Legislature(2007 - 2008)BUTROVICH 205
03/23/2007 01:30 PM Senate RESOURCES
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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 | |
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 23, 2007
1:35 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
03/22/07 (S) Heard & Held
03/22/07 (S) MINUTE(RES)
03/23/07 (S) RES AT 1:30 PM BUTROVICH 205
WITNESS REGISTER
MARTIN W. MASSEY, Manager
Joint Interest
ExxonMobil US
POSITION STATEMENT: Spoke in opposition to SB 104.
PAT GALVIN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding SB 104.
TOM IRWIN, Commissioner
Department of Natural Resources
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding SB 104.
MARK HANLEY, Manager of Public Affairs
Anadarko Petroleum
Anchorage, Alaska
POSITION STATEMENT: Spoke to SB 104.
DAVE VAN TUYL, Gas Commercialization Manager
BP-Alaska
Anchorage, Alaska
POSITION STATEMENT: Spoke to SB 104.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 1:35:07 PM. Senators Wielechowski,
Huggins, Stevens, Wagoner, Stedman, and Green were present at
the call to order.
SB 104-NATURAL GAS PIPELINE PROJECT
CHAIR HUGGINS announced the consideration of SB 104. He said the
only company he has not heard from is Mid-America. There will be
a joint session tomorrow for public testimony, he noted.
1:36:38 PM
MARTIN W. MASSEY, U.S. Joint Interest Manager, ExxonMobil, said
he has held his position since 2001 and is responsible for
ExxonMobil gas resources in Alaska. The company has been in
Alaska for over 50 years and has been a key player in oil
development in the state. It holds the largest working interest
in Prudhoe Bay, and current net production is 150,000 barrels of
oil per day. Commercializing the Alaska's North Slope gas will
allow for the relationship with Alaska to last another 50 years
or more. The project has the potential to generate billions of
dollars for the state, the country, and for Canada. It could
supply energy for Alaska and North America for decades to come.
ExxonMobil supports efforts to advance the pipeline project and
is ready to work with the state. ExxonMobil's share of gas in
the pipeline has the potential to add over one bcf per day,
which is more than a ten percent increase to its current
worldwide gas production. ExxonMobil has spent more than $180
million studying ways to commercialize this gas.
1:39:13 PM
MR. MASSEY said, based on studies, it has determined that a
producer gasline project will result in the best value to the
state, to the producers, and to the nation. ExxonMobil is
committed to moving it forward. There is a perception that this
is just a gas-treating, pipeline project, so there is a tendency
to underestimate its size and risk. The pipeline would be the
largest private investment in North America, significantly
larger than most oil and gas mega projects. Nothing compares,
thus many factors impact commercial viability, and the previous
estimate of $20 billion has grown because of steel prices and
labor costs. Also, worldwide mega projects are placing pressure
on pricing and availability of global materials. Despite recent
increases, gas prices remain volatile. The price of natural gas
before 2000 was less than estimates of gas transportation and
treatment costs. He said other risks include cost overruns,
schedule delays, and regulatory and state fiscal uncertainties.
Investments will have to be made ten years before the gas flows
down the pipe. Size accentuates the impacts of poor execution. A
mistake made on this project would cost everyone dearly.
1:42:07 PM
MR. MASSEY said commercially sound oil, gas, and pipeline
projects traditionally have been able to obtain financing with
strong sponsors. Key project commitments will take the form of
firm long-term gas transportation commitments (FT), which are
binding obligations made by the companies, known as shippers, to
pay for the costs of receiving a quantity of gas capacity on a
pipeline over a specified period of time, typically many years.
The commitments are made during an open season, which will last
at least 90 days during which any prospective gas shippers can
make binding commitments for transportation capacity. Financial
institutions require commitments to provide funding for a
pipeline, and they must be provided by credit-worthy shippers.
In this case the shippers will be the producers and, indirectly
or directly, the state. The FTs are substantial and in the tens
of billions of dollars, and they must be paid whether the gas is
moved or not. The shipper must pay regardless of the price of
gas. Pipeline investors use the FTs to show creditors they can
secure financing and must rely on the financial strength of the
companies backing the FTs to secure the financing. So the
financial institution will look at who is making the FTs to
decide if it is secure enough. Thus the development cost and
overrun risk are ultimately borne by the shipper.
1:44:35 PM
MR. MASSEY said the shipper must make long-term FTs and agree to
pay the transportation and treating rates that are based on the
ultimate cost of the pipeline and treating facilities. The
information will be a projection of the costs, which is based on
the entity doing the work. So the parties taking the risk must
be able to manage those risks. The producers, as shippers,
cannot make FTs during open season unless they are confident the
pipeline project can be built cost effectively and operated on a
long-term commercially viable basis, including being competitive
to other gas. Maximizing the value to the state requires
selecting the right design and delivering gas at the lowest
possible cost. A project this size means construction and
operating experience should be a significant consideration. Only
a limited number of companies have demonstrated the capability
and financial strength to do it. The producers have such
experience on numerous projects world-wide and have demonstrated
success in meeting objectives. ExxonMobil operates on every
continent except Antarctica. It is the world's largest non-
government producer of both oil and natural gas. Its global
development company is unique within the industry. It leads the
industry in project costs and schedule performance. Costs have
been 20 percent lower than the industry average on a dollar per
barrel basis, and nearly 90 percent of ExxonMobil's projects
with costs greater than $1 billion are delivered within 15
percent of the estimated costs at the time of project funding,
and nearly 80 percent of those were delivered within 15 percent
of the funding schedule. ExxonMobil's superior performance was
validated by a report. It came out on top of the analysis with
the lowest slippage rates despite taking on challenging
projects. It is highly competent, he stated.
1:47:31 PM
MR. MASSEY said ExxonMobil has extensive Arctic experience. Its
Arctic offshore activity started in 1966 with the installation
of the ice-resistant platform in Cook Inlet, which is still
producing oil. In the 1970s ExxonMobil provided research and
engineering for Prudhoe Bay and developed the combined hydraulic
flow model and thermal simulator for the design of TAPS. In 1984
ExxonMobil installed the concrete island drilling system in the
Beaufort Sea. It has extensive experience in Canada. He named
projects including the first and only iceberg-resistant offshore
structure in the world. He spoke of an offshore platform in
Russia. These examples show that large projects with significant
complexity "is what we do." ExxonMobil has a long-term
commitment to technology innovation, and that has played a key
role in Alaska oil development. It spent $3 billion on
technology since 2002. ExxonMobil has demonstrated world-class
leadership in safety and environmental performance. Its employee
recordable incident rate is below the average U.S. petroleum
industry benchmark. It's commitment to safety, health, and
environment manifests itself in superior performance across all
operations. The gas project is a basin-opening project that will
benefit the state and industry. Such projects are successful
when there is alignment between the host government and the
lease holder. "At a high level, we are very well aligned." A
producer-owned gasline project will result in the maximum value
to the state and to them. The producers have the maximum
incentive to control costs. Low capital operating costs and
access to a premium market will result in a higher netback value
on the gas. The state will receive a majority of its revenue
from the gas sales via revenue received under the royalty
settlement agreement and for the taxes that are paid.
1:52:11 PM
MR. MASSEY said third-party owners do not share the same
incentives-they actually benefit from increase capital costs. He
said both the state and the producers want Alaskans to benefit
from future job opportunities. To progress the project and
mitigate its inherent risks, ExxonMobil needs some things from
the state. The billions in financial commitment require fiscal
terms that are predictable. ExxonMobil is willing to take the
geologic, cost, and commodity price risks, but it is not willing
to take a tax-change risk. Market risk is inevitable, but it is
managed by getting the products to the best market. Fiscal risk
is outside of ExxonMobil's control. Fiscal terms need to be
predictable and durable. If they can be changed in the future
then ExxonMobil cannot make an investment decision for its
shareholders. An increase in taxes during the life of the
project could offset the benefits of taking it on. Because AGIA
allows fiscal terms to be modified, it does not provide fiscal
predictability. He said total state take must be provided.
1:55:37 PM
MR. MASSEY said alignment between the state and the lease-
holders is essential to a basin-opening project of this
magnitude. It is important that AGIA bring upstream and
midstream together and provide for an integrated proposal,
because the upstream pays for the midstream. The upstream is the
revenue generated from the sale of gas and liquids. To calculate
that, there must be clarity on the taxes and royalty, which must
be set at a level that makes the project viable. Any proposal
must demonstrate how a successful open season will be achieved.
