Legislature(2013 - 2014)BUTROVICH 205
02/03/2014 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Gasline Key Themes | |
| Presentation: Aklng Project Plan by Steve Butt, Senior Project Manager, Exxonmobil Corp. | |
| 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
February 3, 2014
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Fred Dyson, Vice Chair
Senator Peter Micciche
Senator Click Bishop
Senator Lesil McGuire
Senator Anna Fairclough
Senator Hollis French
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION: GASLINE KEY THEMES
- HEARD
PRESENTATION: AKLNG PROJECT PLAN BY STEVE BUTT, SENIOR PROJECT
MANAGER, EXXONMOBIL CORP.
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JANAK MAYER, Partner
Enalytica
Legislative Consultant on Gas Commercialization
POSITION STATEMENT: Talked about key gasline themes related to
the in the HOA and the MOU with TransCanada.
NIKOS TSAFOS, Partner
Enalytica
Legislative Consultant on Gas Commercialization
POSITION STATEMENT: Talked about key gasline themes in the HOA
and MOU with TransCanada.
STEVE BUTT, Senior Project Manager
ExxonMobil Corp.
POSITION STATEMENT: Presented an outline of the AKLNG project.
ACTION NARRATIVE
3:30:42 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators French, Micciche, Fairclough, and Chair
Giessel. Senator McGuire joined the committee shortly after.
^Presentation: Gasline Key Themes
Presentation: Gasline Key Themes
3:30:57 PM
CHAIR GIESSEL announced taking up the presentation on Gasline
Key Themes.
3:31:41 PM
SENATOR MCGUIRE joined the committee.
3:31:52 PM
JANAK MAYER, Partner, Enalytica, Consultant on Gas
Commercialization, introduced himself.
3:33:06 PM
NIKOS TSAFOS, Consultant, Enalytica, introduced himself.
MR. TSAFOS said they wanted to give them initial reaction to the
news that has come out; this is not meant to be the final word
on these topics.
He said they structured the presentation on two themes, but
first he wanted to comment on where they are in the process. He
can look at Alaska developments from the Outside perspective,
and the message he wanted to deliver was that a lot of different
things were happening in Alaska with gas and oil and with the
recent developments people are now noting that something is
actually happening.
3:35:43 PM
SENATOR BISHOP joined the committee.
MR. TSAFOS said he would talk about project choices and
commitments - what exactly is being bolted down right now - and
the Memorandum of Understanding (MOU) with TransCanada (the
midstream).
3:38:35 PM
SENATOR DYSON joined the committee.
MR. TSAFOS said last year they said a lot of natural gas market
fundamentals need to happen in parallel before an LNG project
could take off, and he wanted to put the current decisions in
the context of a project.
3:40:11 PM
He explained that his project has seven different components:
upstream (fiscal), midstream (partnership and basic agreements),
liquefaction (ownership structure), shipping, marketing,
financing, and permitting.
The pre-FEED (Front End Engineering and Design) phase will last
12-18 months; the FEED process would last slightly longer. The
final investment decision (FID) for construction comes 3-4 years
from now. He stated that the real money gets spent after FID,
because that's when everything has been sorted out. It's so much
money that frequently companies partner with other companies and
governments to have enough.
3:41:45 PM
Most of the estimated $45-65 billion for this project will not
be spent until the later part of this decade, and that the
decisions in front of them deal with the first parts of the
entire chain that amount to usually less than 10 percent of
CAPEX.
MR. TSAFOS said there are two layers of decision making: one is
you have some gas and then you'll have to figure out what to do
with it - take it in value or in kind; if you take it in kind,
you will have to market it yourself or get someone else to do
it. The state's intention seems to be going towards taking gas
in kind.
3:43:49 PM
MR. TSAFOS said in examining all the LNG projects around the
world they found state participation was all over the place in
terms of equity. On one extreme the federal government and the
State of Louisiana are purely a taxing authority and regulator;
they don't have any equity in the LNG projects. On the other
extreme, Algeria is 100 percent equity owner of the upstream,
the midstream, and the liquefaction; it even has some ships, as
well.
So, he thought a good conversation for Alaskans would be about
where they want to be in this world. And it seems that there is
clearly an intention on the equity side, but nothing this year
settles where the state will end up. It could start with equity
and then get rid of it; it could start with the intention of
being an active marketer and change its mind, or it could start
with the intention of being a passive marketer and still change
its mind.
3:45:45 PM
He advised to think about these deals as dynamic and over a long
period of time, say 40 years, and advised that as states develop
more experience they often opt to take a more active role. His
point was that where you start is not necessarily the same place
where you end up.
SENATOR FRENCH asked if there was any financial benefit one way
or the other to the state for marketing its gas or having
another agency do it.
MR. TSAFOS said he wanted them to think of equity as ownership
of an asset and the level of engagement as a separate thing. You
don't want to conflate the idea of equity and having to market
your own gas.
SENATOR FRENCH asked if there was a financial benefit to the
state one way over the other.
3:49:36 PM
MR. TSAFOS answered that it depends on what kind of deal you get
if someone else is marketing your gas, and he was not ready to
say which was better at this point.
3:50:44 PM
He had seen states participate in LNG projects through national
oil companies, and because the LNG business tends to be slightly
more complicated than the oil business in many ways, states tend
to start off as slightly more passive participants in projects,
but then take more active ownership as their expertise develops;
Alaska's Permanent Fund is an example of how investing models
change with experience. There is not a right or wrong way and
there are tradeoffs. He wanted to highlight that nothing so far
locks the state into any specific type of proposition.
MR. TSAFOS also stated that LNG projects can dynamically change.
