Legislature(2007 - 2008)FAHRENKAMP 203
03/22/2007 04:15 PM Senate RESOURCES
| Audio | Topic |
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| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 22, 2007
4:19 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 104
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
03/14/07 (S) Heard & Held
03/14/07 (S) MINUTE(RES)
03/16/07 (S) RES AT 3:30 PM BUTROVICH 205
03/16/07 (S) Heard & Held
03/16/07 (S) MINUTE(RES)
03/19/07 (S) RES AT 3:30 PM BUTROVICH 205
03/19/07 (S) Heard & Held
03/19/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 3:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 5:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/22/07 (S) RES AT 4:15 PM FAHRENKAMP 203
WITNESS REGISTER
VINCE LEMIEUX, Manager
New Ventures Alaska
Chevron
Houston, Texas
POSITION STATEMENT: Spoke to SB 104.
TIM HOUSTON
Commercial Management, Alaska
Chevron
Houston, Texas
POSITION STATEMENT: Spoke to SB 104.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS reconvened the Senate Resources Standing
Committee meeting from March 21, 2007 at 4:19:56 PM. Senators
McGuire, Green, Huggins, Wielechowski and Stedman were present
at the call to order. Senators Stevens and Wagoner arrived soon
after.
SB 104-NATURAL GAS PIPELINE PROJECT
4:21:02 PM
CHAIR HUGGINS said they would continue to take testimony on SB
104 from Chevron today via teleconference. He said one of the
terms they used yesterday had to do with risk mitigation and he
asked that issue to be revisited.
TIM HOUSTON, Commercial Management, Alaska Chevron, responded
that as a customer, Chevron's big risk during an open season is
"signing up for something where you don't exactly know what
you're going to get and what it's going to cost, but you're
making these large financial commitments a whole lot earlier
than you otherwise would on a normal development timeline."
Chevron might end up getting something other than what was
expected, he explained. Uncertainties include ultimate cost and
time of completion. The terms and conditions of the rates and
other parameters of service may be different than expected and
the economic returns might suffer.
4:23:12 PM
VINCE LEMIEUX, Manager, New Ventures Alaska, Chevron, said risk
mitigation would bring more certainty to the items mentioned or
the negative impacts could be a shared "and that is where the
concept of alignment becomes important."
4:24:33 PM
SENATOR WAGONER asked how the risk in this project is any
different from any other pipeline project.
MR. LEMIEUX replied that the risks aren't different, but the
scope is very different. This project is unique and depends on
specific technology, he said, so the risks are the same, but
"uncertainties are such that it takes on new meaning."
MR. HOUSTON agreed that the risks are the same and also that
this would be a basin-opening pipeline and there are some
additional risks for the first pipeline in an area. He mused,
"What is everyone else suppose to do when you're not sure if
that pipeline is actually going to move forward or what its
timeline will be?" He put it another way saying the risk is
smaller if there is already a gas network and a natural gas
business in the area.
MR. LEMIEUX said this pipeline is also different because "it
actually is a multinational pipeline and that's not necessarily
a typical thing" except in Europe.
4:26:44 PM
CHAIR HUGGINS asked if a newspaper was correct in saying Chevron
stated the cost of the pipeline would be between $20 billion and
$30 billion.
MR. HOUSTON responded that Chevron did not make the statement.
4:28:17 PM
MR. LEMIEUX said that is one of the issues the he struggles
with, especially in looking at the Mackenzie Valley pipeline.
There are bases for thinking $30 billion would be the low end.
SENATOR WAGONER said he has heard a lot about risk for the last
two years, but this is a risky business. He asked if there would
be any difference in committing Chevron's gas to a gasline built
by an independent company or one built by the producers or one
of the producers.
MR. LEMIEUX responded that an ownership position would affect
how Chevron would run its internal economics, but he was not
prepared or maybe not the right person to discuss this issue.