To insure the best result, AGIA should establish broad key
objectives and allow applicants flexibility in meeting them by
providing requirements they feel are necessary to make the
project viable. It would be best to let applicants determine if
they need capital contributions from the state. It is important
for the state and explorers to have access to the project so
their gas can be treated and transported to markets. It must be
attractive to the shippers when they make their initial FTs. The
shippers that must invest substantially to explore, develop, and
produce gas will not be able to enter into long-term financial
commitments for the transportation of gas if there is a
likelihood that the rates will increase in order to accommodate
expansions. Under the Alaska Natural Gas Pipeline Act, Congress
struck a balance between encouraging investments by those
willing to commit the initial capacity and those who explore.
1:58:42 PM
MR. MASSEY said because of the unique nature of the Alaska gas
pipeline project, the Federal Energy Regulatory Commission
(FERC) approved unprecedented policies to enable a FERC-mandated
expansion to benefit explorers. The issue of how potential
future shippers may access initial capacity and future expansion
capacity, if needed, should be administered by FERC. Shippers
should not be required to subsidize other expansion gas holders
at 115 percent of initial maximum rates due to a mandated roll
in of costs. A 15 percent increase could increase the FT
commitment by $0.30 to $0.50 per MBTU on gas shipped, which is
$500 million to $800 million per year on the initial shippers.
The expansion shipper might like it, "but at this state we don't
know who the expansion shipper might be." It is too high of a
risk. The pipeline entity should not have to accept a FERC
certificate irrespective of FERC-imposed conditions. The
upstream inducements require significant modification to ensure
a commercially viable project. It would be better to leave the
issues open and allow the applicant to make a proposal to
address those necessary terms. AGIA prescribes activities that
must be completed within a specific timeframe. Setting arbitrary
target dates is not good management. Milestones are not
necessary if the project is commercially viable. The producers
will progress the project at the maximum prudent pace consistent
with the industry-proved gate process for project development.
2:00:46 PM
MR. MASSEY said AGIA gives commissioners broad authority to
adopt additional requirements and establish regulations. AGIA
doesn't establish criteria for evaluating proposals and
selecting a successful bidder, which is likely to lead to
litigation. The parties must have an impartial means of handling
disagreements. Binding neutral arbitration is widely used in
commercial agreements and is not a new concept in Alaska. Alaska
courts have recognized a strong public policy in favor of
arbitration. He said ExxonMobil is committed to move the
pipeline forward. He suggests that AGIA be amended to allow each
applicant to decide how best to meet the state's objectives. The
state can then accept the proposal that delivers the most value.
2:02:49 PM
SENATOR WAGONER asked if ExxonMobil is saying that if the state
leaves rolled-in rates and the 15 percent in place, that
ExxonMobil and the other producers will not participate.
MR. MASSEY said he described where AGIA is very prescriptive.
"It also removes an applicant's ability to argue in front of
FERC what they think is right and in the best interest of the
project or them as an initial shipper or an expansion shipper.
It is too prescriptive. As a result, I'm encouraging that it be
removed from the bill. FERC will decide what is right no matter
what we put in this agreement. They have the responsibility for
overseeing these rates, and they will do it."
SENATOR WAGONER said if it is left in AGIA and the state selects
a proposal, the proposal goes to FERC and if they didn't accept
the rolled-in rate and the 15 percent, then, at that time, the
argument could be made to change it. "Seems to me like either
process would work."
MR. MASSEY said if ExxonMobil agrees to it, it would be required
to put it in front of FERC, and that does not mean that FERC is
going to agree. It doesn't mean some other shipper may protest
and is not a party to the agreement. This is a long-term deal,
and it is difficult to predict where things might land. It might
not even be in the best interest of the state to have it in the
agreement, because the gas that may be flowing may not be its
gas. It could be gas from federal lands, "but you're required to
subsidize that." There is already a process for dealing with
expansions and rate changes, and that is FERC. "We should be
careful to prescribe things that may sound good, look good
today, but we're entering a very long-term relationship that we
can't today predict what the situation might be."
2:06:19 PM
SENATOR WIELECHOWSKI said Mr. Massey has talked a lot about
fiscal stability. ExxonMobil has been in Alaska for many years.
When the oil pipeline was built, there was no locked-in tax, and
ExxonMobil has made billions, probably hundreds of billions, in
profits. He said he read an article in Wall Street Access that
was disturbing. It said there is unlikely to be an Alaska gas
pipeline in ExxonMobil's future because Alaska has been an
unreliable partner, as quoted by ExxonMobil's CEO. Senator
Wielechowski said he understands how important stability is, so
he looked at where ExxonMobil is partnering to compare with
Alaska. ExxonMobil has major investments in Chad where there are
seventy political parties and is subject to multiple military
coups. Chad recently threatened to throw several oil companies
out of the country. It has one of the top ten largest pipeline
projects in the world, and ExxonMobil is part of that.
ExxonMobil participated significantly in Equatorial Guinea,
which was recently rated as one of the worst dictatorships in
the world. It has widespread torture, arbitrary arrests, and a
total corruption of government services. ExxonMobil is in
Nigeria, Libya, Bolivia, Indonesia, Angola, and Kazakhstan, and
it is looking at investing in Iran, which just seized 15 British
soldiers. "I am just wondering if you believe those countries
are more reliable partners and provide more fiscal stability
than Alaska does."
2:08:41 PM
MR. MASSEY said the discussion is about what is required to
allow the pipeline to progress. "Without stable fiscal terms, I
don't know how to make an adequate investment decision. It is
not like a small drill well in west Texas. This is a mega
project and the fiscal terms--I have to know what they are and I
have to know what they are going to be over time, so that I can
make an adequate investment decision. This is such a huge
project that it will have an impact on ExxonMobil as big as we
are because of the magnitude of the capital investment that's
required to put in this project. We can't make that capital
investment and then a few years later, that capital investment
is no longer viable."
2:09:52 PM
SENATOR WIELECHOWSKI said ExxonMobil didn't get a tax lock-in
when building the oil pipeline. Alaska has been very fair with
ExxonMobil and the other oil companies. He said he finds it
insulting that ExxonMobil doesn't trust Alaska and says it isn't
a reliable partner.
MR. MASSEY said it is not a matter of trust; it is a matter of
knowing the fiscal terms to make an investment decision. "And
until it can be agreed, between ourselves, how we're going to
share the benefit from this project, then I'm not able to make
an adequate decision."
SENATOR STEDMAN said Mr. Massey needs transparency and
predictability. The tax structure on the books is transparent.
The bill has a transparent and predictable time frame. "What am
I missing?" The bill talks about ten years, he added.
2:11:46 PM
MR. MASSEY said the bill includes ten years of fiscal stability
for gas production taxes. There are several ways for Alaska to
tax the project, including property taxes, oil taxes, and
corporate income tax, so a small lock-in on gas production tax
doesn't give the full scope of fiscal terms throughout the life
of the project. He can't run the economics and make a good
decision without knowing the taxes he will pay. The pipeline is
going to be the revenue generator for ExxonMobil in the future,
so fiscal terms must be identified.
2:12:57 PM
SENATOR STEDMAN asked if all state and federal taxes are equally
important.
MR. MASSEY said ExxonMobil follows the principal that it is
perfectly acceptable to work with the resource owner--Alaska.
"We're in this together. Your resource doesn't get to market
unless it's viable and I can't build it for you unless it is
viable for me." The federal government doesn't own the resource,
so the state and the lease-holder must define what it takes to
make it work, he stated.
2:14:27 PM
SENATOR MCGUIRE said the comments centered on the building of
the pipeline and it being a highly-risky mega project, "so let
someone else build it." She asked what ExxonMobil would do if
someone else puts the money up and builds it, and the open
season comes up and ExxonMobil needs to make a decision and lock
in ten-year gas rates. She noted that rolled-in tariffs are used
by Imperial, ExxonMobil's counter part in Canada, so it is not
unfamiliar to ExxonMobil.
MR. MASSEY said a successful open season will only work if the
project is commercially viable to the shipper, and in this case
the shippers are the producers and the state. So if it is not
commercially viable, then it will not be a successful open
season. AGIA does not provide for a commercially viable project.
SENATOR MCGUIRE said, "So, you pass up the open season because
you make the decision that it is not commercially viable for
you. And there are two other major producers along with
independents that have led to great discoveries through
exploration over the next couple of years, and together they
make the firm FTs that are needed to get the gas moving. No way
around it. There's a company that's going to agree to build it;
it's being built; the FTs are there; you've passed up your open
season; you've given up your opportunity to lock in your tax
rates. What'll your shareholders have to say about the fact that
you've given up the opportunity to monetize your gas?"
MR. MASSEY said if ExxonMobil decides it is not viable then
other companies will make the same decision.
2:16:56 PM
SENATOR WIELECHOWSKI asked if the producers talk among
themselves about making bids during an open season.