He illustrated with the Queensland Curtis (QC) project in
Australia saying that it's hard to imagine it is actually the
same project as it started. Today it is much bigger, very
different ownership of resources, different ownership of
liquefaction, offtake completely different, external financing
from the Japan Bank of International Corporation as well as the
U.S. EX-IM Bank, the ownership of the reserves had changed, and
gas is being sourced from another LNG project. And this project
had not come alive yet! His point was that Alaska is on the left
of that FEED and that underscores how little is bolted down
right now. It's quite typical for new partners to come in and
new contracts to be signed even after FEED has started and even
after FID has been taken.
3:55:09 PM
SENATOR MICCICHE said he agreed with Mr. Tsafos' explanation of
the project, but it's important that the legislature understand
the cost of the optionality in the MOU.
MR. TSAFOS said in any LNG project you have to look at the fine
print, and the key thing in assessing this is not just to assess
it for the purposes of today, but to make sure that the project
can adapt over time.
3:57:05 PM
SENATOR BISHOP asked for an example of how the QC project had
changed in six years.
MR. TSAFOS explained that BG thought they had they had a little
bit less gas in the beginning and bought Queensland Curtis Gas
Company (QGC) along with a few other companies. So, they were
able to prove up and feel more comfortable about their resource,
and, therefore, felt more comfortable expanding.
He explained also that for many LNG projects one of the ways to
share risk is by having the same partners along the chain.
Chinese National Offshore Oil Corporation (CNOOC) was looking
globally for more gas and found this project; but they also
wanted to become an investor, because of returns on the upstream
and the liquefaction, and because it also provided a greater
sense of security of supply.
Asian oil and gas companies actually measure very carefully how
much LNG comes from projects that they are owners in and target
them for security of supply. Side deals (liquefaction and
upstream) frequently come together with the offtake agreement;
the same can be said for Tokyo gas.
MR. TSAFOS said what really changed beyond FID in the QC project
was the ownership structure on Train 1 from 90/10 to 50/50 and
then the project sold a little more gas to CNOOC; CNOOC also got
an option for a third train. He reasoned that two things were
probably going on: one is everyone wants to partner with Chinese
oil companies, because that's where the growth is, and because
BG had a number of capital commitments around the world and
needed to raise cash. The idea is in the beginning when the
project is a little bit riskier, sometimes you have to take more
of the risk yourself, but as you start constructing, people feel
more comfortable and that share can be sold down to new partners
that maybe didn't want to come in six months or a year ago. It's
mostly about de-risking the project and reallocating some of
that risk; it's also about connecting the sales and purchase
agreements with some burden-sharing on the cost structure. In
fact, when the CNOOC took that 50 percent, it included
reimbursements for some of the costs that BG had taken up until
a certain point. So, this was both strategic and financial; and
that type of deal where you see offtake together with equity is
fairly common. He would be surprised if that element didn't
occur at some point in Alaska.
He explained that a lot of times, these national company buyers
bring in additional benefits; for example, having a Japanese
equity owner usually opens up the project for state supported
financing. The Japan Bank of International Cooperation is
probably the largest third-party financier for LNG projects in
the world, and they generally tend to give you money if you have
a Japanese company in the mix.
4:02:34 PM
Switching to the MOU and midstream (slide 5), Mr. Tsafos said
there are a large number of ways to structure a pipeline, and
all sorts of ways to approach the midstream have been tried. It
seems for the most part, there are three possible options: a
midstream structured by the producers, the producers and the
State of Alaska (SOA), or you can have the producers, the SOA
and a third party. If one were to have the last structure, you
could think either about leveraging the AGIA process or about
terminating the AGIA process and going through with a new bid.
The path in the MOU leverages the AGIA process.
MR. TSAFOS said he would go through each option in a systematic
way and talk about the pros and cons. Before doing that he
wanted to list what is important to the state (in no particular
order of priority).
4:04:59 PM
1. Producer and SOA alignment to minimize disputes over where
value is allocated and has tariffs that reflect value
maximization across the entire project
2. A project that favors expansions enabling additional
investment throughout Alaska
3. Instate deliveries
4. Pipeline execution on time and at the lowest price possible
cost
5. Continuity and momentum that accelerates current investment
interest and leverages work to date
4:06:08 PM
MR. MAYER said he would analyze what each option might look like
as measured by the five key criteria.
First, he said a midstream component for this project held
solely by the producers might look like a series of problems
with less than optimal solutions. SOA involvement is key to the
question of alignment and the question of how it draws its value
from the project versus how the producers do it. Specifically,
from a producer's-only perspective, if this is one big
integrated project that ends up with LNG being delivered into
Asia, they are not sure where in the value chain value accrues.
But if you are a third-party shipper of gas who is not a
shareholder in the liquefaction chain - maybe the SOA trying to
get its own gas to market or trying to get gas to Alaskan
residents - you care a lot about what the pipeline tariff is,
because the higher the tariff the less you are able to meet
those key objectives. With only the producers involved in the
pipeline you get a much greater potential for disputes around
the question of value and where in the value chain value
accrues, what the tariff should be, et cetera. If the state is
involved, that alignment begins to be addressed right away.
Similarly, third party expansions would be easier if the
resources didn't all belong to the producers, because they would
be most interested in commercializing their own resources. It
also wouldn't be clear what the tariff would be for instate
deliveries, because of the question of where value accrues
across the value chain and whether it would be optimal or not.
4:12:17 PM
Finally, it seems that any option that doesn't in some way
involve TransCanada specifically as a partner, because a bunch
of work that has been done to date through the Alaska Gasline
Inducement Act (AGIA) process, would have significant
uncertainties about time, money, and litigation over terminating
the agreement.
4:13:02 PM
Alignment is much better with the three producers and the SOA
(slide 8). Then the state can ensure that the approach to the
whole project meets its objectives as well as the producers' and
gets rid of the fundamental questions of where the value accrues
across the value chain.
MR. MAYER explained that the third party expansion issue is more
of a question, because in principle the state can take a more
active role as a participant in the midstream and seek to have
its role be the vocal pro-expansion voice in this consortium.
