Legislature(2009 - 2010)BUTROVICH 205
01/28/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: Open Season for Alaska Gasline Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 28, 2010
3:45 p.m.
MEMBERS PRESENT
Senator Bill Wielechowski, Co-Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
MEMBERS ABSENT
Senator Lesil McGuire, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Thomas Wagoner
COMMITTEE CALENDAR
Overview: Open Season for Alaska Gasline Project
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
SCOTT HOBBS
Consultant for the AGIA Team
POSITION STATEMENT: Gave presentation on open season for the
Alaska Gasline Project.
ACTION NARRATIVE
3:45:11 PM
CO-CHAIR BILL WIELECHOWSKI called the Senate Resources Standing
Committee meeting to order at 3:45 p.m. Present at the call to
order were Senators French and Wielechowski.
^Overview: Open Season for Alaska Gasline Project
Overview: Open Season for the Alaska Gasline Project
3:45:48 PM
SCOTT HOBBS, Consultant for the AGIA Team for the
administration, said he was here to speak about the open season
process they are about to embark on for the Alaskan Gas Pipeline
Project.
Slide 2 - Topics for discussion:
1. Background and progress assessment
2. General discussion of open seasons
3. The Alaskan Gas Pipeline Project open seasons
4. Conclusions
3:46:46 PM
MR. HOBBS said he's here as adviser to the AGIA Team and his
opinions are his own. He has spent the last 33 years in the
natural gas business.
3:47:42 PM
Slide 3 - We've made great progress, but we still have a long
way to go - He read a quote from American Gas Association saying
that people have been expecting a pipeline for 30 years, and
many believe the project is closer to happening than ever
before, and that gas could flow by 2020.
3:48:40 PM
SENATOR WIELECHOWSKI said they've heard from a variety of
sources that the gasline and AGIA are dead and this project
won't happen because of the explosion of shale gas finds and LNG
imports in the Lower 48. Do you share those assessments?
MR. HOBBS said no. "Let's let the facts speak." Right now they
have the largest gas pipeline operator in North America and the
three North Slope producers all working actively on a gas
pipeline project. The shale gas development in the Lower 48
presents a competitive alternative for certain customers, but an
increase in demand is also taking place there. LNG imports have
not markedly increased and remain at about 1 or 2 bcf/d.
SENATOR WIELECHOWSKI asked if he thought Alaska natural gas from
a pipeline can compete economically with shale gas.
MR. HOBBS said that remains to be seen. There are factors that
can affect cost of development of the shale gas. For instance,
regulations are being considered at the federal level on
hydraulic back fracturing. However, at the same time overall
demand is increasing and he believed that Alaska gas will play a
part in the overall supply mix.
3:50:58 PM
SENATOR WIELECHOWSKI asked if he has rough figure of what shale
gas will cost versus what it is expected that the Alaska natural
gas shipped via the pipeline will cost. He has heard that shale
gas isn't economic below $6 or $7/mcf.
3:51:17 PM
MR. HOBBS replied that it depends on which shales they are
talking about and which part of the shale gas play they are
talking about. Clearly some shale gas development will require
that kind of price. Others will be more economic. If you have a
developed supply at Prudhoe and a developing supply at Pt.
Thomson, you have gas that is available; and if you add the
transport costs, depending on what the forecast is, it can
compete with any sort of supply in the Lower 48.
3:52:12 PM
MR. HOBBS explained slide 4 - What is an open season and why is
it held. He said it is a public process in which the project
sponsors propose terms and specific design parameters to
potential customers in the effort of soliciting bids for the
capacity that they are proposing to build. Open seasons started
as a requirement of the FERC in the late 1980s. The purpose is
to ensure that all interested parties can bid on that capacity.
Then the pipeline sponsors will select those bids that place the
highest value on that capacity. This particular project has very
specific requirements.
3:53:37 PM
SENATOR FRENCH asked if oil pipelines go through the open season
process or just gas pipelines.
MR. HOBBS replied that it is generally unique to gas pipelines.
Oil goes through similar solicitation, but not the same process.
