Legislature(2015 - 2016)BUTROVICH 205
02/18/2015 03:30 PM Senate RESOURCES
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| Aklng Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 18, 2015
3:29 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Bert Stedman
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Peter Micciche
OTHER LEGISLATORS PRESENT
Senator Charlie Huggins
COMMITTEE CALENDAR
AKLNG UPDATE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAVID VAN TUYL, Regional Manager
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Said he has been working with BP for the
last 30 years, the last 15 of which have been dedicated to
working to get Alaska's gas to market.
DARREN MEZNARICH, Integration Manager for the AKLNG Project
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Said he is very proud to be a part of this
significant project.
BILL MCMAHON, Senior Commercial Advisor
ExxonMobil Corporation
Anchorage, Alaska
POSITION STATEMENT: Said Alaska is an important part of
ExxonMobil's worldwide portfolio and they are encouraged by the
progress they have seen on the AKLNG Project as described by Mr.
Butt on January 3.
VINCENT LEE, Director
Major Project Development
TransCanada
POSITION STATEMENT: Said he serves as the commercial lead for
TransCanada in the AKLNG Project.
DAN FAUSKE, President
Alaska Gasline Development Corporation (AGDC)
POSITION STATEMENT: Said the AGDC is involved in both the
Alaska Stand Alone Project (ASAP) and the AKLNG Projects.
MARTY RUTHERFORD, Deputy Commissioner
Department of Natural Resources (DNR)
POSITION STATEMENT: Said she was also the administration's lead
on the AKLNG Project.
DONA KEPPERS, Deputy Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Said she was part of the transition team
from the prior year when the project was started under the
previous administration.
RANDY HOFFBECK, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Related that there had been some concern
with how the MAGP group is fitting in with the process.
ACTION NARRATIVE
3:29:54 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:29 p.m. Present at the call to
order were Senators Costello, Coghill, Stedman and Chair
Giessel.
^AKLNG Update
AKLNG Update
3:30:18 PM
CHAIR GIESSEL announced that today the committee would get the
second portion of the required quarterly updates on the AKLNG
Project. They heard earlier from Steve Butt about the project
itself, and today they would hear about gas production, the
commercial, fiscal and regulatory terms, as well as the external
affairs and governmental relations units.
3:30:43 PM
SENATOR WIELECHOWSKI joined the committee.
SENATOR STOLTZE joined the committee.
DAVID VAN TUYL, Regional Manager, BP Alaska, said he had been
working with BP for the last 30 years, the last 15 of which have
been dedicated to working on getting Alaska's gas to market. His
current role is on the joint fiscal team and the management
committee of the Alaska LNG (AKLNG) Project. Today, he said the
right parties are aligned in a way to collectively advance the
project. That was true last February and it is true today, but a
lot of work has yet to be done. However, they remain on track
for a 2016 decision to move the project into the next phase of
development, the front end engineering and design (FEED) stage.
He said the companies before the committee had all dedicated
their resources to meet that challenge, and so has the new
administration. They are all now actively engaged on a variety
of fronts to continue to progress the project and the associated
commercial work that is required to meet that goal. Any one of
them, even with their very best efforts working in isolation
can't make this project a success, but all of them working
together cooperatively can.
They have taken some very important and very successful steps
along the way. Last year this body passed SB 138 and entered
into an agreement to begin the current pre-FEED phase. They
filed for a Department of Energy (DOE) export license
application and initiated the Federal Energy Regulatory
Commission (FERC) pre-filing process. The project has momentum
and they look forward to continuing this journey together.
3:35:34 PM
DARREN MEZNARICH, Integration Manager for AKLNG, ConocoPhillips,
Anchorage, Alaska, said he very proud to be a part of this
significant project. ConocoPhillips sees two key steps before
going to the FEED decision; first is commercial and second is
fiscal. First, they are building a commercial foundation for the
project, in particular, completing two key agreements: the gas
supply and the governance agreements that must be in place
before the fiscal package is considered by the legislature. The
second step is finalization of the fiscal legislation package.
With the commercial and the fiscal foundations in place and the
completion of the technical pre-FEED work, they would expect to
have the information necessary to make a FEED decision.
MR. MEZNARICH said when he refers to a gas supply agreement, he
is just talking about matching a company's cash investment with
the share of gas or LNG they get out of the project.
ConocoPhillips, like everyone else, expects to be making a cash
investment based upon their gas percentage share to the project.
Once that investment is made, they need to make sure they can
deliver that share of gas to the project on a day-to-day basis,
and that they have the ability to get that same share of gas or
LNG from the project on a day-to-day basis. The concept is
relatively simple: their investment share equals their gas
throughput equals their product offtake.