The question then becomes one of state capacity and how much
experience the state has in being a pipeline company; because
ultimately to have a truly pro-expansion outlook to this project
you want an entity at the table that isn't just making money by
transporting molecules to market and selling them, but is making
money through the transportation process, itself, and actually
wants to do the business of transportation of molecules. It's
not clear that the state by itself has all the capabilities of
an independent pipeline company that a dedicated pipeline
company would bring.
MR. MAYER said the SOA can use its equity and total capacity to
carry gas to local markets for instate deliveries, and while
there are three producers with strong capabilities to execute on
the pipeline front, when it comes to future expansions, it might
be under such a model that it's solely the SOA that's carrying
either the future expansion by itself or trying to bring in new
partners. So, that raises the question of if the SOA, as the
sole independent and expansion oriented partner in such a
project, has the same capabilities as a third (pure midstream)
party might.
4:16:21 PM
Finally, he said the same questions exist around loss of data or
work done to date by TransCanada or of litigation that would
apply to all of the non-leveraged AGIA options.
The third option of producers, SOA and a third party
(TransCanada) has a lot of value on all of the key five points
Mr. Mayer said. The same value seen before on alignment because
of state involvement, but greater value when it comes to third
party expansion, because you have a company at the table with a
substantial share in this that is not making value by upstream
production or by selling molecules in end markets, but solely
making its money by the molecules that it transports through the
pipe, and its key to increasing profits is moving more molecules
through the pipe and finding more people with molecules to
provide. This is actually a key strength of bringing in a third
party.
Instate deliveries is a strength of the pure producers plus SOA
and the SOA plus a third party. A pure midstream company that
makes money by moving molecules through the pipe doesn't care
whether they are going to Asia or Fairbanks.
If you're the producer you really are concerned about how much
is spent on the project, because you're not making your money by
moving molecules through the pipe, you're making your money by
selling them at the end market. And the more you spend on the
project, the more expensive it is to move those molecules to
market. Having a midstream company that is strongly pro-
expansion and producers that really care about cost control is a
compelling combination.
4:20:14 PM
On continuity and momentum, Mr. Mayer said, choosing the
TransCanada option rather than another third party has the
benefit of being able to maintain and accelerate all of the work
that has been done to date as well as maintaining the general
sense of momentum people see around this project rather than
pushing back momentum because of needing to reopen a bidding
process, taking another two years and possibly stalling HOA
negotiations and other decisions while those things are being
resolved.
4:21:21 PM
There is uncertainty with this option, however, because one of
the overwhelming goals for the SOA is having the lowest possible
tariff on the pipeline. One can compare the terms, which they
have done with other Federal Energy Regulatory Commission (FERC)
regulated interstate pipelines in the U.S., but it would seem
that the capital structure proposed - the cost of equity and the
cost of debt, the weighted average cost of capital - are all
sort of in quite a comfortable range. Canada has a more
aggressive regulatory approach to these things and tends to have
a lower cost of capital and lower tariffs, but it's in the ball
park for the U.S.
However, he said that without an open bid process, you never
really know what the alternative is; it could be that there are
other highly capable midstream companies that could offer a
better deal; it's also quite possible that one could open up the
process to bidding and take a lot of time to do that and lose a
lot of momentum in the process and find that there isn't a
better offer or that the existing offer is no longer there and a
worse one is presented.
4:23:20 PM
SENATOR MICCICHE asked if prioritizing these five areas of
importance would have been helpful in making these decisions.
MR. MAYER answered that he would be hard pressed to demote one
over another; they are all core priorities for the SOA. He
thought that individual legislators needed to grapple with those
issues.
4:25:19 PM
The last option (slide 10) proposes that the producers, the SOA
and a third party is the best approach, but concludes rather
than leveraging what's been done for AGIA to launch a new
bidding process. It would be similar in its strengths on many of
the key aspects but could lead to a worse tariff and slow the
process down. The biggest difference in this scenario is
momentum and what work done to date can be kept and how much it
would cost the state in terms of litigation.
4:27:02 PM
He said the state needs to weigh some key questions in terms of
its interests in the MOU:
-What compensation the SOA would have to pay to get out of the
AGIA license?
-What intellectual property would AKLNG retain of work that has
been done to date?
-What would happen to the HOA process (momentum) if the
midstream were uncertain in various ways: either because of a
bid process or litigation?
-What are the odds that a bidding process would open up better
terms than are currently on the table - particularly when one
looks at when there has been an open offer on bids for not
completely dissimilar projects?
-Would a better tariff (through a competitive deal) offset the
whole question of absence of a dedicated pro-expansion party in
the midstream from the negotiating table as other key aspects of
the project are being nailed down. Would that be worth the
reduced momentum, litigation and all the rest?
4:29:10 PM
SENATOR FRENCH asked how much the SOA has to participate in
order to get alignment.
MR. TSAFOS answered if you consider equity as valuable for the
purpose of alignment only, there wasn't a clear answer. If
alignment is meant to say we're in this together, we're a
serious player, we're willing to see this through by putting
some more in, and willing to demonstrate our commitment to the
partners and the world, the buyers and the bankers; he still
didn't know the magic number, but he felt that 1 percent
wouldn't quite cut it. Think of alignment as adding value to the
creation, unlocking the project, and getting gas to local
markets, he said.
He said the state might get alignment with 20-25 percent equity
share today, but you might not have to risk it now, because you
can start off and as the project gains momentum it could be sold
down without risking either alignment or momentum of the
project. He really thought the equity needed to be thought of as
serving multiple purposes, not just alignment. One percent is
better than zero, because it brings you to the table and 51
percent is too much in the sense of being a majority owner in a
project. But some states do that, so there is nothing
unprecedented about it.