SENATOR FRENCH asked why gas pipelines are different.
MR. HOBBS explained that an oil pipeline is a common carrier; a
gas pipeline is a contract carrier. So you contract for capacity
that you own and you control on a gas pipeline. No one can come
in and pro rate you down to get capacity; you have to bid for
new capacity and go through a new open season process where
other parties are allowed to come in and the pipeline looks at
those bids and decides if it can construct new capacity
(expansions). With an oil pipeline, if someone new comes in and
wants to move volumes through it, typically they will be brought
in and everyone else is reduced somewhat to accommodate those
flows.
3:55:21 PM
MR. HOBBS explained slide 5 - Who will be involved in the open
season process. Besides the project sponsors, he said that
project regulators (FERC, NEB, NPA, and the state as AGIA
licensor), shippers (producer, marketing company, or local
distribution company), and other parties (land owners,
competitors) may decide to get involved in the process. For this
particular open season they will have to file all of their
procedures (21 different items) with the commission and those
also provide avenues for other parties to intervene.
3:55:49 PM
SENATOR STEVENS joined the meeting.
CO-CHAIR WIELECHOWSKI asked what other parties they could expect
to see in this process.
MR. HOBBS answered maybe no one. But for instance the state, as
a royalty owner needing to protect its interest, may decide it
has to comment on some provisions in the open season filing. It
all depends on whether this avenue is the right place to do it.
But he assured there may be just the traditional regulators and
shippers that participate in this process.
Slide 6 - What takes place in the negotiation process. Mr. Hobbs
explained that in a typical open season a pipeline sponsor will
identify a project (often in a press release), and then initial
discussions with potential customers (shippers) will begin. They
will generally come up with a package of rough terms and then
the negotiation process begins. The project gets defined, scoped
and developed during the negotiations and once they get that
"feedback," the open season is announced.
3:57:58 PM
SENATOR STEDMAN joined the meeting.
3:59:19 PM
SENATOR WIELECHOWSKI asked if only the producers bid for
capacity and not someone - like China.
MR. HOBBS said he is really trying to describe a general
project, but that is probably correct.
SENATOR WIELECHOWSKI said that TransCanada is making a filing
tomorrow and asked if they are at Box 2 - the Open Season
Package on slide 6.
MR. HOBBS said yes. He said once the open season begins, more
negotiations happen and bids for capacity are submitted;
generally a draft precedent agreement is included in the
package. The projects sponsors would ask the parties who they
would like to participate to submit that agreement. More often
than not, that agreement is submitted with changes and things
the shipper wants (terms). Then there are more negotiations;
then there is a precedent agreement. This has a lot of
conditions and things that have to be accomplished before a firm
transportation service agreement is achieved - the real goal for
a project sponsor. Then you get a firm commitment and those
conditions are removed.
4:01:21 PM
Slide 7 - The Precedent Agreement. Mr. Hobbs said the precedent
agreement lays out the project scope, the services that are
going to be provided, the key commercial terms and conditions
that the pipeline sponsor's are looking for; it lays out
obligations on the parts of the shipper and the pipeline
sponsor, representations, and warranties, conditions precedent
(for example, an acceptable certificate from the FERC), and
termination rights for both parties.
In transforming these into a firm transportation agreement, Mr.
Hobbs said, a lot of the terms and conditions will be carried
forward. This gets them to the final commercial terms and
conditions, but most importantly those conditions precedent are
resolved. Then there really is a firm commitment.
4:03:32 PM
SENATOR WIELECHOWSKI said it has been speculated that maybe all
bids will be precedent upon fiscal certainty, for instance. Do
you expect that in this case? Is it common?
MR. HOBBS responded that he would answer those questions a few
slides from now.
Slide 8 - Typical Outcomes for an open season. In some cases
there may be minimal interest and no meaningful commitments, Mr.
Hobbs said. In that case for the project sponsor it's back to
the drawing board. They may decide to defer the project or
abandon it. While this has happened, most savvy pipeline
operators won't have an open season if they don't think they
will get some kind of meaningful feedback from the shippers.