Governance agreements can be called venture agreements; these
are where the business is set up like how costs are shared and
voting rights, who is in charge of what and how to pay the
bills. Today, the commercial agreements are not complete,
neither is the fiscal package, but they are working hard to meet
the schedule. Everyone wants to find a way to make this project
successful.
3:37:37 PM
BILL MCMAHON, Senior Commercial Advisor, ExxonMobil Corporation,
said Alaska is an important part of their worldwide portfolio
and they are encouraged by the progress they have seen on the
AKLNG Project as described by Mr. Butt on January 3. The signing
of the Heads of Agreement (HOA) and the passage of SB 138 were
key achievements last year. Since that time, the five parties
represented at the table and the Department of Natural Resources
(DNR) and Department of Revenue (DOR) have been actively engaged
in working on the things that need to be complete to be able to
set up the decision to go through the next gate, to enter FEED.
Their target for that decision is in 2016.
3:39:02 PM
VINCENT LEE, Director, Major Project Development, TransCanada,
said he serves as the commercial lead for TransCanada in the
AKLNG Project. In 2014, he said TransCanada signed an HOA with
the Alaska Gasline development Corporation (AGDC), the state and
the three producers. At the same time, TransCanada and the state
agreed on a memorandum of understanding (MOU) that established
the material terms for TransCanada to provide gas treatment and
transportation services to the state for the state's share of
the gas in the AKLNG Project.
Following the passage of SB 138, Mr. Lee said TransCanada
entered into a precedent agreement (PA) and equity option
agreement with the state. The PA formalized the material terms
that were agreed on in the MOU. The equity option agreement
provided the state an option to buy up to 40 percent of
TransCanada's ownership interest in the gas treatment plant
(GTP) and pipeline segments of the AKLNG Project. As a party to
the joint venture agreement for AKLNG pre-FEED, TransCanada has
to bring on highly skilled and experienced pipeline and project
management employees including the pipeline manager who leads
all technical activities for the pipeline segments of the
project.
TransCanada is negotiating with the state administration to
reach agreement on the long-term transportation services
agreement (TSA) that would replace the PA. They are working to
have the firm TSA finalized and ready to present to the
legislature for review and approval later this year. TransCanada
is also working diligently with the other participants in
advancing the commercial agreements to prepare for the FEED
decision.
3:41:19 PM
DAN FAUSKE, President, Alaska Gasline Development Corporation
(AGDC), said the AGDC is involved in both the Alaska Stand Alone
Project (ASAP) and the AKLNG Project and it is very reassuring
that seasoned professionals from all walks of life are
participating in these projects.
3:42:55 PM
MR. MCMAHON (ExxonMobil) said he would walk them through a
description of how the project is structured and the work that
is going on to get to the FEED decision.
He said the sponsors are representatives from the seven parties
(DNR, DOR, AGDC, TransCanada, ConocoPhillips, BP, and
ExxonMobil) that meet regularly to facilitate moving the AKLNG
Project forward. As with any mega-project, a stage gate process
is used to authorize sets of work; the project is now in pre-
FEED, the next stage is FEED. He said it's all about driving
alignment, so that when they get to that decision all sponsors
can give a thumbs-up to moving to the next stage.
This sponsor group is concerned with all aspects of the project.
The joint venture parties (AGDC, TransCanada, ConocoPhillips,
BP, and ExxonMobil) are doing the project pre-FEED work. This is
also the group that filed the FERC applications to get the
process going that will result in the environmental impact
statement (EIS) that will allow the construction permits to be
issued.
3:45:39 PM
MR. MCMAHON explained that last year an application needed to be
filed with the DOE to start the process of getting export
licenses and that a legal entity was needed to file it. So,
affiliates of ExxonMobil, BP and ConocoPhillips formed an LLC
and put that application in. This application would also cover
any potential state royalty in kind (RIK) or production tax as
gas (TAG), so a "future parties" box was used to allow for the
state to have a representative join the LLC so all the gas could
be properly represented.
CHAIR GIESSEL asked if future parties potentially could be the
AGDC or another private company.
MR. MCMAHON answered that is the administration's call, but it
would be someone from the state.
MR. FAUSKE added that AGDC had internal discussions with the
working group and preliminary discussions with DOR and DNR and
will come to a resolution on that issue soon.