4:33:21 PM
MR. MAYER said part of the alignment question is the between how
companies generate value from this project and how the SOA
generates it. We're all in it together. The vision of an initial
structure of the state's share of gas at 20-25 percent and a
corresponding equity stake has a certain compelling logic in
terms of the degree of alignment that it creates that other
approaches would not create; and it goes beyond just the sort of
"we have some skin in the game" that a smaller stake might
entail.
4:36:20 PM
SENATOR FRENCH said he was starting to wonder about some of
their economic analysis of the downside, because the state was
giving up the power to tax this project in exchange for a piece
of it in order to make it happen, and this piece should pay the
same as the taxation, or more, because it's riskier. What could
go wrong? How big of a commitment could the state be asked to
make in the middle of the project?
MR. TSAFOS said there are two risks before the first cargo
leaves the port: delays and cost overruns. Their survey of most
of the LNG projects that have come on line over the last decade
revealed a range of 6-9 months early to 2-2.5 years late and
cost overruns that range from being on budget to being 20-40
percent over budget. Companies have recognized the uncertainty
of construction costs, which is why they quoted publicly a range
of $45-$65 billion for this project; $65 billion is the higher
end of an estimate rather than an overrun.
4:39:05 PM
After that there are risks of lower utilization, and looking at
projects historically they tend to operate at 85-90 percent of
their nameplate capacity. This one is 15-18 million tons due to
weather, so one of the risks could be at any given time it may
be at 85-90 percent and have years of being at 60-70 percent,
because something happened and the plant had to be shut down.
Other risks are less relevant for Alaska: he said domestic gas
diversion happens in a lot of places where powerful
constituencies ask for gas and it gets diverted from the export
market, but his sense was that Alaska would be hard pressed to
find that LNG demand any time soon.
MR. TSAFOS explained that market risk is another factor for
Alaska. In the past, market risk could manifest itself by the
inability to produce or an inability to get a lower price. But
in general, Mr. Tsafos said, LNG projects don't lose money. They
may be suboptimal investments, because once you put the
infrastructure in, the cash generated is generally much higher
than the operating costs, but it's hard to be cash negative at
any given time. You may decide that you didn't invest your
capital wisely, but for the most part, your exposure isn't until
the project comes on line. Even in projects that have
experienced severe cost overruns, the impact is really lower
return on investment rather than being cash negative.
4:41:43 PM
MS. TSAFOS said there are a number of commercial arrangements in
which the state could limit its exposure: one is using an S
curve. Imagine the price of gas being linked to the price of
oil: the S curve says well, the price of gas is linked to the
price of oil, but if you get above a certain point, you won't
keep increasing the price of gas in the same way. In order to do
that, the downside has some protection. So, you could think of
this as having a balanced portfolio with a little bit of bonds,
some equities, and maybe some emerging market equities. The same
can be done for the LNG project, too. The SOA can have 20-25
percent of 15-18 million tons; it doesn't take a lot of upside,
but it would protect on the downside by having at least some
revenue coming in. A second stream of gas has a little bit more
risk exposure and maybe 10-20 percent is fully market dependent.
If the market is great, we'll make a killing; if the market
tanks, that cost will be absorbed. For sure, nothing in front of
them today precludes the state from picking that investment
philosophy, which can be changed over time. BG in the Queensland
Curtis project, back in 2008, marketed almost all of its LNG in
the spot market and were getting great returns. Then they
realized that the market was changing, so they locked all this
gas down into short and medium term contracts. Nothing prevents
the state from being able to adapt to the circumstances, and
there are a number of contractual ways, especially if you are
willing to forgo some upside, to protect the downside. He said
that most LNG projects have state partners and states like some
kind of predictability.
MR. MAYER added that it's important to think about the reward
part of the equation, and where in the overall valuation chain
one maintains ownership of the gas is important to the rewards.
Under the HOA, the state has a lot of options: if it doesn't
come up with successful negotiations around gas in kind and
decides to take it in value at the wellhead, it could decide to
not want the exposure of being an LNG producer and marketing gas
to Asia and negotiate with the producers to buy the gas, or it
could ship it through the pipeline and make LNG out of it - but
not wanting to go through the expense and difficulty of finding
out what is involved in building an LNG marketing operation,
could contract out to different parties to sell our LNG.
Maybe over time what the state decides could change, Mr. Mayer
explained. The key thing to remember is that where you
participate in that value chain certainly shapes the risk that
you take, but it also dramatically shapes the rewards, too.
Equatorial LNG Guinea, the upstream resource holder, gets about
$.25 mmcf/gas; the LNG producer makes it for $2.85 and that gas
is sold into Japan for $14-18/mmbtu. So, there is enormous
variation in the value of gas (both on the risk and the reward),
and having 25 percent of a resource at the wellhead is very
different than having 25 percent of a resource landed in Japan.
4:47:49 PM
SENATOR MICCICHE said our biggest risk is in not understanding
the impacts of an agreement, and asked if the state had no
additional burden under the AGIA agreement what would change on
the producer/state alignment.
MR. MAYER answered that it becomes a question of how one trades
off the possibility (by no means a certainty) of a better tariff
through a competitive process versus the question of both
momentum and having a pure midstream company that makes its
money by moving gas through the pipeline at the table over the
6-18 months when the commercial agreements are being signed.
SENATOR MICCICHE said the state might still have a different
third party.
MR. MAYER said it would take some time for that third party to
come to the table, maybe two years. It would mean a delay of 6-
24 months in the process and other parts envisioned by the HOA
would take longer, or those parts are able to move in tandem but
they are moving only with the SOA without that third party at
the table.
4:50:15 PM
SENATOR BISHOP asked who has the best track record globally on
marketing gas.
MR. TSAFOS answered that he was uncertain, because most
companies can make a killing in any given year, so one must look
at their record over time. Having a good price for gas is an
indication of good marketing strategy, but a portfolio usually
has a range of pricing. No one company stands out; seven or
eight companies are extremely competent LNG marketers that can
get sustainably good value for their gas, but even they
sometimes sign bad deals, in retrospect, because at the time
they signed them the market conditions were such and then they
changed. He thought the state would have lots of options to
choose from and said that a good price is more important than
who signed it.