MR. MASSEY said, "No, we cannot. It is an independent company
decision which we cannot share with one another. And those
commitments are binding commitments on individuals companies" He
said they can share plans for Prudhoe and how they will develop
the gas at Prudhoe Bay and Pt. Thompson. "But the individual
commitments that are made by each company will be private and
not discussed. No one will know until the bids are open."
SENATOR WIELECHOWSKI asked, "If this is an economic project, but
a project that's built by independents as opposed to producers,
and it's an economic project…you will not participate in an open
season?"
MR. MASSEY said a successful open season will only happen if the
project is commercially viable to the initial shippers.
SENATOR WIELECHOWSKI asked again.
MR. MASSEY said if a third party builds it and it's commercially
viable, then ExxonMobil will participate. "The question is
whether it is commercially viable being done by a third-party
participant. That's a question we will answer at the time."
SENATOR WIELECHOWSKI said this project is a national priority.
"Do you think Congress would look very favorably upon an open
season that was deemed to be economically viable and you didn't
show up?"
2:19:06 PM
MR. MASSEY said he will be comfortable in explaining
ExxonMobil's position to anyone. "We cannot make a commitment to
a project of this magnitude if it's not viable for our company
and for our shareholders. That will just not happen."
SENATOR STEVENS asked Mr. Massey to be more specific about what
fiscal certainty is.
MR. MASSEY said, "We would propose that AGIA be amended such
that there're broad objectives that the state wants to achieve
[and] let the applicants make a proposal that describes what
they need in terms of making the project viable. And then also
describe how they intend to meet the state's objectives, and
included in that will be, what sort of terms for fiscal
stability are necessary. It's difficult for me to sit here today
without looking at the whole scope of the deal to give you a
particular period."
2:20:35 PM
SENATOR WAGONER said a few years ago people came by who weren't
producers or shippers but distribute natural gas to commercial
and residential customers. They also have some commercial
generation capacity throughout the lower 48. "Would it be
feasible…if they came to either yourself or another producer on
the slope and were interested in purchasing gas from you…and
then them committing to open season with that gas they've made a
commercial arrangement with you on. Is that going to be
something that some of the producers would consider?"
MR. MASSEY said the gas is always for sale.
SENATOR MCGUIRE said sometimes it doesn't feel like it.
MR. MASSEY said the gas is for sale but it has to be sold at a
market-related price and ExxonMobil has to have confidence that
the project the buyers are pursuing is viable. "Obviously if
somebody would be willing to come up there and make that FT
commitment and build the pipe themselves and give us a market
price for the gas and we believe their project is viable, sure
we would sell our gas."
2:22:38 PM
SENATOR STEDMAN said that was confusing. It would be a demand-
driven open season, and "wouldn't you still face the same issues
you face today in the fiscal arena that you operate? How would
you solve those, or are they irrelevant if it's demand driven?"
MR. MASSEY said, "In that gas arrangement, we would work some
sort of deal with the person purchasing the gas to provide the
stability that we would need. They would have to guarantee that
stability, which could be done. Or we would have to go to the
state and guarantee that stability. So, regardless, you're going
to have to get the stability some way or another. It could be
done through that transportation arrangement as Senator Wagoner
described. Or it could be done with a gas sale, but is handled
through the state at the same time. It still would have to be
there in some form or another."
SENATOR STEDMAN said one scenario is ExxonMobil asking the state
for fiscal certainty, and the other would be somebody else
coming to the state and leveraging for the same fiscal
certainty, because the fiscal certainty appears to be driven out
of the three majors that have the gas.
MR. MASSEY said that is correct.
SENATOR WIELECHOWSKI said it is hard to understand. "There is an
$18 billion federal loan guarantee. If someone comes forward and
the federal government deems that to be an acceptable project,
they're willing to offer $18 billion-unprecedented as you said.
I guess I'm having a hard time seeing why you see that as a
problem."
2:25:07 PM
MR. MASSEY said financing is a very complicated subject, and he
would be happy to bring in financing experts. The federal loan
guarantee doesn't kick in until the project starts. The risk of
completion is the greatest risk and will be on the backs of the
shipping commitment-those that are making that commitment.
"Because they are responsible for paying for that pipe no matter
what it costs when they sign up for that commitment." It is very
complicated. The loan guarantee will help get a lower interest
rate, but it doesn't remove the completion risk that falls back
to the shipper and builder.
SENATOR WIELECHOWSKI said the gas is sitting in the ground.
"It's not making you any money. If someone else is willing to
take the risk of building the pipeline, that's not costing you
anything. If the pipeline doesn't get built, you're right where
you're at. Your gas is still sitting in the ground. So if
someone else agrees to build it and you go to open season and
the pipeline fails for some reason, you've lost nothing." He
asked what the risk is to ExxonMobil to come to an open season
if someone else built the project.
MR. MASSEY said the federal government is not backing the
completion of the pipeline; the costs for building the pipeline
and the risk associated with its completion are borne by the
shippers. "I don't know of a company that can build a pipeline
without a firm transportation commitment. Maybe there's a
company out there, but I don't know of one."
SENATOR WIELECHOWSKI asked why wouldn't ExxonMobil go ahead at
an open season and bid its gas. He asked what the risk is.
MR. MASSEY said if the pipeline is not commercially viable, then
we won't bid our gas.
SENATOR STEDMAN said there are legal briefs, 2005 and 2005a, in
his office and he asked what those are and what FERC's role is.
2:28:52 PM
MR. MASSEY said it all began when the Alaska Natural Gas
Pipeline Act (ANGPA) passed in 2004, which gave ExxonMobil the
confidence it wanted in the federal legislation to progress the
project. It describes what to do to get the permits and
establishes a federal coordinator to guide the different federal
agencies. It also established that FERC should rule and put out
open season regulations. FERC did that in 2005. Even within that
FERC order they put out an order that there will be a
presumption of rolled-in rates. They will judge those cases on
the basis of that order, he explained. Some have misinterpreted
that ExxonMobil's court challenge is about rolled-in rates. "The
presumption of rolled-in rates is there, and that is not what
we're challenging." It is challenging one small aspect of the
FERC open season regulation, "and that is: does FERC have the
ability to order a design change. We believe that is beyond the
scope of FERC today. We don't want to get in a position where we
have progressed the project right to a FERC certificate at about
$1 billion and then FERC orders a design change, and we have to
go back and start over." There was debate when the open season
regulations were being put together, "but that's behind us now."
The issue that is left is the ability to make a design change.
2:31:06 PM
SENATOR STEDMAN said the bill seems to have everybody agree with
each other and not challenge things. "Is FERC biased to the
industry or to the state or are they independent?"
MR. MASSEY said FERC is the regulator, and he can't say who
wins, but ExxonMobil is comfortable working in front of FERC. He
believes they take all views and will land on a decision that
everyone is comfortable with.
SENATOR MCGUIRE noted that Mr. Massey said that one problem with
AGIA is that it put too much demand on expansion of the line,
"and that you would prefer that to be something that FERC would
deal with." But Mr. Massey just said that the part of the 2005
opinion that ExxonMobil is challenging is the ability of FERC to
order a design change. She asked if a design change is different
from an expansion order or an access order. "On the one hand
you're saying you'd like FERC to have more authority over the
very things that we'd like to demand here-expansion of our pipe,
access to our pipe so that our independent explorers can bring
more gas into the system. And on the other hand you're saying
the part of the opinions that you're challenging is their
authority to order a design change."
2:33:53 PM
MR. MASSEY said a design change has great risk, and the state
should see that. "We could get to the point where we have spent
significant sums of money and be ordered to make a change in the
design and have to come back and redo that work." ExxonMobil
doesn't have a problem with expanding the pipe after it is
built. There is a belief that ExxonMobil would block an
expansion, and he doesn't know why it would do that if it was
the pipe owner. ExxonMobil wants the parties to make that
decision. In 10 percent of the cases it may have to go to FERC
to be resolved. Under ANGPA, FERC was given the authority to
mandate an expansion, so it's impossible to prevent someone from
getting an expansion. "They just have to go to FERC and prove
their case and then they will get their expansion."
SENATOR MCGUIRE asked, "So if that is the case, then why would
you mind if AGIA simply reaffirmed your statements on the record
here today. Every two years you take a look at it, see whether
or not you to expand it as you said on the record you'd like to
have more gas in the pipe and that's everybody's goal. Why not
simply reaffirm that in our state law the same way we have in
the federal ANGPA and certainly your statements here on the
record. Why not just do that?"
2:36:18 PM
MR. MASSEY said he was talking about the requirement that
ExxonMobil has to support rolled-in rates that could increase
the tariff by 15 percent. The state may not like it either.