3:48:06 PM
MR. MCMAHON said that next, each sponsor group would talk about
what they bring to the project. The first group was the state
administration with the DNR administering the state's royalty
and pipeline rights-of-way and the DOR administering the
regulation and collection of taxes. Depending on the state's
election to take royalty in kind and a subsequent election by
ExxonMobil, BP and ConocoPhillips for the state to take its
production tax as gas (TAG), the state could receive about 25
percent of the resulting gas production.
The DNR and DOR would also represent the state's interest as a
resource owner, as a potential shipper, and as the sovereign
including fiscal issues and security of gas supply. He explained
that if the state takes RIK and TAG it will be keenly interested
in how gas flows from Prudhoe Bay and Pt. Thomson into the
project. The state has also made it clear that it is interested
in facilitating expansion of the AKLNG Project in the future to
ensure third-party access to the facility.
CHAIR GIESSEL remarked that "the election by ExxonMobil, BP, and
ConocoPhillips for the state to take TAG" was interesting
wording.
MR. VAN TUYL (BP) responded that the disposition of the state's
royalty gas and production tax was articulated in SB 138.
Clearly, the state has to decide whether or not it takes its
royalty in value or in kind. If it makes an RIK election, then
each taxpayer would have the right to make an election to pay
that obligation of production tax in money or as gas. So,
subject to the state making an RIK decision, each one of the
producers will have an election to pay their liability of
production tax as gas. That would result in the 25 percent of
total production accruing to the state.
3:51:33 PM
MR. MCMAHON said AGDC and TransCanada represent the state's
infrastructure interest in the project in the pre-FEED process.
AGDC represents the state's ownership interest in the LNG plant
and TransCanada represents the state's ownership interest in the
pipeline and GTP.
He said ConocoPhillips, BP, and ExxonMobil hold rights to
produce natural gas from the Prudhoe Bay and Pt. Thomson units.
As owners of those units, they are working now to commercialize
those resources. This includes ownership in the new AKLNG
Project facilities.
3:52:40 PM
CHAIR GIESSEL asked for a breakdown of ownership in the two
units.
MR. MCMAHON answered that ExxonMobil has about 62 percent
ownership of Pt. Thomson, BP about 30 percent, ConocoPhillips 5
percent, and a group of minor owners that make up 1 or 2
percent.
MR. VAN TUYL said that BP operates the Prudhoe Bay field and
owns about 26 percent, another 36 percent-ish is owned by
ExxonMobil, ConocoPhillips has another 36 percent, and under 2
percent is owned by Chevron.
MR. MCMAHON said the Project Team is made up of an integrated
group of experienced personnel from ExxonMobil, who is the lead,
TransCanada, BP and ConocoPhillips. They are currently in pre-
FEED and advancing the engineering for the AKLNG Project
facilities. Plans are being drafted on how to move materials and
personnel onsite to construct the three main facilities. The
overall costs and schedules are being refined so that they can
be put into the economic analyses of the individual parties for
the FEED decision. The Project Team is doing the important
technical work that is going to underpin the environmental
permitting applications that will allow the project to be built.
He said a cooperation agreement is in place with AGDC, so that
field data they collect that may be of interest to ASAP can be
shared and vice versa - under the principal of paying for data
just once. The Project Team is interested in legislation called
the Park Right-of-Way Act that would help the project secure
pipeline right-of-way through the various parks the pipeline
will traverse.
MR. MCMAHON said the heart of the project is the LNG plant,
currently planned for the Nikiski area. It will include LNG
storage tanks as well as a jetty for LNG loading onto the ships.
The 800-mile pipeline goes from the LNG plant to the North Slope
and connects to a gas treatment plant (GTP) that conditions the
gas to the right specifications so it can be run through the LNG
plant. Two transmission lines connect the GTP to both Pt.
Thomson and Prudhoe Bay. The Pt. Thomson transmission line will
be about 60 miles and given the location of the GTP, the Prudhoe
Bay unit transmission line will be measured in feet.
He said important work was being done by the owners of Pt.
Thomson and Prudhoe Bay to get those fields ready to deliver gas
into the AKLNG Project.
3:56:21 PM
CHAIR GIESSEL asked if any of the construction costs are
eligible for reduction of their oil tax liabilities.
MR. MCMAHON answered that these costs, as downstream
expenditures, do not qualify for credit or deduction under the
production tax.
SENATOR STEDMAN recalled that they didn't qualify for capital
credits anyway under ACES.
MR. MACMAHON said that was correct.
SENATOR WIELECHOWSKI asked if any portions of the project would
be eligible for tax credits.
MR. MCMAHON answered that all the expenditures in the red dotted
circle are all downstream investments and would not qualify
under SB 21.