However, he said the risk undertaken by those that make the firm
transportation commitment is that they are signing up to pay the
price of the pipeline. It is very important in terms of who is
making the open season and how confident the companies that
participate in that open season are in the company that is going
to deliver the project. "It's a very important factor and in the
perspective of a company's ability - one company's perspective
on another company's ability to deliver on that type of
commitment is going to vary."
MR. HOUSTON said he was not prepared to go into the nuances of
the evaluation, but being an owner of the pipeline project would
make a difference particularly in managing risk and making
decisions that coordinate with timelines that the pipeline is
on. If you're an outsider, you would get whatever information
trickles out. "It's a lot easier to manage your spend and
control your economic results when you've got the maximum amount
of information and participation in all the decisions."
4:31:50 PM
MR. LEMIEUX used the analogy of building a house and you had
built houses in the past and were familiar with the house
building process, but then someone came and told you that you
had to purchase the house and said "by the way we're going to
bring somebody else in to build that house for you." Your
comfort would depend on the builder that was chosen for the
house and how familiar you are with their abilities and
performance in the past.
MR. HOUSTON followed up on that analogy adding that the house
you're going to be delivered at closing is not necessarily the
pictures you saw in the brochure and the price isn't necessarily
the price that was printed. "It's all risk."
SENATOR WAGONER asked if Chevron would prefer to have a
producer-built and owned pipeline than a private pipeline
company-built product.
4:33:17 PM
MR. HOUSTON answered when Chevron does its economic evaluation
it's easier to have more control and make better decisions and
to help the pipeline make decisions that are aligned with their
needs if they are at the table with a vote. It could improve the
results of all participants by having the most informed people
at the table.
SENATOR WAGONER asked how many privately owned and operated
lines Chevron ships gas on and how many producer-owned gas lines
it ships gas on now.
MR. HOUSTON replied that Chevron's North American gas marketing
organization probably moves gas on every regulated pipeline in
the U.S. and Canada. So, it does business on a lot of pipelines
owned by pipelines. Chevron also owns some pipelines and does
business on those. He didn't know about pipelines owned by other
private people that they do business on.
4:34:37 PM
SENATOR STEDMAN asked what the largest pipeline Chevron has
built is and if it is common within the industry for the major
producers to build a pipeline, gas pipelines in particular, and
then divest themselves of it after construction to free up the
capital on to higher returning assets.
4:35:28 PM
MR. LEMIEUX replied that Chevron has partial ownership in
several large pipelines in Azerbaijan, but they were not the
right people to answer that question and they would have to
follow up with that information.
MR. HOUSTON answered on the second part of the question, there
have been pipelines that were conceived and driven by producers
through the open season process through the regulatory approvals
and the construction contracting and that once they had reached
the point where they had supplied the maximum amount of cost
control they could in order to help deliver the best project,
some of the producers decided to sell off pieces of their
interests. So the ownership of the pipeline, once it starts up,
can wind up being different than its ownership at the time of
the open season. "That's just a method of helping the best
people be at the table to make decisions that are the ones that
hit their bottom line the hardest." It's hard to predict,
because all those decision get made at the time based on the
circumstances at the time.
4:37:32 PM
SENATOR STEDMAN asked if AGIA should consider inserting a clause
that would require divestiture of the line a number of years
after first gas, regardless of who constructs it.
MR. HOUSTON replied that he is not sure what that would do for
the state in terms of getting a better project compared to one
person owning it and selling interest in it as it makes sense to
him.
4:38:20 PM
SENATOR WAGONER pointed out that there would no reason for a
private pipeline company to have to divest itself of ownership.
CHAIR HUGGINS asked him to address that question if Senator
Stedman's question were rephrased to whether it was a producer-
built pipeline and then there was a divestiture requirement.
MR. HOUSTON responded that there are quite a few pipelines that
have marketing affiliates - that is companies that actively buy
and sell gas and ship gas on their affiliated pipelines. So, he
wasn't sure if they were saying it would be producers that would
have to sell or any affiliated entity of that company that ends
up being a customer. When you look at it a little more broadly
it gets complex.