There is an agency where the pipeline owner and shipper can go
to state their case. Then ExxonMobil can go in and have that
discussion, and then FERC will make that decision.
SENATOR MCGUIRE asked the definition of commercially viable.
MR. MASSEY said it is very complex, and it involves economics,
exposure, and risk management.
SENATOR MCGUIRE asked if he considers supply of the whole
system. "If you were to bring your gas to the market, there's a
chance that it could lower the price of gas as a whole and
potentially detrimentally affect your investments in other
places, such as Iran." What profit margin is acceptable?
2:39:04 PM
MR. MASSEY said ExxonMobil looks at the project as a stand-alone
investment decision. He said operations are not allowed in Iran.
"No subsidiary of a U.S. based company can have operations in
Iran, to my knowledge." Profit margin looks at total cash flow,
the investor's rate of return, return on the capital, and
present value from the cash flow. It will be analyzed across a
multitude of different variables, and "then land on whether we
think we got a good shot at making it."
CHAIR HUGGINS said this committee sees its role as facilitating
partnership cooperation, but ultimately success in getting the
gas pipeline. He called the commissioners forward.
SENATOR WAGONER said, "Wouldn't your answer have been the reason
Exxon doesn't want to participate on the open season is 'cause
you don't know the tariff and how high the tariff's going to go,
because you don't know who's going to control the project and
what the final expense on the project's going to be?"
MR. MASSEY said that is a good explanation. Regardless of who
builds the pipeline, the shipper pays for it. "And if you're
paying for it, you want to manage it."
2:42:11 PM
CHAIR HUGGINS said making the assumption that it will be 10
years before first gas, the critical event is the open season.
PAT GALVIN, Commissioner, Department of Revenue, said the
critical step is open season. There isn't a single open season,
but there could be a series of open seasons to get the gas
necessary to finance the project. AGIA provides inducements on
the initial open season. "We're at a better opportunity for
success if we get the gas commitment up front at that first
one." But there is the opportunity to have additional ones. That
is why AGIA is designed to make sure that the project will
advance beyond that initial open season. Having success at the
open season is the critical path for the project.
CHAIR HUGGINS said an unsuccessful open season will make him
weak-kneed.
MR. MASSEY said there is no question that the open season is
important, but more important are the producers and the state
agreeing on a contract that describes the fiscal terms that will
allow the project to progress. "I can guarantee you if we can
agree to that we will have a successful open season." Otherwise
the chance of failure is very, very high.
CHAIR HUGGINS asked how the state can facilitate the alignment
among the players so there is a successful open season.
2:45:53 PM
MR. MASSEY said the state and the producers are well aligned to
begin with. Both want a project and both see that there is a
commercially viable project to be had. For a project of this
magnitude the state and ExxonMobil have to be in sync.
TOM IRWIN, Commissioner, Department of Natural Resources (DNR),
said he is glad to hear ExxonMobil say that the project is
commercially viable. "As a committee you need to understand that
everything we have heard [from the producers] to become
commercially viable is an independent negotiation. How much the
state has to give to give certainty [to the producers]…is
undefined. We've asked many times…to define this certainty. And
so when we talk about clear alignment, the alignment comes if
the state gives, from everything I've heard. If that's
different, we're certainly willing to listen."
2:48:02 PM
COMMISSIONER GALVIN said there is alignment between the state
and the producers for moving the project forward. The only area
of disagreement is when an actual agreement is signed. Clearly,
ExxonMobil believes it must be done now, and what AGIA does is
allows that opportunity to take place at some point, but we are
now at loggerheads. The producers' must-haves and what the state
is willing to give needs to change. He said the state is not
going to change the dynamics of the situation, and everyone
needs to reach alignment: gas lessees, state, and pipeline
builder. "What we're trying to do is to allow the project to
hopefully gain some more clarity, eliminate some uncertainties,
so that that discussion can take place in a different dynamic
than we have right now."
2:50:10 PM
MR. MASSEY said it is important that ExxonMobil is asking for
something that is standard for mega projects. It is done
everywhere with mega projects. Until ExxonMobil can get to a
common understanding that that is what it takes to progress a
project, it will be a struggle to go forward. It will accept all
risks except the risk of Alaska changing its taxes. "Once we get
to that understanding, then we can make a project go forward."
SENATOR WAGONER said if he invested in something this big he
would want to make sure he got his money back. In Alberta there
is a 25 percent royalty tax, and all but one percent is forgiven
until the companies have recouped their investment. It is an
accounting process, and once that is recouped, they go back to
the 25 percent. "How would that set with Exxon?"
MR. MASSEY said there are many options. ExxonMobil just wants to
know what the deal is so it can run its economic tests. "What
the state has put in place, here, are mechanisms that tax
because of your history, what you've put in place, and there has
been a general desire to want to continue that approach to
taxing. But there're many different approaches." ExxonMobil is
open to any models, as long it can predict it.
2:53:45 PM
The committee took an at-ease from 2:53:58 PM to 3:08:53 PM.
MARK HANLEY, Manager, Public Affairs, Anadarko Petroleum, said
his company is generally pleased with the bill. It is all about
subtleties. Anadarko is a large independent, and it is focused
on exploration and production. It doesn't have refineries or gas
stations, so that is why its name is less known. He showed a map
of acreage in Alaska that Anadarko has an interest in. Anadarko
is partnered with ConocoPhillips for some acreage. It is
partnered with BG and PetroCanada in the foothills.
3:12:02 PM
MR. HANLEY said Anadarko generally looks for anchor fields,
larger fields that can sustain their own infrastructure, like an
Alpine-sized field. It does not look for satellites, so there is
higher risk and higher rewards. The foothills area is a gas
province. Wells for oil found a lot of gas, and that is where
Anadarko is focused. People ask him if Anadarko will drill a
well for gas, and it will probably do so to keep its valuable
leases. There is a timing issue. "You don't want to strand a lot
of capital…so we don't want to put a lot of dollars out in there
if we don't think a pipeline is going forward." In the
foothills, Anadarko has four pretty well-defined prospects that
seem good. Anadarko just contracted to build a new rig, and
there are partners on line to actually drill a well next winter.
He said he thinks there is gas down there, but it may not be
enough to be commercial. But one well isn't enough to go to an
open season, he said. "We can't make a long-term commitment
without understanding the field and how it's going to perform."
3:15:01 PM
MR. HANLEY said if things move forward on the pipeline, "our
preference would be at the initial open season, but just to be
honest with you, the odds that we could be at an open season, if
it's held within about three or three and a half years, is not
very good because it's going to take us one year just to get the
first well and a number of years to drill enough delineation
wells." But if Anadarko drills next winter and if it looks like
there will be an open season, "we may decide to get a couple
rigs and try and delineate that thing as fast as we can to get
in the initial open season. If it's a little slower, we'll go
probably test another prospect. We've got a three-year plan to
try and test all three of these prospects, and then we'll make
decisions based on where we see things going." If there is an
open season within three and a half years, there is a good
chance it will come in two years after the initial open season
and ask for an expansion. That is not unusual, he said, and the
pipeline itself will decide how to handle it. "They may either-
if it's just adding compression or compressors, they may be at a
point in the process where they can actually add those as part
of their construction or they may not." It may have to be put
off until after pipeline start up. "We're hoping that if this
thing moves forward and we don't make the first open season, we
clearly want to have things identified well before start up."
3:17:36 PM
MR. HANLEY said Anadarko likes the process in SB 104 and some of
the specifics. It gives Anadarko a chance before a deal is done
to get its issues out on the table for policy makers to address.
"We feel like having ours considered at least earlier in the
process is easier than having something handed back. And we have
two shots at it during this process. We have this process before
you even pass the bill and applications are submitted, and then
we have the process during the public comment period before the
license is actually granted, and maybe a third because it goes
to the legislature where we'll have an opportunity to presumably
give comments."
MR. HANLEY said Anadarko feels like its comments are being
considered and the process is good and transparent. "We like
that." Referring to the construction inducements, he said,
"having the state put some skin in the game obviously helps." He
said some have suggested the inducements at a different point.
Putting the money into the pipeline to reduce the tariff is
important. He thinks the commissioners understand Anadarko's
perspective. "If the state's putting in $2 billion, if you put
it in the upstream it can improve the overall project economics,
but is hasn't improved the pipeline. If you put it in the
pipeline it reduces the pipeline costs, so…this is going to
actually reduce the tariff and improve everybody's economics,
whether you're an expansion shipper or an initial shipper or
whatever. I think that's the appropriate route." About 70
percent of the money will come back through a lower tariff. It
is a big investment and says something to people, he stated.
CHAIR HUGGINS asked about [the state] having a choice between a
bidder that wanted the money and one that didn't.