3:59:16 PM
SENATOR STEDMAN asked how the oil and gas will be kept separate
for the tax structure. What complexities need to be addressed
and how does Kuparuk/Prudhoe Bay interact with Pt. Thomson with
Prudhoe Bay being dominated historically by oil and Pt. Thomson
being classified as a gas field. How would Pt. Thomson gas being
re-injected into Prudhoe Bay be accounted for?
MR. MCMAHON said those answers are being worked on. The sponsor
group has a broad purview on this project and is certainly
interested in the gas production into the project, the
commercial agreements that will underpin the project as it moves
forward, the fiscal and regulatory work, and building support
for the project.
4:01:45 PM
He said preparations are under way right now to commercially
produce natural gas from both Pt. Thomson and Prudhoe Bay.
Prudhoe Bay will be transitioning from oil production to the
simultaneous sale of oil and gas, and new facilities will need
to be installed to do that. In the context of this mega-project,
those may not seem significant in size, but they are essential
to allow gas sales from Prudhoe Bay.
The Pt. Thomson Unit development is on track with first
production of oil and condensate happening in May 2016
consistent with the Pt. Thomson settlement agreement. This
initial development is focusing on the producing of gas,
stripping out of liquids and reinjection of that gas back into
the reservoir.
To accommodate deliveries of natural gas into the new LNG
project, the Pt. Thomson owners will have to undertake
significant natural gas development; wells will have to be
drilled, gas production and dehydration facilities will have to
be installed and the transmission line will have to be built.
4:03:45 PM
MR. VAN TUYL, BP, commented that a number of upstream
modifications are required to accommodate gas sales at Prudhoe
Bay. For instance, they plan to install two gas offtake points
at the central gas facility, either one of which will be able to
accommodate the whole flow of gas anticipated from Prudhoe Bay
to the project. Given the importance of having reliable
delivery, they thought redundancy was essential.
The project will also require installation of a metering run to
measure the gas before it's delivered to the transmission line.
The flow needs to be stable for an accurate meter reading, so a
number of feet will probably be needed. They also plan to
upgrade each of the gathering centers and flow stations and the
gas dehydration capabilities to ensure the on-spec delivery of
gas to the project. These would be done at gathering centers
upstream of either the central compression plant.
Finally, the anticipation is that those two transmission lines,
one taking Prudhoe Bay gas and one taking Pt. Thomson gas, go
into the GTP where impurities are removed, so a pure gas stream
can be delivered to the pipeline and sold to markets. The CO
2
(the acid gas that comes off the GTP) will need to be re-
injected - now at Prudhoe Bay (but that gas would include Pt.
Thomson gas, which will require an area injection order to be
reviewed and authorized by the Alaska Oil and Gas Conservation
Commission (AOGCC). Commercial terms will be required to enable
that to happen. He said this is an example of one of the
complexities that still remains to be worked - essential to the
overall operation of the project, but complicated because of the
commercial implication, but also doable in the timeframe they
are looking at.
CHAIR GIESSEL said he was describing complex technology
requiring some in-depth knowledge on the part of the AOGCC
commissioners and asked if those commissioners will need a
substantial background in petroleum engineering, geology, etc.
MR. VAN TUYL answered yes and are prepared to initiate a series
of in-depth workshops next month with the AOGCC to provide them
with the information needed to be able to make those
determinations.
MR. MCMAHON, ExxonMobil, said the current design base at Pt.
Thomson is to put in gas facilities and produce that gas into
the AKLNG Project. There are no current plans to produce that
gas and inject it over at Prudhoe Bay.
Regarding the lease expenditure questions and their impact on
the calculation of production tax, as was the case in the ACES
regime, the activities at Prudhoe Bay and Pt. Thomson are lease
expenditures and they would expect them to be deducted as part
of the More Alaska Production Act (MAPA) calculation. Although,
it may be worth asking the administration about their
interpretation.
SENATOR WIELECHOWSKI asked if they have confidence in the
competence of the AOGCC commissioners.
MR. VAN TUYL answered yes; they are a very competent body.
4:10:14 PM
SENATOR STEDMAN said they should consider what throwing all
those gas expenditures against the oil will do to the severance
tax; it will be zero or close to it, he thought. He wants a
positive severance on oil that is stable.
MR. MEZNARICH, ConocoPhillips, clarified that the tax as gas and
royalty in kind is taxation for the project as it's envision in
the HOA right now (slide 8).
