tax, and return on rate
base) and it would take 50 units to fill the pipe, FERC
would calculate the tariff at $100 cost of service divided
by the 50 units that would be going through the pipe, so
each unit would bear $2 of cost.
If you apply the example in method two to the Port Authority's
proposal, only ¼ of the pipe would be full for the first three
years, so AGPA would be transporting only 12.5 of the 50 units.
FERC would allow it to charge only $2 per unit for a total of
$25, but AGPA or its investors would have to eat the $75 that is
not subscribed until they get commitments for that unused
capacity.
^DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP,
commented that its FERC attorneys gave him a response very
similar to Mr. Twomey's.
9:15:58 AM
^BILL WALKER, General Counsel and Project Manager, Alaska
Gasline Port Authority
BILL WALKER, General Counsel and Project Manager, Alaska Gasline
Port Authority, clarified that AGPA looked at a larger pipe
because it is best for Alaska based on the vast resources on the
slope. Discussion with its FERC counsel indicated that it is a
possibility; but their project does not depend on it to be
economic.
9:17:17 AM
CHAIR SEEKINS said his question is whether they can build a
bigger pipe and make it economic.
^RADOSLAV SHIPKOFF, Director, Greengate LLC
RADOSLAV SHIPKOFF, Director, Greengate LLC, said that he was on
the call with their FERC counsel, who said that it is not only
possible, but that he thinks it is the only plan FERC will
approve, because the pipe is properly sized for the commercial
development of the field and makes commercial sense for all
parties. FERC won't overrule a commercial agreement that makes
sense.
9:18:14 AM
CHAIR SEEKINS asked what commercial agreement Mr. Shipkoff was
referring to.
MR. SHIPKOFF replied that he is not suggesting that they are
sizing the pipe to accommodate future expansion, the fact that
they are designing a pipe that accommodates future expansion
means they must have had discussions with the shippers (whoever
they may be) such that they anticipate an expansion. He asked
why they would design it this way if they didn't know an
expansion was coming.
CHAIR SEEKINS said that is his question exactly.
MR. SHIPKOFF retorted that, if there is not a reasonable
expectation of expansion, it means the highway project is not
proceeding.
CHAIR SEEKINS said that his sole purpose is to look at this
proposal through the eyes of his constituents and determine what
is in their best interests. He asked Mr. Shipkoff if they have
had talks on that commercial agreement, or if he anticipates
talks, because the only four shippers that he is aware of are
the three producers and the state of Alaska.
MR. SHIPKOFF responded that there are four shippers today; who
potential shippers might be in the future he did not know.
CHAIR SEEKINS interjected that he knows that Anadarko plans on
an exploration effort in the future, but there are only four
now. He asked where AGPA is at on discussions with them.
MR. SHIPKOFF answered that they would like to engage in
conversation about commercial gas supply; clearly, they will not
have a project without such discussions.
^MAYOR JIM WHITAKER, Chairman, Alaska Gasline Port Authority
JIM WHITAKER, Chairman, Alaska Gasline Port Authority, agreed
with Mr. Shipkoff that, if there is no conversation, there is no
gas. He said that the legislature, given its legal mandate, and
the administration, should understand that and, if there is
incremental value in a Port Authority or other similar project,
should ensure that gas supplies are made available. If the
legislature and the administration are unwilling to do that,
then whatever is in the best interests of the three major
producers will proceed, and that might mean doing nothing for
another three years, or doing something that strips significant
value from the state's share in a deal. He said that AGPA does
not believe that is acceptable; there is another option and the
legislature has the responsibility to ensure that the option is
given fair vetting.
9:22:28 AM
^STEVEN B. PORTER, Deputy Commissioner, Department of Revenue
STEVEN B. PORTER, Deputy Commissioner, Department of Revenue,
said that he appreciates the state's responsibility and, as the
Port Authority mentioned yesterday, the only way to succeed with
the Port Authority plan is to cut a commercial deal with the
producers first.
CHAIR SEEKINS said that, as he understands it, at some point
there has to be a determination as to whether or not the project
will be regulated by FERC. He asked Mr. Twomey at what point in
the process that would happen.
MR. TWOMEY replied that, assuming the Port Authority continues
to assert that it is not subject to FERC regulation, it is not
clear when FERC would step in; but it would be sometime before
the beginning of construction. He said that the more he
considers it, the more convinced he is that FERC will try to
take control of the Port Authority project, both the pipeline
and the LNG terminal. He referenced an article by Greenberg
Traurig on the Energy Policy Act of 2005, which strengthened
FERC's control over LNG facilities. It reads in part, "The act
amends the Natural Gas Act [NGA] by granting the commission the
exclusive authority to approve or deny applications for the
siting, construction, expansion, and operation of LNG
terminals."