MR. HANLEY said, "If it's going to reduce the costs, I would say
we prefer it be reduced. If the state's willing to put some
money in and actually reduce the cost for everybody, I think
that's our preference."
CHAIR HUGGINS said some people suggest putting the money
contingent on a successful open season. "You get the money; it's
just at a different point. It's an incentive."
3:21:34 PM
MR. HANLEY said the application requirement of providing a
detailed description is helpful to "all of us." On page 5, the
language requiring an "estimate of rates and charges for all
services and a detailed description of all access and tariff
terms" is valuable. It is the appropriate language, but it only
applies to the LNG project and should be moved up in the section
so that either route, the highway or LNG, will be included. He
noted that sometimes it is important to know what the operating
pressure of the pipeline will be and the gas quality
requirements. Page 6 contains the idea that people will assess
market demand through nonbinding public solicitations or other
methods, and "we like that idea." He agreed that ExxonMobil is a
large company that can get projects done and do them well, but
his concern is that normal motivations change when a producer
owns the pipe. Independents build pipelines all over, and
producers are always riding on them. The producers would have a
desire to keep the costs as low as possible. He said there are
concerns, however. The normal tension that exists is a pipeline
company saying the pipeline is risky and asks FERC for a higher
percentage, and the shippers say it isn't risky and ask for a
lower rate of return. "FERC's going to listen to that and that's
the normal tension that occurs." A producer-owned pipeline would
not have that tension. The producers aren't going to oppose a
high rate of return on the pipe. "Our concern is that the higher
the rate of return on the pipe, that's the higher the tariff is-
-that means the lower wellhead value for explorers, producers.
But if you're aligned as a producer and a pipeline owner, it is
one pocket into another, and, in fact, the higher the tariff is
the lower the state's share because of the wellhead value. So
you almost automatically have an incentive to argue for that
higher tariff." A producer-owned pipe won't keep the return low.
3:26:49 PM
MR. HANLEY said the incentives are not the same. Originally
producers were prohibited from owning any part of the pipe. This
pipeline will be a monopoly, and it needs to be looked at extra
carefully. If the pipeline is owned by a pipeline company, it
would want to expand, and a producer-owned pipeline might not
want to do that.
SENATOR STEDMAN remarked that it seems possible that if the
producers build a pipeline, they will divest themselves of it in
the future, alleviating Mr. Hanley's concerns. He suggested
requiring a divestiture after so many years.
MR. HANLEY replied that the producers may not want to divest,
and there will be things set in the beginning, like the rate of
return. Including the language in AGIA is important. He wouldn't
suggest a required divestiture.
CHAIR HUGGINS said Mr. Massey believes some of the language is
redundant, and he has faith in FERC. He asked Mr. Hanley if FERC
is even handed.
MR. HANLEY said FERC is a good venue, but there are challenges
going on right now. He referenced a case where the FERC rules
that were supported by the state and by Anadarko were challenged
by the three producers. The following FERC language is being
challenged by the producers:
In reviewing any application for an Alaska natural gas
project the commissioner will consider the extent to
which a proposed project has been designed to
accommodate the needs of shippers who have made
conforming bids during an open season as well as the
extent to which the project can accommodate low-cost
expansion and may require changes in project design
necessity to promote competition and offer a
reasonable opportunity for access to the project.
Mr. Hanley said,"That is the heart of what we've been talking
about. You see some of that low-cost design language that's in
here-that's specifically in here-and….that section is what
they're trying to get removed. So it causes us concern." It is a
good thing to have some of that language in the bill, including
the low-cost expansion language. "I wouldn't say don't let them
build it-they have great expertise. I suspect if they actually
wanted to submit a bid, they're going to be hard to beat."
SENATOR WIELECHOWSKI asked if the producers are really the only
ones that can build this project. "Do you deal with non-producer
pipelines, and what has your experience been on those?"
MR. HANLEY said Anadarko deals with a lot of pipelines that it
doesn't own, and it goes head to head with them. There are other
big pipeline companies that will likely come before the
legislature and suggest they have experience. Anadarko is an
exploration company and doesn't drill wells; it manages the
wells and those drillers. The producers won't necessarily be
building the pipe themselves; they will manage it. He agrees
that the "Exxons of the world have a great reputation for
managing costs," but he thinks other companies have the ability.
The financing will require commitments from shippers, so there
is a chicken and egg situation.
SENATOR STEDMAN asked if there will be enough gas from Anadarko,
Pioneer, Shell and others to underwrite the pipeline
construction by the time of open season.
MR. HANLEY said no. Anadarko may not be able to be at the
initial open season, unless the timing changes. "We're going to
be either a small part of the initial open season or into the
expansions-us and others that are out there."
SENATOR MCGUIRE asked for Mr. Hanley's opinion on the commercial
viability of the pipeline in ExxonMobil's view.
MR. HANLEY replied that he couldn't speculate.
SENATOR MCGUIRE said she likes his positive attitude towards the
pipeline whereby Anadarko is going to give it a shot.
MR. HANLEY replied, "I will say…when we talk about risks in the
pipeline, if we show up at the initial open season, we will take
the same risk…depending on volumes…more or less. But we will
take that same risk, but we do have more risk in ours overall,
as well, because we have exploration risks that Prudhoe Bay
doesn't have. I mean, we don't know if our fields are going to
perform. We have a development risk cost. Most of the
development costs are already covered at Prudhoe Bay. So they
have-don't get me wrong, they still have the risk of price and
cost overruns on the pipeline and all the things that were
described earlier-but they do not, at least, and to a lesser
extent, they have more risk at Pt. Thomsen because they have
discovered reserves, but Badami did too, and when they turned
the spigot on, it didn't flow like they thought it was, so
there's still risks there, but…the risks of raw exploration is
much greater on the exploration side. So our costs are going to
be higher on an MCF basis. So when we look at what we're going
to do, we're going to have to see the numbers that everybody
else sees. I would say our gas is going to be less economic than
the gas at Prudhoe, and all we can do is look at the publicly
available numbers, look at the kind of tariffs that are out
there, and try and determine whether or not we think it's
worthwhile."
SENATOR MCGUIRE asked if Anadarko had the known proven reserves,
would Mr. Hanley believe this project was commercially viable.
MR. HANLEY said he couldn't answer that.
SENATOR STEVENS asked if Anadarko is worried about access
denial.
MR. HANLEY said that it is a concern. He said the producers'
challenge to FERC to take away Anadarko's ability to get into
the pipe or if it's designed properly, "so we see things along
the way that concern us."
SENATOR STEVENS asked for other entities with similar concerns.
MR. HANLEY said any company that wants to get in on the
expansion. There was testimony last year regarding the pipeline
contract on concerns about getting into the pipe. There are
those in Alaska who are interested in exploring but don't have
identified reserves yet.
SENATOR WAGONER noted that Anadarko will lose its fiscal
certainty if it doesn't participate in the initial open season.
MR. HANLEY said that it is a concern. "On an equitable basis, if
people are making commitments to the pipe and there's a
legitimate certainty that's there, it's no different for people
that come in at different points in the pipeline. I would
suggest that they feel like they should have the same types of
certainty. So the debate that's out there…I think I understand
there's supposed to be an incentive to really get people to go
into the first one, but one of our arguments would be, what if
you come in two years later and you're still in on the first
shipping but you didn't get fiscal certainty. It will affect our
decisions as we go forward just as it does everyone else's out
there. We would probably argue that it ought to be, if you
commit gas to this pipe, you get the fiscal certainty, whatever
that might be that the legislature and the administration feels
is appropriate. Because we'd like to have that more certainty on
the royalty valuation methodology; the 'higher of' concerns us
all the time too, and some of the other issues."
CHAIR HUGGINS asked if certainty is important for explorers and
producers.
MR. HANLEY said, "As much as we can get." He added that
different areas are important to different people. It is a
moving game, and "with our exploration plan, we're going to try
and sink as little money as we can into proving up some reserves
to hold our leases to the point where hopefully we can get a
pipeline that we feel comfortable is moving forward under terms
that we think are reasonable and our prospects are economic and
then we're going to try and development them."
CHAIR HUGGINS asked if there is an unsuccessful open season and
Anadarko has proven gas reserves, "are you going to come forward
subsequent to that…and commit your gas?"
MR. HANLEY replied Anadarko would approach the pipeline like
everyone else to see if money can be made. He said everyone will
have to wait. Not everything can be answered now.
CHAIR HUGGINS referenced a chart showing varying gas prices. He
said, "It shows if gas was $6.50, in a three-year scenario, the
state would lose $6.5 billion with a three-year delay. There's a
provision in the contract that creates what I will call an
accordion. If you have the financing, you've got to get started
in one year; if you don't, it's five years. That will be a
significant amount of money for you if you come to that open
season with that delay if you accept the argument that delay
equals major loss on the part of people that have committed to
the project. Tariff goes up potentially. You're thoughts?"