4:54:08 PM
SENATOR FAIRCLOUGH said legislators receive information from
global experts, but they have to agree as a group on what the
variables are inside the project and that she valued the
conversation about continuity and momentum. It seemed to her
that execution was another gate to go through. Do we agree that
these five ideas encapsulate all of the different opinions on
what is most important for Alaska in considering moving forward
with a huge investment that has potential risk and potential
upside?
CHAIR GIESSEL followed up on that theme saying the state did
have a bid process several years ago - for AGIA.
MR. TSAFOS said there were four parties: TransCanada was the
fifth, but at the end of the day TransCanada's application was
the only one that had a measure of completeness.
CHAIR GIESSEL asked him with his knowledge of who the other
companies were and supposing they were to raise their hands
again in interest, is there a best company in the world that
builds pipelines in Arctic conditions across mountain ranges and
comes in on time and in budget?
MR. TSAFOS said part of the answer is lack of comparable data
points - not a lot of people have built 800 mile pipelines
across similar territory. Shell built the 500-mile Sakhalin in
Russia; it stands out in their table of cost overruns. IHS
Energy puts out a list of the 50 largest publicly traded
companies in the world and does a segmentation of each aspect of
the oil and gas business. So, they looked at the midstream
infrastructure aspect where TransCanada was fourth. One company
was at the top at about $60 billion and three companies below at
the $30-40 billion market cap. So, TransCanada is definitely in
the top five.
4:59:21 PM
However, he pointed out that none of the companies in the top 15
have shown an interest in building a pipeline in Alaska. He
couldn't say why not, but generally they look at risk/reward and
likely completion, and this could look like a tough pipeline to
build. What would you get going to a bid process? He didn't
know, but if you look at the past, none of the other companies
had been associated with Alaska. He reiterated the questions
about how momentum and litigation would be reflected in the
tariff if the state would open the process to bidding.
5:03:28 PM
SENATOR MICCICHE said it is important to clarify that
TransCanada is an incredible company, but their experience on a
pipeline of this size and pressure is non-existent. Their
execution record is incredible, but the one question he had was
there are new entrants into this area of expertise (in the last
10 large scale projects) that if it weren't for AGIA, the state
might be looking at as competitors.
MR. TSAFOS said there are large pipelines associated with LNG,
but if you focus on compatibility of not just diameter but of
terrain and everything else, he couldn't think of an LNG project
that has an infrastructure under construction that is comparable
to what will happen in Alaska with the exception of maybe
Sakhalin in Russia. A lot of pipelines are being built right now
in Australia, but the climate there is fairly different. There
have been technical advancements, but for building big pipelines
in this terrain for an LNG project there is a pretty short list
of companies.
5:08:05 PM
CHAIR GIESSEL thanked them for the presentation.
5:08:17 PM
At ease from 5:08 to 5:19 p.m.
^Presentation: AKLNG Project Plan by Steve Butt, Senior Project
Manager, ExxonMobil Corp.
Presentation: AKLNG Project Plan by Steve Butt, Senior Project
Manager, ExxonMobil Corp.
5:19:49 PM
CHAIR GIESSEL called the Senate Resources Committee meeting back
to order at 5:19 p.m. and welcomed Steve Butt to the committee
to present the Alaska LNG project (AKLNG).
STEVE BUTT, Senior Project Manager, ExxonMobil Corp., said he
had his first introduction to the Alaskan gas business in 1984
when he worked briefly for SOHIO in Mukluk. Since then, he has
had about 30 years of project experience, primarily in the U.S.
He had also been the operations manager in Venezuela, Equatorial
Guinea where they built significant infrastructure, Angola,
Nigeria, Cameroon, West Africa, Qatar (production vice president
responsible for bringing four of the world's largest LNG trains
on line and general manager of the world's largest gas plant).
He came back to Alaska a couple of years ago and started working
with a "great group of people" representing BP, ConocoPhillips,
ExxonMobil and TransCanada in the AKLNG project with the goal of
figuring out the best way to commercialize the North Slope gas
resources through the use of the LNG process.
5:21:13 PM
He wanted to put forth one principal as background: through the
last couple of years working with the project team he used three
ideas to test what they were doing: alignment, risk reduction,
and cost reduction, what he called the "Arch of Success." This
is the most important framework in which to think about the
project. Success in this project comes from maximizing
alignment. This is a unique opportunity where all the principle
resource owners in Alaska, including the state, are trying to
come together to put this forward, a level that has never been
achieved before.
There are still a lot of risks: A regulatory framework that has
never been tested on a project this large, a market that has
never been tested on this project, and a high level of
uncertainty around costs and other issues. His job was to work
with the team and drive them down, to make sure they understand
what the uncertainties are and mitigate them. Working together
in aligned fashion to reduce risks is all about reducing costs
of supply, the guiding metric the companies use to decide if a
project can really survive.
He said gas is a commodity and buyers want a cheap commodity
that they can trust, because they are going to put their entire
economy at risk to the LNG that they buy. Their children and
their grandchildren are going to use that LNG over long term
contracts and they want to know that the project is going to
deliver LNG to their doorstep every two days or three days for
the next 35 years. That's a huge commitment, but it all comes
down to their confidence in the project: if have they reduced
the risks and built enough alignment that they can deliver at
low enough cost, because those markets go up and down.
He invited the committee to test him against those three
concepts: alignment, risk reduction and cost of supply.
5:23:26 PM
Overview of the Project Design:
MR. BUTT said they have an integrated design; they know where
the gas would be treated, how it would be transported, and how
it would be liquefied. The Nikiski industrial area is their lead
site; they were in Kenai last week and it is a great place to
work. Kenai has a long history of LNG manufacturing and they are
getting a good reception from the land owners, a very important
point, because to go to the DOE and get an export permit they
have to demonstrate that they have the land that they need to
build the plant. It is a critical uncertainty that they are
working on right now; and once that is resolved they will go to
the next one on permitting.