MR. MCMAHON went to slide 11 and started with activities
authorized under SB 138. The DNR has been given the authority to
modify leases in two different areas. One is to address the
royalty in kind (RIK)/royalty in value (RIV) switching rights
that are under the current lease agreements. It's envisioned
that the commissioner can consider modifying those rights to be
consistent with the way LNG is marketed under long term
contracts.
Also, SB 138 provided for conversion of certain leases to a
fixed percentage. For example, Pt. Thomson has some sliding
scale royalty (SSR) leases, so it authorizes the commissioner to
work with the Pt. Thomson owners and to see if the parties can
agree on a fixed percentage that could be used to replace the
sliding scale royalty, another way to remove some uncertainty in
the project and potentially increase the state's RIK share and,
therefore, the state's ownership in the project. Ownership in
the project should match the expected gas production into the
project.
4:14:06 PM
Pt. Thomson also has net profit share leases that go through a
very complex calculation to figure out what additional royalty
will be paid based on the "profits" coming from the lease. So,
SB 138 also provides the opportunity to potentially negotiate a
fixed percentage for that portion. So, commercial work is being
teed up in that area.
MR. MCMAHON said the DNR commissioner has a decision to make
around state RIK (versus RIV). Under the HOA, the state is
envisioned as owning a portion of this project and a decision
around RIK would be consistent with triggering an election by
the taxpayers for TAG in an amount that would flow into the
state's share of the project, another piece of important
commercial work that needs to be done. So, ExxonMobil, BP, and
ConocoPhillips are in dialogue with DNR on what they can do to
facilitate that decision.
SENATOR STEDMAN asked him to explain the difference between RIK
and RIV and why it's such a big deal. How does it impact the
sovereign's net income potential?
MR. MCMAHON explained they believe that RIK and state ownership
of the project are a key enabler for it, because it avoids
traditional disputes on paying royalty, over values received for
the hydrocarbon when sold into the market, and over values
deducted from that for transportation and shipping. When the HOA
was negotiated and signed, it was viewed by the parties as being
a key enabler. The financial impact to the state for RIK and RIV
are equivalent, because they are based on the same thing:
selling LNG and deducting costs to ship it, create it, transport
it and clean it.
MR. MEZNARICH added that the HOA envisions state participation
and that alignment is really key to a successful project. SB 138
built upon that HOA roadmap.
MR. VAN TUYL, BP, said that the state taking RIK and, therefore,
direct participation in the project encourages all parties,
because they all commercially look similar. It creates an
alignment that doesn't exist today, which is very important and
will tend to help avoid potential future disputes. State
participation provides a strong voice to potential buyers of LNG
about host government support for the project, which is usually
one of the things a buyer will ask. Being able to say the state
is a direct participant in the project is an "amazing" thing to
be able to say.
4:19:33 PM
SENATOR STEDMAN asked him to explain the net back difference
between oil and gas and why this project isn't structured as an
oil line instead of a gasline.
MR. VAN TUYL responded that there are a number of differences.
One key difference with this gas project is the manner in which
it is regulated, which is under FERC Section 3 of the Natural
Gas Act. It provides commercial flexibility as to how the actual
costs of the project are allocated to different segments. LNG
projects are typically structured on long term contractual
arrangements between sellers and buyers; it is not typically
sold on a spot market and oil has a deep liquid spot market.
This creates a difference in the manner of not only how those
commodities are sold, but how those two different sorts of
projects would be regulated - contract for gas versus common
carriage for oil side where anyone can bring additional oil onto
the system. He said there are many other differences, but those
are some of the major ones.
SENATOR WIELECHOWSKI asked if capital spending for gas-only
infrastructure such as gas feeder lines and gas wells are
deductible from the oil production tax.
MR. MCMAHON answered if the expenditures are qualified lease
expenditures they are deductible.
SENATOR WIELECHOWSKI asked if any gas related expenditures
related to Pt. Thomson are being deducted now.
MR. MCMAHON answered the Pt. Thomson lease expenditures that do
qualify are deducted.
MR. VAN TUYL had a similar response for Prudhoe Bay: qualified
lease expenditures are deductible, but he wasn't aware of any
gas project costs at Prudhoe Bay being incurred today.
SENATOR STEDMAN remarked that it is difficult to not be able to
separate Pt. Thomson from Prudhoe Bay and they used to be able
to until three years ago when the ownership changed. "We haven't
had that information delivered to the legislative side, so
frankly, we're clueless on that subject other than the aggregate
number. It could all be in Pt. Thomson or all be in Prudhoe Bay.
There is no way we can separate the two," he said.