9:26:31 AM
With regard to the pipeline itself, Mr. Twomey said he
understands the Port Authority's argument, but believes that it
is misreading the NGA, which also states that FERC has exclusive
authority over sales and the transmission of gas in interstate
commerce. He believes that the NGA intends that municipalities
will be outside its authority unless they choose to do those
things that are specifically within FERC jurisdiction.
MR. WALKER provided some background on this issue. He said they
met with FERC assistant general counsel in Washington DC about
four years ago and explained that they believe AGPA's project is
FERC exempt under section 2 of the Natural Gas Act. They were
advised to speak with FERC's general counsel, who verbally
acknowledged that they were probably right.
9:29:40 AM
He said that AGPA has since retained Hogan and Hartson, which
performed a thorough analysis and concluded that AGPA is indeed
exempt. They did this to accelerate the loan guarantee process.
At this point, AGPA could attempt to obtain a declaratory order
that they are FERC exempt; but they intend instead to sit down
with FERC within the next 30 days and discuss it with them. If
it looks like it will be a long drawn-out battle, they'll
reconsider their plan.
9:30:52 AM
CHAIR SEEKINS said that, according to Dr. Finizza's report, the
advantage of the Port Authority project is Net Present Value
(NPV). This project can get gas to market three yrs earlier if
all of the hurdles are overcome in the time frame required, and
he is trying to determine if that is really possible. He said he
wants to believe it is FERC exempt, but if it is not, he asked,
does it lose its economic advantage.
MR. WALKER responded that they look at the 3-year (maybe more
than 3 year) advantage as the result of work already done by
Yukon Pacific. It is not related to FERC, but to work that has
been done on fuel order permits, gathering soil samples, core
samples, performing air quality studies etc. AGPA's advantage
doesn't hinge on the FERC exemption.
CHAIR SEEKINS asked whether, if we end up with a commercial
agreement to build a larger pipe to Delta Junction, some of the
permitting would be tied together and on the same timeline, such
as the permits from Prudhoe Bay to Delta, and whether there
would be two certificates of public convenience or just one.
9:33:56 AM
MR. WALKER answered that they will have to talk to FERC and do
what is most expeditious. He thinks that, if there is any
certificate at all, it will be only one.
9:35:14 AM
MR. WHITAKER re-emphasized that the downstream regulatory regime
is FERC controlled. Every receiving terminal will be FERC
regulated, so it is understood that anything downstream of
Valdez is FERC. With regard to upstream regulation, that is yet
to be determined.
9:36:09 AM
MR. SHIPKOFF clarified that the Costa Azul terminal is regulated
by CRE (Comision Reguladora de Energía ) rather than FERC.
^ROGER MARKS, Economist, Department of Revenue
ROGER MARKS, Economist, Department of Revenue, pointed out that
the EIS (Environmental Impact Statement) that Yukon Pacific did
20 yrs ago was for a different project that was not FERC
regulated. If this is under FERC regulation, it is very possible
that a new EIS will be required, which will add about two years
to the process. Additionally, he thinks that a 20-year-old EIS
will be considered out of date by NEPA (National Environmental
Policy Act).
MR. TWOMEY added that Mr. Marks is correct, because implicit in
the 2004 Alaska Natural Gas Pipeline Act are specific provisions
for the timing of EIS.
9:38:03 AM
MR. WALKER said that consultants who are familiar with the NEPA
process and the permits, have said that the EIS will need to be
updated, not replaced, whether it is FERC regulated or not.
9:38:45 AM
SENATOR WAGONER prefaced his question by saying that he believes
AGPA has an option on a permit for siting of an LNG facility in
Valdez. He asked if any studies have been done on that siting
due to changes in the industrial standards and recommendations
regarding lot sizes since the explosion in Algeria.
MR. WALKER answered that they have looked into it and their
permits comply with requirements for an exclusionary zone.
9:39:53 AM
SENATOR WAGONER asked if, in case they cannot come to a
commercial agreement in a reasonable amount of time, there has
been any interest by the three majors or any other companies, in
taking over the right-of-way that AGPA now controls.
MR. WALKER replied they have not been approached by anyone about
their exclusive option to date.
9:41:10 AM
CHAIR SEEKINS asked if there were any further questions or
comments related to FERC.
MR. TWOMEY commented that he does not dispute Mr. Walker's
statement that AGPA is FERC exempt; they may be exempt because
they are a municipality. It does not follow that when they
engage in FERC jurisdictional activities they do not become
subject to FERC jurisdiction.
9:42:40 AM
MR. WALKER said that he appreciates that clarification. He knows
that, although they are a municipality, they could become FERC
regulated through involvement in certain activities outside the
state; but they have maintained involvement to remain within the
FERC exemption. They know where the boundaries are and believe
they are well within them.
CHAIR SEEKINS asked if the boundary is at Valdez before it gets
on the ship.
MR. WALKER answered that the sale would take place in the state
of Alaska.