If it's a regulated pipeline, if the decisions that are being
made by that pipeline are consistent with the public interest,
he saw no benefit to having a forced sale. "It all comes down to
are the parties aligned, are the decisions being made that move
things down the path, that all parties collectively agree is the
right path, and if that's the direction things are moving, then
that's the way you want them to go."
4:39:59 PM
CHAIR HUGGINS went to page 11, line 14, and asked a question
about what the pipeline builder's capability is. The first part
says:
If the licensee has credit support sufficient to
finance construction of the project through ownership
of rights to produce and market gas resources, firm
transportation commitments or government financing,
the licensee shall sanction the project within one
year after the effective date of certificate of public
convenience and necessity issued by the FERC.
So, he asked if you have the financial wherewithal and the
commitments, you have one year. If you don't, with the same
scenario, you have five years. He asked for his thoughts on
those two provisions.
MR. LEMIEUX observed that the financial strength of a company is
only one of the measures of the timeframe that should be
required. The capability of the company and the availability of
the right resources and their ability to bring the right
resources to bear would be an equally or even more important
element of that time sensitivity of decision-making.
4:41:58 PM
CHAIR HUGGINS said he reads that to mean if one had a successful
open season and the other one didn't.
MR. HOUSTON responded within the idea of a successful open
season, that paragraph touches on a few other risks, but those
aren't explicitly stated. If you're presuming the pipeline is
going to borrow the money, it is possible it could have a
successful open season as far as getting sufficiently credit-
worthy customers expressing interest for service on it; but it's
hard to find someone that has $35 billion to lend or that can
syndicate a loan that big for a project-financed multi-national
pipeline. So, the open season can still be successful, but that
doesn't necessarily mean you have everything you need to get
financing. "As Vince was saying yesterday, this project will
make its own weather. It will define and change the world just
by it moving forward."
4:43:19 PM
SENATOR STEDMAN asked about the linkage of the PPT to gas, which
was set up under another scenario under another administration,
should be reviewed or left alone.
MR. LEMIEUX replied that he needs more time to think about it.
The tax rate on gas is going to be a hugely sensitive issue,
depending on how you view the economics.
MR. HOUSTON commented that an example of a confusing or
uncertain part in addition to the tax rate is basing the
progressivity on oil price. Trying to understand the tax rate on
the gas one produces when the gas and oil prices aren't
necessarily related adds multiple layers of complexity to the
evaluation. "It makes it a lot harder, once you've even computed
a number, to feel confident that it has any validity."
4:45:33 PM
SENATOR STEDMAN asked if that should be reviewed and possibly
modified before or after open season.
MR. LEMIEUX replied that taxation is a touchy subject, but he
would recommend leaving the PPT in place as it is for a period
of time - just so people get a sense of how it works.
4:46:26 PM
SENATOR STEDMAN said he was not referring to the oil portion of
the PPT, but to the progressivity linkage with gas. "How would
your company deal with such linkage if it's left in there when
you walk into an open season with that type of a gas structure
tax?"
MR. LEMIEUX responded that Chevron would have to work on that
for a suitable answer.
CHAIR HUGGINS reminded them that yesterday, one of the Chevron
representatives made the statement, "Bill can't change the
fundamental economics of project." Then somebody later on took a
red pen and circled that like it was important.
MR. LEMIEUX responded from his perspective the value of a
project is based on some very basic things - the investment, the
timing, the product and the market and the price of the product
on that market. All of those create value. Being able to take
gas from one area and sell it to somebody else in another area
is a basic economic engine. The context of the comment was that
the bill, in and of itself, doesn't necessarily change the
economics. It will start to work on how that value is shared,
how the risk is managed, or how alignment is created. "But it
doesn't really change the underlying economics."
4:49:07 PM
SENATOR STEDMAN asked what Chevron's thoughts were on the two-
year requirement for open season. Should it be lengthened or
shortened.
MR. HOUSTON replied that the timeframe for an open season is
important for running a good one:
So if you want the customers to be convinced this is a
realistic schedule being proposed and realistic costs
being proposed and the project has been scoped;
they've selected a good platform for it so that
there's the right amount of expandability there to
meet future and growing needs, then you would
potentially need more time.