They have moved forward on their summer field season and were
able to get some information north of Livengood for permitting,
which is a big help.
MR. BUTT said they had confirmed their ability to integrate into
Prudhoe Bay, which differentiates this project from previous
projects that worked gas in Alaska. This is not a pipeline
project, so some of the FERC regulatory firewalls required in
the pipeline don't apply here. Phrases like "open season" are
really misnomers in this project.
Most importantly they have some great progress on the gas
treatment plant (GTP), sealifts, and logistics. A project this
big is all about managing those little tiny things that drive
the big costs. If you get them all right, then you can deliver
in a lost cost manner. In Qatar, for instance, all those trains
were delivered on or head of schedule and on or ahead of budget.
The companies involved in this project have a long history of
successfully developing LNG. When you look at LNG and who is
doing what, it is important to understand who is helping drive
the decisions, and if they are working in a manner that is going
to be successful.
5:25:22 PM
MR. BUTT said this project will have huge benefits to the state;
a $45-65 billion investment in Alaska, 9,000-15,000 jobs for
construction and another 1,000 for the long term. The oil and
gas industry creates a lot of other jobs beside the operating
jobs: those 1,000 folks need to eat, places to stay, they need
to buy lunch. Folks use multipliers on the order of 7-9 for the
oil and gas industry.
More importantly, the LNG is unique in that it generates revenue
for the state. As it's designed with the state as a participant,
the state has the opportunity to take its share of the revenue
commensurate with its share of the investment and that creates
alignment which over the decades will bring significant revenue
to the state. This gas also provides natural gas for Alaskans.
MR. BUTT said they have a really good start on their safety,
health, and environmental work. About 150 people in the field
worked almost 100,000 hours in the 2013 summer field season
incident free and were able to measure and quantify the systems;
they understand every ecosystem they touch so that in the event
the project is built they can assure there is no damage.
Megaprojects are often defined as any project over $1 billion
and now they are sometimes defined as a project over $10
billion. By any metric this is one of the largest megaprojects
ever and those will be some of their big challenges. In some
ways it's really five megaprojects, each one working with each
other. It so big, it creates its own weather, and if they are
not careful, it competes with itself. You don't want to have a
challenge with welders on part A working at odds with part B.
So, the work has to be planned carefully match the resources
needed along with the right craft skills.
They also have to look through some complex commercial
arrangements, so the right framework is in place to deliver the
gas, and mitigate socio-economic impacts. They opened an office
in Kenai trying to understand the community and be a good member
of it.
MR. BUTT said no one has ever permitted an 800-mile pipeline in
the post NEPA era in the U.S., or done an LNG plant this big, or
a GTP this big, and they must do all three. They must be done in
a coordinated manner under a single review process, which
ostensibly would be coordinated through FERC. FERC will help
them by coordinating all the other federal and state agencies
that will be involved in the pipeline: hazardous materials
safety administration, Coast Guard, seaways, the EPA and so on.
All of those permits are a challenge that creates risk; they pay
very close attention to them, so they can be managed.
5:29:13 PM
They want to finish their studies this year and move into pre-
FEED. They want enough clarity from the legislature to
understand the participants, the equity and the process. One of
their BP colleagues said they need help with the three P's:
participants, project equity, and process. As they provide
information to the legislature, their help is needed to
understand those P's so they can move into pre-FEED, a level of
project integration not seen in Alaska.
He showed a schematic of what the AKLNG project would look like:
starting on the North Slope, the oil and gas fields will be
integrated with Pt. Thomson, the "anchor tenants," because
that's where a majority of the gas is. There are other fields on
the North Slope with gas but the majority is there. He likened
it to a real estate mall that has the big anchor tenants, but
also has room for plenty of other folks. But you have to have
anchor tenants, so that when the mall is built, folks will come
to it.
From a high level overview, the pipeline runs across the Brooks
Range through discontinuous permafrost over the Alaska Range,
across the Cook Inlet into the eastern Cook Inlet area with the
lead plant site in Nikiski.
5:31:25 PM
Looking at each of the pieces, he said, Pt. Thomson is about 60
miles east of Prudhoe Bay; about 25 percent of the gas is there.
About $1.8 billion has been invested there to date and $4
billion will be invested to get the condensate on stream no
later than early 2016. That work is going really well; the ice
roads and air field are in, the camp is in place, all the
supports for the pipeline are in, and they are working on the
pipeline right now between Pt. Thomson and Badami.
The other big anchor tenant is Prudhoe Bay; it is THE anchor
tenant, because it is the largest oil field in North American
and has a tremendous amount of associated gas with it, but it
had to be managed very carefully, because oil and gas go
together. In thinking about this project's costs, the
integration of Prudhoe Bay as an oil field underpinning this
investment is very important. This project has tons of
challenges: it's got to have the gas treated and transported. No
other project has an 800-mile pipeline between the field and the
plant. The one in Qatar is 26 miles; the one in Equatorial
Guinea is 10 miles. Normally you can site the plant very close
to the source. Here, given the reality of the Arctic conditions
and the fact that you can't ship in the winter, you have to
build this pipeline. You also have to deal with 12 percent COat
2
Prudhoe Bay. Those challenges have to be offset by other
advantages and one of them is the existing infrastructure where
all the compression is already in place at Prudhoe Bay
supporting the oil field.
As long as the oil business stays healthy, you have that can be
leveraged to underpin the gas business, a really important
advantage. If one doesn't have a healthy oil business that moves
from the advantage column over to the disadvantage column,
because that health has to be recreated.
After the gas is gotten out of Prudhoe Bay and Pt. Thomson it is
brought into a facility that gets it ready to transport, and one
of the key things they have done is understand how the gas would
be readied to move to market. The market only wants the
hydrocarbon gas that they can use for utility, because that is
what heats homes and creates electricity and all the other
benefits of energy.