CHAIR SEEKINS asked Mr. Walker to clarify that the boundary is
that the sale takes place in Alaska and the molecules transfer
ownership before they leave the state.
MR. WALKER agreed that is correct.
CHAIR SEEKINS asked whether the Port Authority would be involved
in the transportation of gas on the ships.
MR. WALKER answered that, as far as ownership of the ships or
gas in the transport process, no.
9:44:17 AM
^ DAN DICKINSON, CPA, Consultant to the Governor
DAN DICKINSON, CPA, Consultant to the Governor, asked Mr. Twomey
where he thinks FERC will draw the boundary in this project. If
the gas ends up outside the state, would FERC regulate only the
activity that occurs outside Alaska, or would it consider anyone
involved in the process as engaged in interstate commerce and
therefore under FERC jurisdiction?
9:44:42 AM
MR. TWOMEY replied that he thinks FERC would look very closely
at the situation Mr. Walker postulated. The gas is
unquestionably going into interstate commerce, and selling at
the border seems to be an artificial way to avoid FERC
regulation. He thinks they'd blow right through that argument.
9:46:00 AM
CHAIR SEEKINS asked who decides.
MR. TWOMEY answered that FERC would assert jurisdiction and, if
the party objected, it would go to court and get an injunction.
9:46:33 AM
MR. MARKS said he wanted to address an issue regarding the
economic analysis done by Econ One. Shipping costs are big part
of the LNG project, and Econ One must have used the Port
Authority's shipping costs, which assume that the LNG tankers
built domestically in the 1980's could be reflagged. When these
ships were built 25 yrs ago, the Maritime Administration (MARAD)
had a Construction Differential Subsidies (CDS) program in place
because U.S. shipyards were not competitive with shipyards
worldwide. Ships built under this program were built for foreign
trade and were not allowed to compete in the domestic trade. The
Jones Act is quite clear that domestically built Jones-Act ships
that were flagged for foreign trade, cannot be reflagged for
domestic trade. It is possible to get a temporary waiver for
purposes of national defense and for passenger ships, but it can
only be reflagged for commercial activity through an act of
Congress, which is no simple thing.
He said that the Department of Revenue had a report prepared by
Wilson, Gillette and Company, a maritime economics firm in
Washington DC, that looked at the political climate for getting
Jones Act ships reflagged. They concluded that it would be very
difficult due to stiff resistance from the shipping industry and
unions. Shipyards have a presence in every coastal state and are
active in state politics in those states. So, this project would
need to build new ships in the U.S., which would add significant
time and about a billion dollars to the project, negating any
NPV advantage.
9:50:53 AM
MR. WALKER said that they retained the best maritime counsel
they could find in Washington DC, and were advised that it would
require an act of Congress; but both the Maritime Engineers
Beneficial Association (MEBA) and the Seafarers International
Union (SIU) have provided Memorandums of Understanding (MOU's)
to work with AGPA in the reflagging process. They are anxious to
put their members to work, and U.S. Shipyards typically don't
get involved. Totem Ocean Trailer Express (TOTE) proposed
bringing a foreign LNG ship builder to a U.S. shipyard to build
new ships if necessary, and thinks that it would be economic.
He said that he worries because those who stand to benefit most,
quickly challenge every suggestion and solution they offer. It's
just tiring. They don't make things up, they get advice from the
best attorneys and experts at every step.
9:54:04 AM
CHAIR SEEKINS responded that, while it may be tiring for him, it
is the first time some of the legislators have heard this, and
that is why they are meeting.
MR. WALKER responded that he appreciates the fact that it is
being discussed, but AGPA has spent the last four years climbing
some very tall mountains; try talking someone into putting
millions of dollars into a project when it doesn't have any gas.
9:54:51 AM
MR. SHIPKOFF said that the Port Authority was approached by the
company that owns the ships in question, a U.S. company and 75
percent shareholder in the largest LNG shipper in the world,
that has been in the LNG shipping business for 25 yrs. He said
they are working with AGPA to reflag those ships and have been
given a timeline of one to two years.
CHAIR SEEKINS asked if that takes an act of congress.
MR. SHIPKOFF confirmed that it does.
9:56:26 AM
MR. MARKS encouraged the committee to read the Wilson, Gillette
report. He said that MEBA is discussed in the report as a fairly
insignificant union with little political influence and that the
two larger unions, SIU and American Maritime Officers (AMO)
would offer considerable resistance. He offered to have Mr.
Wilson meet with the committee to address the issue in detail.
MAYOR WHITAKER said he wanted to pick up where Mr. Walker left
off regarding the hurdles AGPA has continued to cross. He said
one of the biggest is a very uncooperative administration. If
there were problems with FERC, Jones Act shipping, or the IRS,
one would think that the state would be cooperative and helpful
in dealing with them. Instead, the response is continual,
incredible resistance!
He said he appreciates the opportunity to come before the
committee and, if they had received this type of cooperation
throughout the process, the Port Authority project and Alaska's
gas would be much further along than it is today.