Whether two years is enough, it sounds like it should
be, but do you want to write a hard restriction in
that would potentially limit you if two and half years
winds up being what is actually needed? So if you make
the commitment potentially a little too tight, then
you run the risk of having an open season being run
under less than ideal conditions with less than ideal
information being shared and then not getting the
results that you'd desire.
So, I'd suggest the pipeline companies that you talk
to would have a lot more experience on what level of
information they feel would best meet everyone's
needs. I'm more of a customer in those open seasons
than actually the provider; so I only really offer the
customer perspective. But, when I go into the open
season, if you put a gun to my head and give me 90
days to decide, I'd like the best information
reasonably possible in order to use in that position.
4:51:46 PM
SENATOR STEDMAN said the bill requires an open season every two
years.
MR. HOUSTON apologized for answering the wrong question and said
he was thinking of the requirement that you have to run the open
season a set number of years after the license is given.
Answering the correct question, he said the two-year requirement
is worded well in that the pipeline is free to do it as
frequently as it feels the market needs, so long as it is done
once every two years. So, if industry activity or other
requirements mean they need to be run more frequently, they can
respond. Running one every two years should not be an undue
burden in order to make sure the pipeline is considering all the
potential needs for capacity in its long-term planning. Having
an open season at least every two years for expansion capacity
makes sense and it probably makes sense to have those running
before construction is completed.
4:53:10 PM
CHAIR HUGGINS said someone characterized a perfect pipeline
building storm in which multiple producers team with one or more
pipeline companies, maybe other parties, and get on with the
project. He asked him to reflect on that concept.
MR. HOUSTON reflected that the perfect storm means there's a
real opportunity to get the best producers and pipeline
companies together to create the most efficient project
possible. That is a possibility, he said. It would be important
to think through how this team would build alignment and share
the risk between the various partners. He didn't know exactly
how to do that.
4:55:26 PM
SENATOR WAGONER asked what kind of an effect the federal loan
guarantee of $18 billion would have on overall corporate risk
for this project.
MR. HOUSTON replied that it depends on how the pipeline designs
its rates and allocates them. If that $18 billion is cheaper
than the rest of the money they have to borrow and if that flows
through to the shippers, then there's a small benefit in rate
reduction. But if there's still the same requirement on making
payments and the same financial structure and rates comparable
to the value of gas at the other end of the pipeline, whether
there is a loan guarantee on a piece of the borrowed money or
not might not make a big difference to the underlying risk.
4:56:45 PM
SENATOR STEDMAN said the bill calls for five delivery points and
asked what Chevron would recommend for take off delivery points
that would be advantageous to the state over the next 50 years.
4:57:19 PM
MR. LEMIEUX replied that focusing on the major [indisc.] of
Alaskans seemed like the best answer. He hesitated to say much
more, since he wasn't qualified from the perspective to comment
on how the delivery would work. Fairbanks would certainly be one
of them.
SENATOR STEDMAN turned to the 70/30 equity/debt split and how
challenged the Mackenzie project has been in dealing with the
prices of steel and labor and asked once the state has a
proposal and there's a handful of years for construction with
some clear risk for cost, how he would recommend the state
structure this bill to not put the project at a disadvantage if
there were a 30 to 40 percent cost overrun.
MR. HOUSTON replied that the developer will need to have control
of the project and be able to fund the equity requirement at
whatever the cost winds up being. If there is an applicant that
can fund the equity component of 30 percent at whatever the
estimated costs are and if you do get into a cost overrun
situation, that's the wrong time for that entity to go out and
try to borrow money - because the story isn't all that good:
So, part of the selection has got to be that you want
a proponent or group of proponents that have the
balance sheet needed that they can fund their equity
piece of the pipeline and there being no doubts about
that. If that's a concern you've got, it sounds like
you might have picked the wrong applicant in that
situation.
CHAIR HUGGINS thanked Chevron on behalf of the legislature for
its candid testimony. The committee adjourned at 5:01:27 PM.
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