A second potential outcome is shipper interest, but insufficient
commitments to fill the pipe. This type of outcome is fairly
common and maybe they go back and negotiate some favorable terms
or change the scope.
4:05:09 PM
MR. HOBBS said a third potential outcome is that there are
sufficient commitments volumetrically, but they have a lot of
conditions. This is a highly probable outcome for most open
seasons. In this case, negotiations are continued and mutually
agreeable conditions are established. Another potential outcome
is that you get commitments that commit to exactly what the
sponsor was looking for, but that is highly unlikely. The likely
outcome for any real commercial project easily comes in between
two and three.
4:06:33 PM
Slide 9 - Timeline for a project in the Lower 48. Mr. Hobbs
explained that the typical project takes from three to five
years. It can be compressed if the pipeline sponsor is willing
to spend a lot of money on the front end to remove some of the
"time takers," like environmental or field work or filing for
the FERC certificate early.
MR. HOBBS said that right now both the Denali and AGIA projects
are trying to get terms worked out before initiating a formal
open season. A typical open season period in the Lower 48 is
about 30 days or less. In this case FERC Order 2005 is requiring
90 days.
4:08:35 PM
Once the bid is made, you're back to negotiations, which could
take another six months before getting to firm pressing
agreements. Then work can be done to get a FERC certificate
filed. Assuming you receive a certificate, over a 12-month
period you would look at the project sanction decision, which is
"where the rubber meets the road" - when the pipeline sponsors
are ready to commit to the project.
4:09:02 PM
Slide 10 - Mr. Hobbs said that they will really know that a
project will be constructed at the project sanction point, when
the sponsors commit to construct the project. This is generally
well after an open season and after front-end engineering and
design work, environmental impact studies, major regulatory and
permit approvals (including approvals from the FERC and NEB),
critical rights-of-way acquired, detailed cost estimates, and
all conditions precedent in the precedent agreements are
resolved. Once that is done, firm transportation service
agreements are executed and then the project financing needs to
be assured.
4:10:20 PM
Slide 11 - Recent Open Season workshop conducted by FERC on
January 12 in Anchorage. Mr. Hobbs said that FERC detailed all
the requirements of FERC Order 2005 and found 21 separate things
that have to be addressed. The Ruby Pipeline Project was used as
an example of a major project progressing over the years.
4:11:34 PM
Slides 12 & 13 - The Alaskan Gas Pipeline Project. Mr. Hobbs
said a few more pieces have to come together to make it work.
Probably the most important piece is the project timeline. This
project will probably take a minimum of 10 years. When that kind
of timeframe is added to a project, uncertainty and risk is
injected, especially with respect to cost of construction. This
project will cost over $30 billion and it will have
corresponding development costs that go along with it. No other
project in the Lower 48 has even exceeded $7 billion.
The Allowance for Funds Used During Construction (AFUDC), in
other words the cost of money for this project, is part of the
overall construction costs, Mr. Hobbs explained. For this
project, it exceeds the cost of any other pipeline project that
has been attempted in the Lower 48.
4:13:26 PM
SENATOR FRENCH asked Mr. Hobbs to remind him where the state
stands in relation to throughput. Do other pipelines in the
Lower 48 deliver 4.5 bcf/d of gas?
MR. HOBBS replied that some pipelines deliver that volume, but
they have been built over years with multiple expansions and
additional loops. No other project has attempted to take on that
initial volume with the opportunity to go up.
4:14:11 PM
SENATOR STEDMAN asked him to expand on the impacts of AFUDC.
MR. HOBBS explained that the AFUDC is considered a capital cost.
For years FERC has allowed it to be capitalized and included in
the rate base and ultimately charged.
4:15:12 PM
SENATOR WIELECHOWSKI followed up by asking if the tariff is
based on the present value of that money.
MR. HOBBS answered that is where the AFUDC comes into play. If
you spend $500 million in the first year, the rates are actually
based on the accumulated cost in year-10. So that $500 million
might be $700 million by the tenth year with the cost of money
applied to it. That is what goes into the rates.