9:59:06 AM
MR. PORTER said he agrees with much of what Mayor Whitaker said.
He has been a proponent of moving the Port Authority's plan into
a project management style of process, hiring a project manager
and beginning to work toward overcoming the hurdles. The state
should financially and verbally support that methodology; but
part of that is making sure that the parties are all on the same
page. For example, it would have been helpful to the state to
know that reflagging would take an act of Congress; but this is
the first time the Port Authority has acknowledged that for the
record. The maritime union information is accurate, which does
not mean that it is a showstopper, it means that the Port
Authority should approach those other unions and try to get the
support it needs. The key is to make the project commercial, to
get the per-unit cost of production down to the point that
somebody is going to ship gas on this line. To put it in very
simple terms, if it is competitive, shippers will want to ship
on this line and, if you can get it going two or three years
earlier, everybody wins. If it is not competitive, you must get
it online two or three years earlier in order to beat the
competition so shippers will have to use it. In that case, the
shippers will sign an FT contract to sell gas early, but then
will be selling gas at a loss for the next 30 years. They are
banking on the incremental advantage of those three years. So
the first and foremost thing this project has to do is get
competitive.
CHAIR SEEKINS commented that not all of his colleagues believe
in net present value either.
10:02:42 AM
SENATOR WAGONER said that, when he was at an energy conference
in Washington DC about two years ago, he and several other state
senators asked Senator Ted Stevens if the Port Authority would
be able to get a Jones Act waiver and were told that it would
not happen. He said he thinks that the Port Authority will have
to work with Senator Stevens on this reflagging issue.
10:04:15 AM
MR. WALKER agreed with Senator Wagoner and said that was one of
the reasons they adjusted their plan. He commented that one of
the things they suffer from is that they put out a great deal of
information, but it isn't always used in the Port Authority's
best interest. He said that the Jones Act issue is one they have
addressed fully, and they have recently received a resolution of
support from the Seafarers International Union. He thinks they
are lining up the appropriate issues, and they plan to address
this with Senator Stevens soon. He reminded the committee that
Senator Stevens was a huge help to the project with regard to
loan guarantees.
10:05:49 AM
MR. PORTER said he wanted to follow up on Mr. Walker's comment
about information utilization, and said that there is a level of
mistrust that is hindering communications. He noted that there
have been times when the administration has asked for additional
information to try to understand the project and been told it is
confidential, perhaps partially because the Port Authority is
afraid it will be used against them. That is not the
administration's intent, and for this project to move forward
will require a greater level of trust.
10:06:36 AM
MR. SHIPKOFF said he wanted to provide clarification on one of
the points Mr. Marks brought up. The CDS for the ships in
question has been repaid, a condition of them being flagged out
of the trade.
CHAIR SEEKINS asked if there were any more questions on the
Jones Act or shipping before the discussion moves on to other
things.
10:07:12 AM
MR. MARKS went back to page 20 of Dr. Finizza's presentation, to
the discussion of Internal Rate of Return (IRR). He said that
66.9 and 74.8 percent are very high and, although Dr. Finizza
doesn't place much value in IRR, some people will focus on those
high numbers. He thinks Dr. Finizza calculated it with the
producers paying the tariff over time instead of up-front, which
results in higher figures. He believes that most corporations
capitalize that commitment up front and wondered if Dr. Finizza
would address that issue.
10:09:41 AM
^ DR. ANTHONY FINIZZA, Consultant, Econ One Research, Inc.
DR. ANTHONY FINIZZA, Consultant, Econ One Research, Inc. said
that, on page 20, he showed some IRR's when comparing how the
two models he was evaluating were performing, but that is the
only place he used them, because he does not feel that IRR is
going to be helpful in this case. To illustrate, he said that if
the IRR is calculated as Mr. Marks suggested and the LNG project
is scheduled to start three years before the highway project as
proposed by AGPA, but there is a 1-yr delay in the LNG project,
the IRR goes up. It does not seem helpful that, when the project
is not on target, the IRR would be higher, which is why he did
not use that calculation more extensively.
MR. MARKS agreed that that IRR has limited applicability, but it
is an important metric for the specific question of whether a
project can repay its investors. he simply cautions the
committee not to look at a 65 percent IRR and get carried away
with how great it is, because if one capitalizes the commitment,
it is much lower.
DR. FINIZZA reminded Mr. Marks that this is not an analysis of
the Port Authority project; it is an analysis of two models.
10:12:12 AM
MR. SHIPKOFF said that, if he understands Mr. Marks' argument
correctly, he is saying that the proper way of looking at
returns to the producers is to include all of the midstream
components into the overall return. The conceptual problem with
that approach is that it is blending two very different types of
projects with very different risk profiles. He pointed out that
midstream components are regulated and generally obtain lower
returns because of the nature of those investments. If they are
blended with the upstream, it drags the upstream returns down.