MR. HANLEY agreed that delay is a problem and said that it is an
issue for all involved. Once the decision is made to go ahead,
people want to start as soon as possible. If the pipe takes a
while, it'll be a risk, he said.
CHAIR HUGGINS asked what would push Anadarko to explore more.
MR. HANLEY said that progress on the pipeline is the catalyst.
SENATOR WIELECHOWSKI asked for comment on the importance of
rolled-in rates to Anadarko and to encourage exploration.
MR. HANLEY replied that they are important, and the language in
the bill doesn't require rolled-in rates. FERC is the decider.
The bill requires the pipeline owner to ask for and support
rolled-in rates. The 15 percent cap would get through two
compressions and maybe the first looping. The pipeline company
wouldn't care, but the shippers would disagree. A producer
owning the pipe would wear two hats. The pipeline part of the
company may support rolled-in rates and the shipping side-the
initial shipper-would probably say no. The policy call should be
whatever makes the most sense, but Anadarko, as an explorer,
likes the provision. Everybody is looking at their bottom line.
He suggested looking at the Canadian system where they generally
use rolled-in rates and there are "no property rights to a
specific right when you get that." The Canadians believe there
are benefits to expansions, like adding to the security of the
pipe, which benefits all the users. He noted that two-thirds of
this pipe will be in Canada; so explorers in Canada might get
better rates.
3:52:30 PM
SENATOR WIELECHOWSKI asked if rolled-in rates tend to lead to
more exploration and more expansion.
MR. HANLEY said that he would think so, "but ask a pipeline
company." He referred to the debt structure of 70/30 "regardless
of what you apply for." He appreciates the state trying to keep
tariffs low, and that is another example of that. He referenced
the evaluation criteria in AGIA and said they are appropriate.
How the applicant plans to manage cost overruns is critical.
"You can go to an open season and you've got to be careful
because if it comes in way over…" There are ways to protect
yourself with contingent bids and he gave the example of: "if
somebody says the tariff's going to be $2.30 and it goes to
$4.00, you're not committed on the pipe, and then whose risk is
it, if they've built the whole pipeline?" There are tensions as
a rule, but it is a much bigger scale, he stated, so it is a
significant risk.
CHAIR HUGGINS suggested that contingencies may make it difficult
to get financing.
MR. HANLEY agreed, but said, "There are agreements to share
risks where the pipeline now has the same incentive if you come
in on time on budget or under budget. There are incentives. If
you don't, you pick up a share of it. Now there's no incentives
to go over those kinds of things…That's a big issue on the cost
overruns. You should get people to see how they do it. This is
not, maybe not on this scale, but these issues are there every
time a pipeline is built, so they're handled somehow. And I
think it's worth understanding that, to see what those risks
are." Referring to Page 9, "the extent to which low
transportation rates, again, it's just focused on low rates,
which we think is a good idea. Accommodate low-cost expansions-
this is just the criteria they have to present in how they're
going to handle these things. So we like that. We want to see a
pipeline design that preferably will handle low-cost expansions,
and hopefully the first expansion will be beneficial to
everyone. In other words, the rate will go down for everyone
because it will be rolled in and the compressors will be out
there."
3:56:03 PM
MR. HANLEY referred to the resource inducements. "If we're not
going to be on the initial one, if there's value, which we think
there is, and we think you've identified some of the issues that
are concerns. The royalty valuation methodology for any of our
leases that are out there has always been a point of contention
among the industry [and] between the state. And tax certainty.
Both of those. So to the extent that it's going to be available,
we think anyone that commits on the line, whether it's first
open season or otherwise, makes sense to, we would argue, to
give that certainty, whatever you choose to give." He said
Anadarko is still assessing smaller details [of AGIA]. "If you
wanted to change that to make the resource inducements apply to
everybody, I could make it real quick-give you an amendment.
But, anyway, that's a policy debate as to whether it should just
be those in the initial open season or those otherwise. We would
argue everyone should get it, and we can fix that easily."
3:57:26 PM
CHAIR HUGGINS noted that Anadarko and BG are doing some
exploration, "but your appetite is restrained until the point
that you see the pipeline really going forward?" He asked if the
trigger will be the successful open season.
MR. HANLEY said yes, a pipeline going forward, which will
probably take a successful open season.
CHAIR HUGGINS asked what else would be an incentive.
MR. HANLEY said a successful open season suggests they are going
through the certificate process and then construction.
CHAIR HUGGINS suggested that Anadarko's profile of risk is low
until success is evident.
MR. HANLEY agreed, and said everybody's risks are low before the
commitments on the pipe. He said, in summary, Anadarko likes the
process and appreciates the ability to comment and participate
from the beginning. He said Anadarko likes a number of the
provisions, as mentioned, in AGIA.
The committee took an at-ease from 4:00:45 PM to 4:12:10 PM.
DAVE VAN TUYL, Gas Commercialization Manager, BP-Alaska, said
the committee will hear familiar themes. He said BP wants and
absolutely needs a pipeline, and "we need that pipeline to be
built for low capital costs and to be able to be operated
efficiently at a low cost." Low costs are good for BP and the
state, because it will result in lower tariffs, higher netbacks,
and more revenues for both. It will provide incentive for future
exploration. The low-cost pipeline needs to be built in the
first place for this all to happen. The pipeline project is
hugely important to the nation. It's the largest known
undeveloped gas resource in the United States and in BP's global
portfolio. The project extends the economic life of Alaska's oil
production for decades to come, he said.
MR. VAN TUYL explained that BP shares the desire to start the
project and wants to work on a balanced fiscal framework. BP's
Alaska future is directly linked to this project. It needs to be
done right. AGIA is the administration's commitment to advance
it openly and transparently. There are a number of areas of
concern in AGIA. He said it may create unintended consequences
that could jeopardize getting the gas to market quickly. AGIA
would result in an exclusive winner before any real work is
done, and it awards state funds based on promises, not results.
SENATOR WAGONER said Mr. Massey expressed a lack of clear
criteria for the state to assess the proposals. But, "if you
give the answers to the test, then people are going to shape the
proposal toward the answers instead of shaping their proposal
toward the best proposal they can perform."
MR. VAN TUYL said BP feels that the best way to allow for
competition is to allow concepts to be proposed. That is how the
free market can generate the best possible project.
SENATOR WAGONER asked if the state will take prior experiences
into account, and he believes that a company who hasn't built a
line will be eliminated.
MR. VAN TUYL said there is such a provision in AGIA, but he was
referring to performance on this particular project and actually
delivering results beyond just promising.
4:20:44 PM
MR. VAN TUYL said that the administration has laid out criteria
for a selection in a transparent way, but the project could be
further advanced by setting out a clear framework for investors.
From there the market will work to identify the most effective
project. He said BP supports competition. FERC requires that the
market demonstrate that it wants that application before
awarding a certificate; that's what happens in a successful open
season. There are specific desires for the project like Alaskan
jobs, training, expansions, and gas access, and BP supports all
of those objectives. They can, and will be, addressed through
open competition. He said AGIA can result in one party
subsidizing another. It specifically requires that initial
shippers who financially underpin the project and bear most of
the risks, to bear the additional cost of tariff increases of 15
percent or more for expansions. BP shares the expandable
pipeline desire, but the state should consider the adverse
consequences of requiring subsidization. This policy places risk
on the initial shippers and could put the project at risk, he
opined. "The issue of rolled-in rates isn't really the concern;
it's the issue of subsidization." He said the state can
subsidize, but it is not good policy to take risks with other
people's money.
MR. VAN TUYL noted that Congress made clear in the Alaska
Natural Gas Pipeline Act that rates for initial shippers should
not increase if a mandatory expansion is ordered. The law states
(Section 105b) that FERC shall insure that the rates do not
require existing shippers to subsidize expansion shippers. FERC
put in a rebuttable presumption of rolled-in rates provided it
did not require subsidization by initial shippers. He read the
preamble to Order 2005: "In conclusion, to provide guidance to
potential shippers in advance of the initial open season that is
the subject of this rule, the commission intends to harmonize
both objectives: rate predictability for initial shippers and
reduction of barriers to future exploration and production in
designing rates for future expansions of any Alaska natural gas
transportation project. It is consistent with our guiding
principle that competition favors all the commission's customers
as well as with the objectives of the act to adopt rolled-in
rate treatment up to the point that would cause there to be a
subsidy of expansion shippers by initial shippers if any subsidy
were to be found."
4:25:45 PM
SENATOR WIELECHOWSKI asked if it's fair to say that any rolled-
in rates lead to that kind of subsidy.