Prudhoe Bay gas has about 12 percent CO and Pt. Thomson has
2
about 4 percent. So, Pt. Thomson reservoir pressure is a little
bit higher, about 10,000 psi and Prudhoe Bay reservoir pressure
is a little bit lower at 3,200 psi. So, you have to look at
those two systems and then design a gas treatment plant (GTP)
that will work for both.
5:34:54 PM
He showed the GTP design: the 130 ft. high X 28 ft. towers would
treat the gas such that the impurities can be stripped out
through the "Amine process." The plate steel in the walls is
about 8-12 inches thick; the gas is moved up and the liquids go
down, so that the impurities are carried off. The importance of
that is that the only thing that goes in the pipeline is very
dry hydrocarbon gas; that means there is no water and very small
traces of hydrocarbon liquids, like propane and butane, but it's
inconsequential. This is because in Prudhoe Bay the gas has been
getting cycled for 30 years. That means the operator has done a
great job of taking the gas out of the ground, taking the
liquids out, putting it in TAPS, and then putting it back in the
ground.
MR. BUTT state that the Prudhoe Bay reservoir had been cycled
three times. In doing so, they have stripped most of the
hydrocarbon liquids normally associated with gas, so this gas
stream is almost all methane with a little bit of ethane -
another important point, because there is enough ethane in this
to make - a rich gas, a rich LNG stream at 1100 Btus that the
Asian market really likes.
So one of the things they were able to design early on with the
benefit of an integrated system is how to make an "LNG spec"
that people will want to buy. And they could put gas in that
pipeline without any impurities or contaminants that might
represent corrosive risks and move that gas down a pipeline.
He said this is designed as a 42-inch system to move about 3.3
billion cubic feet off the North Slope. They are looking hard at
the materials; the type of material is important, because it
defines the amount of steel in the line and the type of steel
needed, and that tells you who can make it and what it will
cost. So, one of the things they have to study in pre-FEED is
the material in that pipeline design. Those are the questions
and those are all uncertainties: little questions that drive
huge value, because the system is so big that any little change
you make is hundreds of millions of dollars of decisions. They
go from the really big questions and keep grinding them down,
and finally get to such a high level of certainty that investors
are ready to make a decision.
SENATOR FRENCH asked the maximum throughput for a 42 inch
pipeline.
MR. BUTT replied this 42 inch system has a designed pressure of
about 2100 psi - so the standard spec of ANC-600 can be used. It
has eight compression stations and is designed so it can be
expanded another 25-30 percent. Gas is compressible; you can put
as much gas as you want into any system as long you have
integrity in the wall to hold it and you have enough pressure to
put it there. It's a question of steel and pressure, and it
comes down to how much money it will cost to add compression.
He said he sensed that everyone wants more gas now, but you want
to have 20 years of plateaus, so that when you go to the market
to sell LNG you will be able to provide it for a long time.
Buyers want to know it's there for years and years, like the
ConocoPhillips plant in Kenai that successfully delivered LNG to
Japan for 40 years. That's what they want, because they put
their entire economy at risk to get it.
He explained that you don't want to move too much gas too fast,
so you balance that plateau. This system was balanced out about
20 years based on the resources known at Prudhoe Bay and Pt.
Thomson, but if more is brought in the line can be expanded, and
that capability is there on a unilateral basis.
5:39:19 PM
MR. BUTT said their design has five off-takes points for
Alaskans, a roughly 250-450 mmcf/day average for summer to
winter. Seasonal swing is important, because the system has to
be built to operate on the coldest day of the year. The other
364 days they just try to balance it: the volumes are lower and
they try to liquefy all the gas moving through the system that
isn't delivered to Alaskans. And because they have been able to
work together with an integrated view, they have been able to
balance that system: horsepower in the plant with idle capacity
in the summer so they always have the ability to move the gas
and liquefy it.
5:40:19 PM
He said this integration is unique. In previous projects,
because of the firewall, those decisions couldn't be made; only
what was in the pipe is what could be seen, because it was about
delivering from point A to point B. This integrated system sees
the resources, knows what's in the ground, and having an
integrated process model that understands the composition,
pressure, temperature of the gas at every point will help it be
built to be as efficient as possible. That was impossible in
previous efforts, because under FERC rules they had to be
firewalled off.
5:41:07 PM
Once you get it down to the eastern Cook Inlet, you build the
liquefaction facility; the whole reason being is that liquid gas
is very small, dense, and easy to move. Mr. Butt explained that
if you could build a pipeline across the ocean to the Asian
market and touch every single market, you might consider it,
because a pipeline is a very stable delivery source. But the
costs and challenges of building a pipeline across the ocean are
daunting and all the markets can't be touched. An LNG plant
allows flexibility to ship to any market that can buy it. All
that is done is take this really cold LNG at -260 F and warm it
up and it gets used as gas. It's no different than pipeline gas,
but it's delivered in a liquid form, because it's so much more
efficient. It would take 600 ships to deliver the same volume of
gas that you haven't liquefied; if you liquefy it you only need
one. So, the amount of shipping and infrastructure goes down by
a factor of 600, and that is why you put the investment into
building a plant. Theirs is designed for 5-MT trains of average
size and those provide 15-18 million tons of LNG per year.
Three storage tanks are needed to store it before shipping and a
jetty with two birthing facilities.
5:43:26 PM
The annual LNG output is the same as about 40 years of gas to
Alaskans, because there is so much resource; Alaskans use about
a tenth of the 3.5 bcf put into the system.
5:43:44 PM
SENATOR MICCICHE asked the storage capacity of the three tanks.
MR. BUTT answered they are three-160s.
He summarized that ExxonMobil's activities at Prudhoe Bay
continues to work on the integration; he said it is such an
important difference between this project and other ones.