In response to Mr. Marks' statement about capitalization of the
firm transportation commitments (FTR), there is some truth to
that; but some of Econ One's slides illustrate very effectively
the essential difference between including the obligation into
an integrated project and treating the upstream as separate,
while taking into account the commitments to supply gas and to
pay the tariff.
10:14:47 AM
DR. FINIZZA said he agrees with Mr. Shipkoff, and if the
analysis were simply comparing the highway line against similar
projects he would engage in this argument; but he said he does
not want to spend a lot of energy proving a measure that he
doesn't think will be useful.
10:15:30 AM
MR. VAN TUYL said that Mr. Marks and others have suggested how
the producers might look at economics, so he thought it would be
appropriate to provide a producer's point of view. The critical
observation is that the cost of the firm transportation
obligations has to be recognized when looking at project
economics or upstream economics. The midstream and upstream
investments are linked, because the upstream owners of the
resource only have the midstream investment due to a firm
transportation commitment, which has value to those seeking a
loan; therefore, it has a cost to those who make the obligation.
He said that Mr. Marks is right that it is typical to capitalize
the cost of that obligation. Mr. Shipkoff is also correct that
the nature of the two cash streams may have different risks, so
a more rigorous analysis might include a dual discount approach
to reflect the profile of each of those obligations. The bottom
line is that you can't ignore it; and it seems that much of this
analysis, in looking at the upstream returns, simply ignores the
fundamental commitment that is made by the resource owners.
10:17:38 AM
SENATOR THERRIAULT prefaced his question by saying that type of
commitment is made on all the pipelines BP ships on, and BP
doesn't own them. He asked Mr. Van Tuyl why this one is
different. He noted that Exxon is very strident that this isn't
to be treated as a debt, and the state's independent consultants
say that it is noted on the balance sheet, but is not listed as
a debt.
MR. VAN TUYL replied that this is not a unique valuation; it is
done for every pipeline project that BP invests in. There are
examples of projects like this that are not simply noted, but
end up on the balance sheet and are classified under
international GAAP as debt-like payments. The appropriate
treatment of them, whether they end up on the balance sheet,
noted, or as footnotes, is that they are treated like a debt
because they are actual obligations. There are different methods
for calculating them in project economics.
MR. MARKS followed up by saying that he would supply documents
from GAAP and Moody, and chapters from financial textbooks on
how long-term purchase obligations like the tariff are treated
financially. The reason these don't show up on the balance sheet
is that, per GAAP standards, unless the commitment involves 90
percent of the life of the asset or 75 percent of the asset
value, it appears in the notes. Just because it is off-balance-
sheet debt, does not mean it isn't debt.
10:20:49 AM
MR. DICKINSON said that, as the only CPA at the table, he wanted
to point out that the notes are an integral part of the
financial statement, but cautioned the committee not to get
caught up in accounting treatment issues. He said there are two
important points here, one is balance sheet impairment, that is,
what will those long-term financing commitments do over time;
another is how financial analysts look at those commitments
relative to the company's position.
10:22:09 AM
REPRESENTATIVE KELLY asked Mr. Dickinson if he supports pitching
IRR over the bank and using the cash flow analysis, as Dr.
Finizza recommended.
MR. DICKINSON responded that he does not believe Dr. Finizza is
suggesting that they pitch IRR out, but that each of these
financial metrics has a place, and one has to decide which
metric and which criteria are important. He thinks Dr. Finizza
was saying that, depending upon what one is comparing, IRR
becomes a better or worse measure. IRR is good for valuing a
project, but becomes problematic when comparing projects because
of the reinvestment problem.
10:24:01 AM
DR. FINIZZA commended Mr. Dickinson for his clear and accurate
explanation. He thinks it is better to avoid using that measure
on this type of comparison to avoid having people choose the
numbers they like.
10:25:16 AM
MR. SHIPKOFF said he agreed with Mr. Dickinson that the
accounting treatment of these obligations is of secondary
importance to the cash flow side and analyzing the project's
competitiveness. He said he is not arguing that commitments on
the firm service obligations should be ignored in the analysis;
but making those is not the same as investing in the midstream
infrastructure. Part of the reason upstream investment is
riskier than midstream investment, is that they have to make
firm service obligations. In effect, the upstream shippers are
leveraging against the midstream infrastructure, which increases
their risk, therefore their expected return on capital is
higher.
10:27:11 AM
MR. MARKS commented that there is an old adage in finance that
you can't make a bad project good by borrowing money. If,
instead of paying off the $24 billion to build a project, you
borrow it, your IRR goes way up and it looks good. There are two
reasons why that does not work. First, the long-term FT
commitments are debt that impacts the credit-worthiness of a
company. Second, if your tariff includes both principal and
interest, you're paying off the interest of the weighted average
cost of capital so your hurdle rate becomes the cost of equity
itself.