MR. VAN TUYL said there is that possibility. A rolled-in rate
that resulted in an increase isn't necessarily subsidization,
and FERC will have to make a judgment.
SENATOR WIELECHOWSKI surmised that the FERC presumption assumes
that initial shippers will be subsidizing future expanders.
MR. VAN TUYL said it is rebuttable if the rolled-in rate
resulted in a subsidy.
SENATOR WIELECHOWSKI said he can't envision a scenario where
rolled-in rates wouldn't increase the rates of initial shippers.
MR. VAN TUYL said a rolled-in rate could result in lower rates
for all shippers. It depends on the nature of the expansion. It
could be more efficient than the base rate, he explained
4:28:32 PM
CHAIR HUGGINS asked if the existence of a subsidy must be
proven.
MR. VAN TUYL replied affirmatively. He said that AGIA and
federal law could be in conflict, and if that is true, resolving
the conflict would add delay and uncertainty. FERC has spoken
favorably about the bill, but the issue needs to be consulted
before progression. "We plan to go ahead and consult with FERC
in the very near future just to insure there's not a conflict
problem in the future when we actually are progressing the
project." Requiring a potential subsidy for shippers would be a
disincentive during open season. He clarified that the producers
are only challenging the issue of design change requirements
after the open season. "We're not challenging the rebuttable
presumption of rolled-in rates, provided it doesn't result in a
subsidy." The motivation for the challenge is to ensure that
costs are minimized and delays are avoided from a mandated
design change.
MR. VAN TUYL said that a third area for careful consideration is
the $500 million grant; it may be attractive to underfinanced
project sponsors or companies unwilling to risk all of their own
money. Instead the state could ask project sponsors to propose
their own mid-stream inducements. "That would give the free
market the opportunity to do what it does best." The
administration wants to provide the $500 million up front
because that is the riskiest phase of the project. "We have a
very different view." The upfront phase is risky for a non-
resource owner who is not confident that it will have customers
participate in its open season. Enbridge has that view. He said
the riskiest phase for the ultimate shippers is in the
construction period, when cost control is critical. Also risky
is entering the open season when firm transportation commitments
must be made, which means "committing real dollars to enable the
project to be financed to begin with." All project risk
ultimately flows to the resource owners, he said.
MR. VAN TUYL said the fourth area of concern is that AGIA
doesn't address the resource framework, which is the key enabler
for financing. The resource owners will pay the cost and bear
the risk of building the pipeline whether they own it or not,
because they reimburse the pipeline owner through the tariff
cost in the toll. Just like Wall Street needs to know the rules
before lending money, resource owners need to know the fiscal
rules that will govern the project before making the commitment.
The details of an upstream framework are complex, but unless
they are addressed the project won't secure financing.
4:35:04 PM
MR. VAN TUYL referenced a slide to show resource owner risks.
They include: price, which might fall below the rate of the
tariff; production, which requires a full pipeline every day;
fiscal risk, whereby the fiscal terms on the upstream business
might change; construction, like cost increases; regulatory
delay; and the risk of financing in the capital markets. He
showed another slide showing the ten largest oil and gas
financing in history, and the largest has been $3.7 billion,
which is a fraction of what this project will be. All risks are
taken by the pipeline company and passed through to the resource
owner. The pipeline company receives a regulated rate of return
on investment, come rain or shine. In exchange for a reasonable
rate, it is protected from certain risks, which are passed,
instead, to the resource owner. Ultimately, all risks are borne
by the resource owners. It's important that the risk-bearers can
manage it, so it's critical that the upstream risks are balanced
with rewards. The state is uniquely positioned to manage that
risk because it establishes those fiscal terms.
MR. VAN TUYL concluded with four key messages: 1) BP wants and
needs a pipeline. 2) BP fully supports an open process that
leads to a mutually agreed fiscal framework with the state that
allows the project to advance and attract financing. It is
critical that the legislature supports that framework, and the
judicial branch should review it for constitutionality. The
people of Alaska should be consulted, and the resulting
framework should be made available to all potential investors to
insure competition. 3) Mutually agreeing on an upstream
framework is critical. The resource issues have to be resolved
so the owners will have the confidence to make commitments in an
open season. He said he is willing to engage in developing that
upstream framework. 4) A number of the midstream details in AGIA
need to be fixed to avoid picking a winner in advance. Any
payment of inducements should be made after the results are
delivered. A sponsor could win the inducements after a
successful open season.
4:41:58 PM
SENATOR WIELECHOWSKI asked if there is a master operating
agreement that deals with all the North Slope producers.
MR. VAN TUYL replied that each individual field has its own unit
operating agreement.
SENATOR WIELECHOWSKI asked if the Prudhoe Bay operating
agreement requires one party to get permission from the others
before taking gas.
MR. VAN TUYL said there are provisions for overlift and
underlift, and there is the ability for any individual owner to
take its gas or oil in kind, but that is limited by not
interfering with operations.
SENATOR WIELECHOWSKI asked if there's a provision that requires
the other owners to take gas if one owner is.
MR. VAN TUYL replied that he doesn't know of any such provision.
There are over-lift or under-lift provisions, which happen all
the time with tanker schedules. "I might need to underlift
because the tanker that I'm planning to deliver my crude to is
delayed…when another tanker is already in port. What I don't
know, specifically, is how far out of, how over-lifted I can
become."
SENATOR WIELECHOWSKI asked if BP would need permission from the
other owners to take a certain amount of gas, or if they all
have to put their gas on the market.
MR. VAN TUYL replied that one can take gas in kind if it doesn't
interfere with unit operations. There are already minor gas
sales so that provision is utilized. He is not aware of a
provision that requires putting gas on the market.
4:45:48 PM
SENATOR WAGONER asked for an updated version of "this" with an
additional column for which projects were over or under budgets.
SENATOR STEDMAN asked for the dates of the referenced projects
as well. The projects appear to be the same size as the gas
treatment plant.
MR. VAN TUYL said, "About that size or slightly smaller."
SENATOR WIELECHOWSKI said the numbers look low, and he thought
the oil pipeline cost $9 billion 30 years ago.
MR. VAN TUYL said he is not sure what the financial arrangement
was for delivering TAPS, but he will find out.
4:47:50 PM
CHAIR HUGGINS said that he recalls another expensive project
that's not on the list. It was over $15 billion. "You might
check your source." He asked if BP will apply under AGIA.
MR. VAN TUYL replied that it depends on the ultimate form of
AGIA, but he hopes so. Its concerns would need to be addressed.
CHAIR HUGGINS asked if the upfront application timeline will
work for BP.
MR. VAN TUYL said a project of high importance needs sufficient
time to thoroughly evaluate proposals. There are certain
stipulations in AGIA that might make this difficult. "The
concern that we would have is could we make an adequately
conforming proposal basically in good faith."
4:50:08 PM
CHAIR HUGGINS asked for BP's estimate on the project cost.
MR. VAN TUYL said the estimate was $20 billion in 2002, but
steel prices have doubled and labor costs have gone up.
SENATOR WIELECHOWSKI asked for specifics on what BP wants.
MR. VAN TUYL replied that it's difficult to say what provisions
are needed; the key is getting risk/reward balance. There isn't
one specific solution; there's a host of possible outcomes.
Allowing applicants to propose what they want "would be a
reasonable step forward, I think."
4:52:39 PM
SENATOR WIELECHOWSKI said he doesn't know how else to do this.
He said he is sympathetic to Mr. Van Tuyl's concerns, but there
is no way to evaluate what he wants without more specifics. He
asked if the inducements in AGIA shouldn't be there, and instead
BP comes and tells the state what it wants. "At any time will
you come to us in an open hearing and tell us what you want?"
MR. VAN TUYL said he is not advocating a particular process;
that is the choice of the state. "I'm not sure that a new piece
of legislation is required; I think that the administration
negotiates terms, and whatnot, all the time outside of
legislation. Ultimately that would be, if that happened, that
would need to go to the legislature and be endorsed, approved,
reviewed by the judiciary. I think the, like I say, one process
forward might be to allow potential project sponsors to propose
to the state what that risk/reward balance package would look
like, rather than to stipulate specific terms in the bill that
might--the concern I have is that by being too specific, whether
it's with the application or with the form of inducements, we
may preclude the one option or the combination that allows the
project to advance. I know that that wouldn't be the intent in
providing that specificity, but that's just my concern."
SENATOR WIELECHOWSKI said he can't evaluate what BP wants unless
he is told. "I guess my suggestion would be to put together a
package and bring it to us. We're going to be hearing this for
the next few weeks. I would like to see what your package is. I
would like to see what exactly you want us to do, because if you
don't tell us, then we're not going to know what to do-what
you'd like us to do. We won't be able to fairly evaluate it."