4:25:44 PM
CHAIR GIESSEL asked if the RIK decision by the DNR commissioner
could be delayed until next year for the negotiations to
continue to the FEED decision.
MR. MCMAHON replied that decision is critical to the FEED
decision in 2016. SB 138 also requires there to be separate
commercial discussions between the State of Alaska and
ExxonMobil, BP, and ConocoPhillips regarding offers to purchase
the state's share of gas and LNG before the lease modification
applications can be approved. It is a key component of SB 138
and is driving discussions as they speak.
Other Commercial agreements need to be sufficiently complete to
underpin a FEED decision by 2016; for instance, the governance
agreement (for FEED and beyond) that will control how the
venture acts on the long term. There will also be agreements on
how gas is taken off the pipeline and how LNG is lifted from the
tanks and onto the ships. There will be agreements around in-
state gas and expansion.
Finally, Mr. McMahon said, a long term firm transportation
service agreement (FTSA) needs to be completed between
TransCanada and the state.
CHAIR GIESSEL asked if there is a time certain on that
agreement.
MR. LEE replied the current Precedent Agreement has a date of
December 31, 2015 for the state and TransCanada to enter into an
FTSA.
CHAIR GIESSEL asked if there is wiggle room.
MR. LEE replied that they are currently working with the state
administration to finalize the FTSA and that deadline will be
met.
4:32:25 PM
MR. MCMAHON said given the unprecedented scale of this project
and the need to compete in global energy markets, a competitive
predictable and durable fiscal environment is required.
Establishing these fiscal terms is a key enabler for the LNG
project and it is also important for the LNG buyers, the
potential lenders and investors. He said good progress had been
made during 2014 with the HOA and SB 138. Along with the
election of RIK and setting up state participation, all the work
they are doing in fiscals is important to enabling the project.
MR. MCMAHON said they are also here to work with the
administration and legislature on ideas related to property tax
payments during construction and are keen to see the work
products coming out of the Municipal Advisory Gas Project Review
Board. Legislative review and approval will be necessary to any
changes to the property tax system that might support the FEED
decision.
SENATOR STEDMAN asked if Pt. Thomson is an oil or gas field from
AOGCC's current regulatory viewpoint and when do those
discussions take place.
MR. MCMAHON replied that they are in active discussions with the
AOGCC. With the initial production system coming on line early
next year, they will need field rules to produce condensate and
oil. At the same time, they are having discussions about having
gas offtake authorizations to support the AKLNG Project.
SENATOR WIELECHOWSKI said the state is paying out $100 million
more in tax credits than it is receiving in production tax
revenue and that is expected to go to $400 million or more next
year; there is a $3.5 billion deficit this year and billions of
dollars in deficit for years to come and asked if the
legislature should be expecting them to request more tax cuts
for oil and gas.
MR. VAN TUYL answered that the fiscal discussions they are
having now with the administration are focused on identifying
the terms necessary to make the AKLNG Project a success. The
current environment will look very different in 10 years' time
when first gas is seen. They believe the modifications made in
SB 21 are doing the things they need to do; increased activity
and production is being seen. They don't control oil price; the
problem they are facing with revenue is a common one. They also
receive 100 percent of their revenues from oil and gas
production; the problem is with the oil price and not the tax
regime.
MR. MEZNARICH seconded Mr. Van Tuyl's comments and said he
believed that the HOA lays out a good road map for the project;
SB 21 and SB 138 are the right steps to enable the project.
SENATOR WIELECHOWSKI he said he took that as a "no," they aren't
requesting any tax concessions.
MR. MEZNARICH replied that they have no plans to request oil tax
reductions.
CHAIR GIESSEL asked what is in the term sheets that they will be
negotiating before 2016.
4:39:36 PM
MR. MCMAHON replied that term sheets are a tool that commercial
negotiators use to walk through a complicated agreement. They
are used to exchange ideas, to document where they have
agreement and to resolve open issues. Everything on the
commercial and fiscal page lends itself to the use of term
sheets. The essence of a deal are in these agreed upon terms and
then the actual language can be drafted with confidence.
MR. MCMAHON said they are often asked what is meant by
predictable and durable terms and balance. Predictable means the
state royalty and taxes are calculated in a way that is
consistent and as unambiguous as possible. Durable means the
terms would last for a time commensurate with the risk being
taken. Balanced is the idea that parties' revenue shares are
clearly defined in a way that improves the probability that a
commercially viable project will be achieved.
He said fundamentally, the AKLNG Project is world-scale, so all
the investors, including the SOA, need to understand the
investment structure and the commercial terms before proceeding.