10:29:42 AM
MR. SHIPKOFF said that, as Senator Therriault pointed out,
upstream production companies engage in FTR with third parties
all the time. No one has suggested that it would be unique for a
third party to provide the midstream service to the upstream
producers, and the inherent increase in risk to them because
they are leveraging off the midstream infrastructure is
reflected in the risk profile of the upstream investment. But,
if one ignores this issue and rolls the entire midstream
infrastructure into this project, the returns still look good.
He said that, either way, he is not sure what the issue is.
10:30:52 AM
MR. VAN TUYL said that earlier, Mr. Shipkoff presumed his
agreement with the assertion that firm transportation
obligations are treated differently from a cash obligation or
cash stream generated by a project, and he wanted to be clear
that he does not agree with that assertion, they are a debt
obligation.
At ease 10:31:31 AM to 10:43:33 AM.
MR. MARKS prefaced his comments by saying that he believes the
public concern is advanced when people understand the complexity
of these issues. He said it has been pointed out that the price
of gas in Asia is generally tied to oil prices, and most of it
is sold on contract. What ensues from that is that prices in
Asia are not set by supply and demand, so just because prices
are high in Asia does not mean demand will be there. So,
although prices are high, it does not necessarily open up
opportunity for a diversion option. In addition, when diverted
oil does show up for sale in Asia, it is outside the realm of
the contract, not tied to oil prices, and subject to
competition. In that dynamic, it is the lowest priced bidder
that commercializes the gas. Accordingly, any value that can be
realized from a diversion option of Alaska gas would be very
small.
10:46:16 AM
MR. SHIPKOFF said that it was widely reported that, during last
winter, Japan was outbidding the U.S. for spot cargos because of
shortages. AGPA is suggesting that Alaska will be one of those
who have opportunity to sell there. More importantly, he
stressed that Dr. Finizza's analysis ignores the value of that
option and still shows the LNG project is very robust.
CHAIR SEEKINS asked Mr. Shipkoff to remind him, regarding the
effect of long-term shipping commitments, how they could divert
some of the gas.
10:47:50 AM
MR. SHIPKOFF replied that, the way it is done contractually is
that the seller has the right to divert but must compensate the
buyer for any replacement gas costs, because the seller has to
obtain the gas somewhere else. He said that their analysis took
into account all of the costs the seller would have to pay,
including the fixed infrastructure capacity reservation.
10:48:45 AM
CHAIR SEEKINS asked if it is economic to divert gas, even with
the cost of buying gas elsewhere, paying for the terminal and
the diversion.
10:48:57 AM
MR. SHIPKOFF answered yes, when the price is sufficiently high
to cover your fixed costs.
MR. PORTER commented that, in the winter you can produce gas
better and may be able to exceed the FT commitments and move
more gas. So, it doesn't always have to be a trade.
MR. SHIPKOFF agreed that a lot of spot trade occurs because of
increased output.
DR. FINIZZA asked if Mr. Shipkoff took into account the
discounted price in the diversion market.
MR. SHIPKOFF said no, that the analysis assumed the average
Japanese price, and he projected the Japanese landed prices on
the basis of an assumption of contractual oil prices. One might
have to take into account a discount below market price, but he
repeated that the analysis did not rely on the value of the
diversion option to make the project economic.
10:52:39 AM
MR. PORTER said that one of things the administration is looking
at is Costa Azul's intent to be fully subscribed by the end of
year, so that window will close. He thinks they need to look at
what the options will be some time from now and how to open
those doors.
MR. SHIPKOFF reminded Mr. Porter that AGPA is negotiating with
Costa Azul regarding their time schedule.
MR. PORTER said he appreciates that because, if you have no gas
now, you can't subscribe.
MR. SHIPKOFF assured him that Costa Azul knows their situation.
10:54:26 AM
CHAIR SEEKINS asked for questions from members.
10:54:39 AM
REPRESENTATIVE SAMUELS said he would like some input from
representatives of the Port Authority, the administration, and
the producer group. He asked, if he has gas, and the
constitution says he can maximize the revenue for the state of
Alaska, and he can choose to pay $3.55 on the slope, or pay
$2.17 across the continent, even if they are off by 50 percent
and the Port Authority is right on and gets the gas, the problem
remains $3.55 to $2.17. He said he understands the timing with
regard to NPV, but is having a hard time understanding how to
make it a commercial deal initially.
10:56:38 AM
MR. VAN TUYL replied that BP wants to deliver gas to market at
the lowest possible cost. BP has tried to make LNG work over the
years and was a member of the LNG sponsor group, but it shifted
its focus to the gas pipeline when it realized it could deliver
gas to the Lower 48 and the West Coast lower than it could LNG.
He continued that Representative Samuels referenced a 5.5 Bcf/d
project, which would be the 1.2 LNG and the 4.3 gas projects,
and that raises questions in his mind, because it takes a
fundamentally different gas treatment plant to process gas to
LNG specs than it does to process gas to pipeline specs. LNG
2
doesn't tolerate CO or aromatics, so it is a different process.