He pointed out that the gas quality and treatment is another
complex issue. The largest gas treatment plant in the world will
have to be built on the North Slope to process this gas. Its
construction and logistical requirements over 1700 miles -
arctic and subarctic terrain, mountain ranges, and earthquake
zones - are not insurmountable problems, but they are a
challenge. The regulatory requirements and oversight are in at
least two countries and aboriginal peoples will be involved. No
other project has had to deal with this level of regulatory and
right-of-way complexity.
Slide 14 - What will be negotiated as part of this open season
process? Mr. Hobbs said the obvious answer is the mutually
agreeable precedent agreement. He explained because the
timeframe is short for building a pipeline in the Lower 48, the
pipeline sponsor will ask for a specific figure for building it.
Here, because of the timeframe and uncertainty associated with
the cost, rather than agreeing on a rate, parties will have to
agree on rate principles - like return on equity, capital
structure, and defined components of the cost of service that
will ultimately yield the rate once the project costs are
established.
4:18:40 PM
MR. HOBBS suggested that, because this pipeline is a non-
operating pipe they will probably try to adopt an existing
tariff (all the terms and conditions that establish what a
pipeline company has to do when they operate a pipeline -
hundreds of pages long). Typically sponsors adopt the existing
tariff and maybe modify it for the shippers. Hopefully that gets
negotiated out during the open season process. All of the major
producers on the North Slope want to own part of the pipeline
and he thinks that may be one of the terms that will be
negotiated between the parties. They may also want to
participate in the project management.
Slide 15 - What sort of conditions will be included in
negotiated precedent agreements? - Mr. Hobbs gave examples based
on his experience - maybe key commercial terms or tariff
provisions that haven't been worked out yet. Shippers may say if
adverse changes to their economics occur - like a change in gas
price or project costs exceed a certain amount - they want the
right to get out of the agreement - a term that is in most
precedent agreements.
4:22:47 PM
MR. HOBBS said shippers may condition their bids on project
milestones not being achieved, on reaching acceptable fiscal
terms with the state or on a minimum level of equity
participation in the project. Using certain board approvals is a
standard in any precedent agreement, but those are generally
limited to a certain time period. Finally, the termination
rights; it's very important to understand the basis for a
termination and who is exercising it and what the consequences
are. Who pays for the incurred costs up to that point if a
shipper pulls out or if the project dies?
4:24:04 PM
SENATOR FRENCH asked Mr. Hobbs if he has seen fiscal terms
negotiated in open season commitments.
MR. HOBBS answered that fiscal terms are generally not raised in
open season commitments, but because Alaska's resources are so
much more vast than, say, the State of Texas, a foreign country
that has a known huge resource would be a better comparison.
SENATOR FRENCH said the subsurface mineral rights always belong
to Alaska - period, but that is not entirely common, and he
asked if that plays a role in setting the fiscal terms in the
Lower 48.
MR. HOBBS answered that he has not seen it as an issue in the
Lower 48.
4:26:26 PM
SENATOR WIELECHOWSKI said one of the terms in AGIA said
companies that bid their gas in the initial open season get a
locked-in rate for 10 years and asked if a company makes a bid
in open season and conditions it on acceptable fiscal terms with
the state, would they qualify for that AGIA benefit.
MR. HOBBS said he did not want to speculate; it would be a legal
question.
4:27:30 PM
Slide 16 - what value will conditional open season commitments
provide to project? Mr. Hobbs answered that the open season
process has to be gone through to get the commitments that start
defining how they are going forward. The pipeline sponsors need
the technical information contained in those bids - volume,
term, maximum and minimum operating pressures - and under AGIA
they have to provide an option to go both Valdez and Alberta.
The shippers need to commit where that gas will go; it's very
important to establish the route and allow all comers to make
commitments so they know how to go forward with the project. He
said it will provide the commercial terms and conditions that
are needed for shipper commitments.
4:29:21 PM
MR. HOBBS said the open season will define the allocation of
risk sharing for moving the project forward and the termination
rights. Under any scenario, the project sponsor's understanding
of the commercial requirements will be substantially improved by
going through the open season process.