These terms need to recognize the risk and balance of the needs
of the state, ExxonMobil, BP, and ConocoPhillips.
4:42:14 PM
The ongoing regulatory work falls into two categories: DOE
export permits and FERC activities. The applications for the
DOE export permits were filed and the export permit for free
trade agreement (FTA) countries has been received. Deliberations
are continuing for a permit for export to non-FTA countries.
4:43:05 PM
SENATOR STEDMAN asked him to expand on which countries are FTA
and if the country has to be specified on the permit.
MR. VAN TUYL explained that there are 20 FTA countries. The
Pacific Rim includes Korea and Singapore and a number of South
American and Middle Eastern countries. It does not include
Japan, the Philippines, China and Malaysia. The non-FTA
countries are country-specific. The U.S. government is in active
discussions with a number of countries to see if that status can
change.
SENATOR STEDMAN asked how long that will take and if it's a
potential roadblock if Japan or China aren't allowed to trade.
MR. MEZNARICH replied that may happen towards the end year,
which would be consistent with when the Kenai LNG Project got
its export authorizations.
MR. MCMAHON said the other key regulatory activity is the
project's interactions with the Federal Energy Regulatory
Commission (FERC). They are currently in the National
Environmental Regulatory Act (NEPA) pre-file process, which sets
the foundation for the Environmental Impact Statement (EIS) that
will allow the FERC to issue permissions to start construction
of the project. He explained that the pre-file process allows
interaction on a preliminary basis with the regulator, so a
higher quality formal application can be built.
He said a key part of that application is the 12 resource
reports and the first draft had been filed with FERC this month;
it is over 9,000 pages. The FERC and their contractor will be
following up with talks with different communities and different
stakeholders to get their input on understanding the impacts of
the project. That information will be used in filing another
draft report. Then they would be able to file a very good final
submission that has good stakeholder engagement, a key measure
of the quality of an EIS.
4:48:21 PM
External affairs and government relations work is about
facilitating public dialogue about the AKLNG Project. They will
reach out to federal, state, municipal, and tribal governments
including agencies and legislative bodies, because a project of
this magnitude and complexity cannot succeed without broad
support. That is one of the things looked for in making the FEED
decision.
4:49:15 PM
He said pre-FEED project deliverables will come out of the
project team and include development plans at Prudhoe Bay and
Pt. Thomson, AOGCC gas offtakes, the key agreements necessary
for the commercial underpinning and the fiscal work around
property tax, RIK, and predictable and durable terms, the DOE
export license, progress on the NEPA process with FERC and,
finally, the broad support.
He closed saying the people at this table and the administration
are all targeting a FEED decision in the second quarter (2Q)
2016 and these initiatives have been resourced accordingly.
Consistent with SB 138, they are planning for a 90-day public
review period prior to formal legislative review.
MR. MCMAHON said given the magnitude of the FEED decision for
each party, representing more than $1 billion of commitment,
which is bigger than some projects are, it is essential to take
the time necessary to satisfactorily complete all the
deliverables.
CHAIR GIESSEL asked what AGDC's role would be in the project.
MR. FAUSKE answered that AGDC would represent the state's equity
share in monitoring the project and there could be marketing.
AGDC also has the role, under SB 138, of offtake valves and
possibly intake valves.
4:54:00 PM
SENATOR HUGGINS was present in the audience.
SENATOR WIELECHOWSKI asked if it is reasonable to expect to have
a special session in October. If the parties aren't ready, is it
okay to push it off?
MR. MCMAHON answered that the deliverables are being driven
forward as fast as possible, but he wanted to temper that with
the recognition of needing a quality product to make good
decisions.
MR. VAN TUYL responded that not all elements are within their
direct control. One can't force things to happen, and quality
deliverables are needed.
4:56:57 PM
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources (DNR), said she was also the administration's lead on
the AKLNG Project. She said she began back at the DNR on
December 1 and by December 2 the gasline team began briefing her
on what then was non-confidential information. That began an
intense effort that included, once Commissioner Hoffbeck and
Commissioner Meyers and the Attorney General were available, to
begin to brief them on the non-confidential aspects.
MS. RUTHERFORD said that she signed the seven-party
confidentiality agreement and began to receive very in-depth
confidential briefings. She was impressed with not only the
structure made available to the state through SB 138 and the
HOA, but the quality of the people involved in the leadership
team. That technical team has been retained in the form of five
individuals that work directly within the DNR, some as employees
and some as contractors: Steve Right, David Degruyter, Steve
Swaffield, Audi Setters and Black & Veatch. The Department of
Law (DOL) has maintained its contract with Greenburg Traurig,
the Department of Revenue has maintained its contract with
Gaffney Kline, and the various agencies of DOL, DOR and DNR
continue to commit significant resources from within the
agencies.