10:58:29 AM
REPRESENTATIVE SAMUELS asked if it is possible to have a gas
treatment plant (GTP) on the slope that makes it pipeline
quality, and a fine-tuning mechanism in Delta.
10:58:50 AM
MR. VAN TUYL responded that it is possible to treat the gas
anywhere along the line; the challenge is to dispose of the
2
handling that, but taking it off downstream would present
2
problems for CO disposal. He commented that the other concern
with a 5.5 Bcf/d project is that the pipeline from the North
Slope to Delta is fundamentally different from what the
producers have discussed. To get all 5.5 Bcf/d to Delta would
require them to put in intermediate compression, so the
downstream system would no longer be expandable, which would not
be good for stimulating exploration.
10:59:56 AM
MR. WALKER said he believes the LNG project is very competitive
with the highway project, but AGPA approaches it from a
different standpoint. He reminded the committee that there were
efforts to run the TAP line through Canada, but those efforts
were defeated because the state wanted the largest footprint to
be in Alaska. They are afraid of losing an opportunity for
Alaska if it holds out waiting for a highway project that there
is no commitment to build and that depends on one market. The
LNG project offers Alaska the best of both markets and the
opportunity to enhance the economics of the highway route by
bringing gas to Alaska through Southcentral for export sooner
than later. AGPA does look at the wellhead numbers, but that
isn't only yardstick for measuring the maximum benefit for
Alaska. If this project is pushed out to 2025 or later, the
situation will be very different. He thinks the state can have
it all if it moves quickly to take advantage of the LNG option
now and pave the way for a pipeline and highway project later.
11:03:10 AM
MR. SHIPKOFF said that the differential in the netback is not as
wide as Representative Samuels suggests and pointed to Econ
One's presentation for that figure. He also said that he
believes that, with further technical work, that differential
will narrow further and possibly be eliminated. Regarding the
technical issues of LNG spec gas and pipeline spec gas, he
offered to arrange for Bechtel's engineers to meet with the
producers to address those.
11:04:21 AM
DR. FINIZZA said that any analysis will show that,
contemporaneously, an LNG netback will be lower than a highway
line netback, and it is only when they diverge that the value
changes. As Mr. Porter pointed out yesterday, one would have to
be sure that the 3-year advantage is permanent, that there is no
leakage, and that the differential is very small before entering
into this. Most importantly, the producers have to accept this
as a viable business proposition.
11:06:16 AM
MR. DICKINSON said that, if the base case shows one project is
clearly more competitive than the other, the question is whether
there are intangibles. Mr. Walker said that the LNG project is
competitive, so there must be other things that should be looked
at. Clearly, more options are better than fewer; so there is the
diversion option. If there is a pipeline that heads toward the
AECO hub, it would probably preclude the ability to go into
Asian markets; but he does not think the baseline pipeline to
Chicago is what is going to be built, rather there will be a
pipeline to AECO and multiple options from there. He does not
think it's a choice between a single market and multiple
markets, but between different multiple markets available to the
two projects. If the best use of the gas is the mid-continent
market, and the project has to go down to Kitimat and regas
after the short voyage back into AECO, it would be getting to
the same hub at a much higher cost of transportation.
He added that Mr. Shipkoff is absolutely right in saying that
further technical work on both of these projects may narrow or
eliminate the differences between them, or it may widen them.
And while Mr. Walker mentioned that Bechtel has already put
about 55,000 hours into this project, the sponsors have put in
over 1,000,000 man-hours, so a huge amount of work has gone into
both projects and further work will refine the numbers fully.
Both are best estimates at this point.
11:09:21 AM
MR. VAN TUYL commented that, regarding the GTP issue, it is
ultimately resolvable, it will just cost more and it would be
appropriate to reflect that in a true characterization of the
LNG project. He agreed with Mr. Walker that it is unwise to bet
everything on one project and noted that an advantage of the
highway project is that, as the lowest cost project to open the
basin, it makes everything else possible: more offtake points
and cooperation with interconnecting projects including the Port
Authority's. So, the highway project does not exclude other
options.
11:11:06 AM
REPRESENTATIVE STOLZ said he thinks there is some value in the
Port Authority process, and he is getting the impression that
the sponsors may be willing to entertain options as well. He
asked if the industry partners are willing to come back to the
table and work on it.
11:12:26 AM
MR. VAN TUYL said he was referring to language that is actually
included in the contract, that allows for spin-off projects
including the Port Authority's. There is also language in the
contract that commits the mainline entity to cooperate with
those projects; so, the framework is already in place.
MR. DICKINSON said that, with this contract the state is going
to have as high as 20 percent of the gas, and what they do with
it is not part of the fiscal contract. What the state decides to
do with it will drive some of these decisions.