4:55:13 PM
SENATOR WAGONER surmised that the $20 billion applies to a
pipeline all the way to Chicago. There are alternatives that
will be explored like an Alberta hub and a smaller line to
Chicago. He asked for a modeling of those figures.
MR. VAN TUYL replied that the portion from Alberta to Chicago
was $5 billion of the $20 billion total. It is unknowable what
the available takeaway capability will be in Alberta ten years
hence. There are unknowns like the explorations in the Canadian
sedimentary basin and others. So BP figured out the cost of a
brand new pipe and compared the alternatives. "If we can access
existing capacity for a competitive price, then that would
certainly be a sensible thing to do." There may be some
combination of new pipe required and use of existing capacity.
4:57:04 PM
SENATOR WAGONER asked what percent of the 4.3 BCF capacity would
be taken up with liquids if the line was run at 2,500 pounds.
"How many barrels of liquid would be shipped per day?"
MR. VAN TUYL said the shrinkage on the line is about six percent
total, and about three percent of the gas is used as fuel in the
gas treatment plant (GTP) itself, and about another three
percent in the pipeline as it goes down to the market. The total
liquid volume depends on the richness of the gas at its source.
"My recollection is that the total liquid volume is in the
neighborhood of 100,000 barrels a day."
SENATOR STEDMAN asked what percent of BP's volume will be from
the gas basin if there is a four or six BCF line.
MR. VAN TUYL replied that the project would about a 12 percent
increase in BP's total gas through put.
SENATOR STEDMAN asked if that would be significant.
VAN replied, "Absolutely. This project, anyway you look at it…is
huge, even for a very large company like ExxonMobil or BP.
5:00:01 PM
SENATOR STEDMAN commented that there hasn't been any discussion
on the cost of treatment plants. If there is a third party
pipeline bidder that wins, how will the ownership and
construction of the gas treatment plant fit in?
MR. VAN TUYL replied that ultimately a plant must be part of the
pipeline project scope, because the gas at the North Slope
contains more CO2 well beyond the pipeline spec CO2. The CO2
will need to be removed and there needs to be an initial stage
of compression, which is supplied at the gas treatment plant.
There needs to be other impurities removed, so that should be
included in any project proposal.
SENATOR STEDMAN asked the cost of a gas treatment plant.
MR. VAN TUYL replied that in 2001 it was $3 billion, but the
cost would undoubtedly be higher now.
SENATOR STEDMAN asked how FERC is involved in the plant.
MR. VAN TUYL replied that when FERC promulgated the open season
rules, it included the treatment plants as part of its
jurisdiction, so tariff rates would be included in the gas
treatment plant as in the pipeline. It's part of the pipeline.
The service would be unbundled, which means someone purchasing
the service could choose what portion of compression and what
portion of CO2 removal was required.
SENATOR STEDMAN asked if it would be probable that an
independent company submit a proposal and not address the gas
treatment plant. If so, how would that be reconciled?
MR. VAN TUYL replied that it's hard to speculate, but a
successful project must include a gas treatment plant. "I would
expect that any party would recognize that, whether it was an
independent pipeline or a producer."
SENATOR STEDMAN asked if the plant would be controlled by a
producer.
MR. VAN TUYL said that is difficult to answer now, but
ultimately he imagines the operator of the pipeline would
arrange "operatorship" of the plants as well.
SENATOR STEDMAN said he was referring to ownership.
MR. VAN TUYL replied that the producers are uniquely positioned
to deliver big projects and motivated to do so at low cost since
that means higher netback. It would include the gas treatment
plant. The plant would be regulated by FERC. It would provide
the access regulations.
SENATOR STEDMAN asked if the bill should be expanded to include
the 70/30 debt provision in the gas treatment plant or should
the gas treatment plant be 100 percent equity, or is it
irrelevant to getting the project built.
MR. VAN TUYL said that is a concern on the specificity of the
tariff structure. "We fully support the notion behind AGIA of
trying to ensure that the toll…is as low as possible." He is
concerned about being too prescriptive up front, which may
prevent the best commercial solution. "What the correct toll
structure is for the GTP will ultimately be…in an ideal world,
get set in the market place and it gets regulated by FERC."
SENATOR STEDMAN asked if Mr. Van Tuyl wants it to be left out of
this process and let whoever comes forward with a proposal deal
with the gas treatment plant or not. "I assume it would have to
be wrapped up in their proposal as they bring it forward and let
them, in their proposal, recommend some form of a debt equity
position along with other variables."
MR. VAN TUYL replied that that would be a real possibility for
ensuring the lowest possible toll. He believes the real
objective of the administration of setting the 70 percent debt
component is really trying to get at the lowest possible
weighted average cost of capital. That is what will drive the
tariff lower.
5:09:35 PM
SENATOR STEDMAN asked how rolled-in or incremental rates affect
the gas treatment plants. If the plant is at or near full
capacity and someone wants to come on, would they build another
one or would they expand it? Is there any relationship between
the FERC order 2005 and the gas treatment plant?
MR. VAN TUYL said he doesn't know what the interplay is. The
plant would be expandable because typically those plants are
arranged in multiple trains. So there may be three trains
initially to process 4.5 BCF a day of gas, and if additional gas
came in, another train could be added. "I don't recall the
specific structure of Order 2005 and what it would say, if
anything, about the rolled-in rate treatment in the GTP."
SENATOR WAGONER asked Commissioner Pat Galvin about the "70/30
and whether it applies just to the pipe or the treatment plant,
which is the whole project, or not."
5:11:30 PM
PAT GALVIN, Commissioner, Department of Revenue, said that AGIA
allows the applicant to choose whether or not to include the gas
treatment plant as part of its proposal. "If they do, then they
are required to include the same provisions for both the tariff
structure and the expansion that would be required for the
pipeline." That provision is on Page 7 of AGIA, and it only
specifies the debt to equity, not the expansion. "If they submit
a proposal they can include it in the proposal itself with the
understanding that they would have a 70/30 debt to equity ratio.
It also requires them that if they don't include it and then
subsequently own it, they will still have to be required to use
the 70/30 debt to equity ratio." And that's why it's written
that way. Applicants can include it or not, but they are
committing that ratio at either time.
5:15:33 PM
SENATOR GREEN asked who will build it if it is not included in
the proposal.
COMMISSIONER GALVIN said the market will decide. If a third-
party builds the pipeline they may end up building the gas
treatment plant, or the lessees may decide to build and own it.
SENATOR GREEN said that doesn't make sense.
5:16:25 PM
SENATOR WAGONER said it seems that a private pipeline company
building the line would probably want to build the plant too. He
can't imagine the producers building the GTP if they are
building the pipeline. He said it's a chicken and egg story.
COMMISSIONER GALVIN said he would be happy to come back and
expand on the issue. AGIA is being built on the idea that the
government shouldn't dictate who owns what and what roles
entities play in the overall system. AGIA attempts to avoid
putting restrictions on people that hinder commercialization.
Interested parties could comment on this. The commercial
decisions of the participant may drive them to decide to have
separate ownership.
MR. VAN TUYL said that BP envisioned separate legal entities
owning and operating the gas treatment plant. "It may have
exactly the same ownership individuals as the pipeline and
whatnot, but just because…the remit of the GTP is a bit
different than the pipeline that it may be a different entity
but the same structure as the gas pipeline." Three or four
owners might own both the GTP and the pipeline but they would
form different companies.
5:19:45 PM
COMMISSIONER GALVIN said the two parts of the system have
different roles. The pipeline companies transport the product,
and the GTP is a much different part of the system-it is more
associated with drilling than transporting. That's why there is
a likely division between the two.
MR. VAN TUYL said there are gas pipelines that include treatment
plants. It's not unusual to include both functions within one
physical entity. And it is not exclusive either.
5:21:03 PM
SENATOR MCGUIRE asked if last year's contract had them separate.
MR. VAN TUYL replied that it had envisioned separate legal
entities, but the ownership may have been the same.
COMMISSIONER GALVIN said AGIA is providing the opportunity to do
it either way, but if an entity decides to own both, it is going
to have to have that low cost built in.
CHAIR HUGGINS said that much of the commentary on AGIA is
positive. The state has a spotty record on business enterprise.
The producers need to clarify what they want, and the
interaction between players needs to be encouraged. "I can tell
you that if I'm investing my money, I want the business partners
that show a big bottom line with a big plus beside it because
that's who the best partner is." He said he hopes BP is a big
player, but BP has to help the legislature help it get what it
wants. "And to that extent, we are prepared to be your partner."
SB 104 was held over.
The committee adjourned at 5:24:26 PM.
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