Because of integration, they know how the CO reinjection would
2
be managed. At 500 mmcf/day, CO reinjection is really important;
2
it's 4 tcf over the life of the project. More CO has to be re-
2
injected than Alaskans use every day. So, you want to work with
the Prudhoe Bay operator to make sure all that CO gets used well
2
and the Prudhoe Bay operator has thought that through.
He summarized that they had looked at how the power grids would
be looped and integrated. At Pt. Thomson, you're always thinking
about how to manage the 10,000 psi; it's 10,000 pounds on every
square inch of that pipe. So, to handle that load the pipe in
that line (a recycle line on the high pressure side) has to be
four inches thick, and because it is so thick you have to have
special welding capabilities, which they are working on and the
design has to be well thought through.
His point was that by integrating everything can be understood.
It delivers benefits at the GTP because by understanding the
whole system, it has been redesigned. Both Denali and APP
thought they need four GTP trains based on the public data, and
that's because Prudhoe Bay has 12 percent CO. But understanding
2
the composition better and taking a sharper pencil to the design
of, for instance, those really big 130 ft. towers: inside them
is a bunch of packing beads that allows that gas and liquid to
mix. You want them to touch each other and when they do that,
the liquids strips out the impurities in the gas. So, the better
you can cause them to talk to each other, the better that can be
integrated, the better it can be co-mingled and the more
efficient they are. So, they were able to improve their packing
technology in those towers and went from four to three trains,
saving a lot of money. But more importantly, it means that the
system in the north with three trains for treating is now
balanced with the system in the south with three trains for
liquefaction. So, for operations and maintenance over the next
35 years, the system is a much better balance. Getting back to
the three important things, he said, this reduces costs, reduces
risks and helps them move the project forward.
5:47:39 PM
SENATOR BISHOP asked how many sealifts to bring this on.
MR. BUTT answered the APP design had four sealift seasons using
120 different modules up to 85 tons each. The GTP is 250,000
tons - or 140,000 F-150s or 200,000 Subaru's; it all has to be
moved. The original plan was to do it over four trains and three
sealifts; now they are thinking three trains and four sealifts.
What they did is split out the trains and pulled the utilities
forward, which means building the utilities in the first year
and then bringing up the trains one at a time. That allows
balancing the start up with the plants; so, again, the system
has been balanced.
5:49:19 PM
SENATOR MICCICHE said he didn't have any experience in dilution
of CO and asked if the cost of handling it would increase
2,
because it's going to be a higher proportion of gas through the
years.
MR. BUTT answered the way the Prudhoe Bay operator is going to
manage the higher vapor pressure liquids is by using the
miscible injection system that is used on TAPS. That system is
designed to handle up to 25 percent CO. So, you flush gas
2
through that system to reduce the CO to about 12 percent, and
2
then come backwards and re-inject that gas until you come up to
25 percent. As you go from east to west and see the CO rates go
2
up, you shut in the wells and just keep moving. The Prudhoe Bay
operator has done an outstanding job of thinking this through
and has come up with some great ideas. If given a couple more
years to work it, they would come up with stuff that's even
better, because they are a smart bunch.
The challenge is how to move through some of the more difficult
areas: Antigun Pass is tall and challenging, because it's
already got a pipeline; the Denali National Park area is
particularly challenging with Glitter Gulch that doesn't have a
lot of room for pipelines. There are three different ways of
moving the pipeline through Denali and all have questions of how
closely the terrain can be followed and where to use bridges;
the other challenge is how to cross the Cook Inlet and the Yukon
River. They are pretty sure the Yukon gets crossed with a bridge
and they are working on the Cook Inlet right now. It's a
question of where and how to cross the Susitna; one option is
just stay on the west side; the other options involve moving it
to the east, but they just don't know right now. That is the
work they are trying to finish over the next few weeks.
5:51:34 PM
It's really exciting to have a fully integrated team of people
from all the companies looking at this route; six primary
engineers are working on it and between them they have 200 years
of experience. He was sure they would come up with some good
ideas.
On the LNG plant, he said sea states, currents, ice and managing
larger LNG carriers in the Inlet because of the presence of ice
are being monitored. They have looked at ice monitoring systems
and think with some intrinsically safe design they can put in
caissons to manage any ice flow and protect the LNG carriers
when they are moored. They will also have a set of fairly large
tugs to support the LNG carriers when they move.
They have finished the environmental work and with that said,
they have some things left to do in the 2014 summer season. He
concluded that if they can keep alignment and integration, this
project can see and do things that its predecessors couldn't.
The challenge is to keep understanding the risks and reducing
them, so that cost of supply can be minimized. That is what
makes a project successful; you measure their impact on your
ability to deliver LNG at the lowest possible cost, because that
is what makes it competitive and it's also what secures your
margin. If you can't get all those hundreds of factors and
elements aligned to support the lowest possible cost of supply,
you need to keep working it; that's the challenge.
CHAIR GIESSEL asked what his role would be, theoretically,
should this project go forward in the AKLNG project.
MR. BUTT replied that right now he works as the project manager
under what is called the Concept Selection Agreement; it has a
lead party and he works for that on behalf of the whole project.
The next phase would be to move into a joint venture agreement
that defines a lead party, and that lead party would define a
person to fulfill the same role he has, which is a lead project
manager role. He will keep doing it if asked.
5:55:41 PM
Finding no further questions, Chair Giessel thanked him for the
presentation and adjourned the Senate Resources Committee
meeting 5:55 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES Project Choices, Commitments & Midstream Options - Tsafos, Mayer 20140203.pdf |
SRES 2/3/2014 3:30:00 PM |
|
| SRES AK LNG Steve Butt 20140203.pdf |
SRES 2/3/2014 3:30:00 PM |
|
| Gas Market Outlook & LNG Business Fundamentals LB&A 20140128.pdf |
SRES 2/3/2014 3:30:00 PM |