11:15:08 AM
REPRESENTATIVE KELLY said he likes lots of options and is glad
to have the opportunity to discuss this one. He also said that
it is important to recognize the difference between hostile
questions and hard questions designed to get at necessary
information. The Port Authority should not take offense because
the legislators are trying to get at what is best for Alaska,
and whether AGPA can do what it says it can within the time
frame stated is a real issue.
11:18:36 AM
SENATOR WAGONER said that he has a request of the
administration. He recalled that Tony Palmer said every penny
difference in the tariff on the pipeline project will cost the
state $150 million over the life of the project, and $3.55
versus $2.17 calculates out to about $20 billion. He asked if
the industry representatives would get a realistic calculation
for him.
11:19:34 AM
SENATOR THERRIAULT said that his constituents are uneasy with
any proposal going through Canada, and that's one reason that
the Port Authority proposal is attractive to them. He asked the
administration representatives how the state should deal with
the uncertainty of going through Canada. There is no assurance
that the pipeline can get through Canada in 3 years and the
legislators have heard that the current contract with the
producers doesn't get Alaska anything with regard to Exxon
Canada. He asked if Alaska is going to need additional
agreements with Canadian companies and the Canadian government.
11:21:37 AM
^Michael Menge, Commissioner, Department of Natural Resources
MICHAEL MENGE, Commissioner, Department of Natural Resources,
said there is no guaranty (feedback). But there is netback
benefit to Canada in this project, so it is in their interests.
Also, Canada is the U.S. largest trading partner, so preventing
us from moving gas through Canada to the Lower 48 would not be
politic. And finally, this is a transit and not production line,
so there are mutual interests and there is a willingness to come
to an agreement.
11:23:52 AM
SENATOR THERRIAULT asked a question about dealing with Canadian
subsidiaries of the major producers. (partly indiscern.)
MR. MENGE replied to the effect that it is a more efficient way
to do it. (partly indiscern.) He said that the administration
has spent three years working on this day and night, and they
all would love to fully embrace the Port Authority plan; but
they have to do what they believe is in the principal best
interest of Alaska. They have looked at the Port Authority
project from every angle and simply do not believe the economics
are there.
11:27:27 AM
CHAIR SEEKINS commented that this is a very complex issue for
the legislature. He agrees with the underlying premise of the
Port Authority, which was from its inception to build, or cause
to be built, a natural gas pipeline. No Alaskan disagrees with
that premise, and he believes that the Port Authority is putting
their project forward because they think it is the best thing
for the people of Alaska. Other people are resisting it because
they believe their plan is best for the people of Alaska. It is
hard, but as a business person he wants to know how much it will
cost to get this much gas in that big a pipe to market every
day. And whichever project provides the best wellhead value is
his favorite project from the start.
He said that the question today is the value of being able to
get gas to market three years sooner; but the whole thing falls
apart if all parties don't cooperate. The producers are saying
that they will get the gas to the offtake in Delta in their pipe
and the Port Authority can take it from there. So, the
discussion seems to be whether it is the producers' pipe or the
Port Authority's pipe to Delta Junction. From Delta Junction, it
doesn't appear to be a problem.
He stressed that getting the gas, having a defined market,
getting a commercial agreement, all are necessary to promote a
project. He said he appreciates the opportunity to discuss this
issue in a roundtable venue. There are huge hurdles, and he
hopes they can be overcome to provide benefit to the state of
Alaska.
11:32:17 AM
CHAIR SEEKINS asked if everyone present agrees that the benefit
is to get gas to market sooner.
MR. DICKINSON replied that is one aspect of it, but it would not
make sense to build something two years sooner and spend the
next 30 years paying for it.
CHAIR SEEKINS said he is right, unless those two years paid off
well enough to compensate for the remaining years at a lower
rate of return.
11:32:47 AM
^KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources, added that, looking at Dr. Finizza's numbers on page
46, the 2013 start date has about a 5 percent improvement in NPV
over the highway project. If that 2013 start date slips to 2016,
the project loses 20 percent of the NPV, about 6 percent per
year compounded. Even if it started only one year late, in 2014
it would already have lost any additional value associated with
the early start. While we are looking at 3 years, we are looking
at a project concept with such fragility that in only one year
the economic benefits can be lost.
11:34:03 AM
MAYOR WHITAKER closed by saying that reasonably priced energy to
Alaska is a significant part of the Port Authority's mission. He
pointed out that the motivation of the major producers is to
enrich their stockholders, while the Port Authority's motivation
and mandate is to ensure that a project gets built for Alaskans.
He said his greatest fear is that the market will come into
equilibrium without Alaska's gas.
11:38:20 AM
MR. MARKS commented that, if these projects are in conflict, it
is possible that competing forces could prevent any project from
being built.
CHAIR SEEKINS thanked all of the members for their input and
asked for final questions.
Adjourned at 11:40:46 AM.
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