4:29:56 PM
Slide 17 - Timeline of what may be seen for the AGIA licensee's
proposed open season. Mr. Hobbs explained that with this
timeline, the FERC has about 60 days to act on the filing by
TransCanada. Once the FERC issues an order on the filing for the
open season, Mr. Hobbs said he plugged in 30 days for
TransCanada to actually put together and formally initiate the
open season - sometime around the end of April of this year.
AGIA requires a 90-day open season and at the end of that time,
hopefully draft precedent agreements will come in from people
participating in it. He estimated five months for negotiations
after the open season; however, he cautioned it could take a lot
longer.
4:32:04 PM
He said hopefully after the end of the year they would have
signed precedent agreements. At that point the front-end
engineering and design - a tremendous amount of work - has to
continue based on what was learned from the precedent agreements
a certificate filing will be put together and made to FERC
around the end of October 2012. If that is the case, he plugged
in about an 18-month period for FERC to act on it - maybe by
June 2014. He provided an additional four months for the parties
to review the filing, convert the precedent agreements into firm
transportation agreements, and actually make a project sanction
decision at the end of October.
4:33:18 PM
Slides 18 & 19 - Conclusions. Mr. Hobbs concluded that the
project has made significant progress, but it faces future risks
and uncertainties. Numerous issues have to be negotiated
throughout the development phase - all the way up to project
sanction. The successful completion of precedent agreements will
not insure that this project will go forward. That won't occur
until the project sanction date, which he estimates will be late
2014. The state may need to participate in negotiations with all
of the parties to complete precedent agreements, but it is very
likely that it will have to engage in negotiations to reach
project sanction. He thought the upcoming open season will
likely result in conditioned bids, but that will frame the
issues for what needs to be negotiated to get binding precedent
agreements to advance the project forward. Under any scenario,
he thought the project sponsors will be a lot better informed
and better equipped to move the project forward through the
certificate process regardless of the outcome of the open
season.
4:35:51 PM
SENATOR WIELECHOWSKI asked who decides what is acceptable if
there is a contingent bid, let's say, based on fiscal certainty
or tax structure.
MR. HOBBS answered that both the licensee and the state will
have to agree that fiscal certainty is provided on the condition
that an absolute commitment is made to the project.
4:37:07 PM
SENATOR FRENCH said because the state has granted fiscal
certainty by statute, he expected that would be confronted
during the opening of the bids.
MR. HOBBS agreed, but said he would suggest any negotiation or
request for fiscal certainty be spelled out in very specific
terms, and the administration would agree, and then obviously
submit it to the legislature for its approval.
SENATOR FRENCH asked when the negotiations stop.
4:38:43 PM
MR. HOBBS replied there is always an opportunity for parties to
negotiate. A lot depends on what is negotiated between the
shippers, the pipeline sponsors and the representatives of the
state that are participating in that negotiation. He thought the
state would lay that out in a form that would be subject to
legislative approval, and if that doesn't occur, it's back to
the drawing board.
4:39:33 PM
SENATOR FRENCH asked if there is any external deadline to
negotiate.
MR. HOBBS said it may be that the shippers will lay down a
timeline or they will want to terminate their commitments.
4:40:14 PM
SENATOR WIELECHOWSKI asked when the TransCanada package comes
out tomorrow, does the public have an opportunity to comment.
MR. HOBBS replied that is to be determined. TransCanada will
file with the FERC; the FERC will notice the filing and
stipulate how many days for parties have to comment. He
speculated that it wouldn't be more than 30 days because they
have a 60-day window in which to act. They also have the right
to extend the whole process.
4:41:52 PM
SENATOR WIELECHOWSKI thanked everyone for their comments and
adjourned the meeting at 4:41.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Open Season Public Presentation Final 1 28 10 (2).pdf |
SRES 1/28/2010 3:30:00 PM |
|
| Open Season talking points 012810 (3).pdf |
SRES 1/28/2010 3:30:00 PM |
|
| Alaska Open Season talking points 012810 (2).pdf |
SRES 1/28/2010 3:30:00 PM |