She said the new administration also continues to keep the same
principals of the work put into place by the previous
administration and those are to continue to prioritize and
protect the state's interest, to identify, assess and address
the full spectrum of opportunities and benefits, risks and
costs, associated with this project through commercial
arrangements that protect the state's interests. Additionally,
all the parties are continuing to progress this project under
the framework of SB 138 and the HOA and are moving forward on
all the commercial agreements that will allow them to make the
significant FEED decision in the early second quarter of 2016.
5:01:32 PM
The DOR, working with Lazard, is looking at its financing
options that will be made available to the legislature. Finally,
while many are on a steep learning curve coming back into this
project discussion, the team members continue to have regular
meetings and continue to progress the technical discussions and
elements of the commercial agreement so that everybody is
working towards alignment.
Their next steps are many of the commercial agreements: gas
supply and balancing the offtake, expansion and access, access
to domestic gas, LNG disposition marketing, the RIK decision and
the lease modifications associated with net profit share and
sliding scale leases, the associated lease provision with
switching and the financing.
5:02:29 PM
Additionally, MS. Rutherford said they are having to deal with
several organizational issues that include the ultimate
operating model for the project, the governance aspects of that
model, and what a joint venture (JV) might look like as they
progress into FEED. They are looking very significantly at the
mechanisms that might be available to the state for providing
some durability to the various elements of the fiscal regime,
some of which were identified in SB 138, specifically, the 13
percent production tax as gas, and what the actual royalty in
kind should be if the state chooses to take its royalty in kind.
It will not be a flat 12.5 percent, because of deviations at the
Pt. Thomson unit.
5:03:42 PM
DONA KEPPERS, Deputy Commissioner, Department of Revenue (DOR),
Juneau, Alaska, said she was part of the transition team from
the prior year and came to Alaska in 2008 as an audit master
within the Tax Division. Previous to that, she spent nine years
with Mapco Alaska Petroleum and nine years with Alyeska Pipeline
Service Company in various leadership roles in both commercial
and accounting areas. She was part of the AKLNG Project under
the previous administration working with the governance and
operating model and tax implications. In December, she became
the deputy commissioner and became exposed to all areas of the
project.
MS. KEPPERS explained that the DOR is highly integrated with
state gas team members imbedded in all fiscal and governance
areas. They are pretty much in lock-step with DNR and AGDC in
several of these areas. They have daily internal meetings and
integrated meetings with sponsor parties to connect. It has been
moving rapidly. A couple of major areas for the DOR are the next
phase of the financing alternative, work with Lazard and First
Southwest, to do the further analysis in order to generate a
report in the fall. The other piece of work deals with the
Municipal Advisory Gas Project Review (MAGP) Board, which
Commissioner Hoffbeck would provide more detail on.
5:06:26 PM
RANDY HOFFBECK, Commissioner, Department of Revenue (DOR),
Anchorage, Alaska, related that the MAGP group is meeting on
Friday to consider the payment in lieu of taxes (PILT) structure
to be introduced into the economics of the project. He said the
mayors and municipal representatives had been very open to the
process.
MS. RUTHERFORD added that she and the entire administration feel
that the device structured in SB 138 is very workable and allows
conflicts to be resolved.
SENATOR COGHILL said he was relieved to hear about them working
together, because the legislature doesn't get to see that. What
they do see is that several members of the AGDC board haven't
been appointed yet. People will have to come up to speed like
she and others are.
5:10:01 PM
MR. FAUSKE responded that he was not privy to actions being
taken. He pointed out that the corporation is doing fine; the
board has four members and has held one meeting, which went very
well.
SENATOR COGHILL urged that all hands need to be on deck and need
to get going.
CHAIR GIESSEL thanked the presenters.
5:11:56 PM
SENATOR GIESSEL adjourned the Senate Resources Committee meeting
at 5:11 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AKLNG SRES AK LNG PowerPoint 02-18-2015.pdf |
SRES 2/18/2015 3:30:00 PM |
|
| AKLNG SOA 3rd Party Commitments 1-30-2015.pdf |
SRES 2/18/2015 3:30:00 PM |
|
| 2.17.15 Sec 77 SB 138 Report_Revised for SRES.pdf |
SRES 2/18/2015 3:30:00 PM |
SB 138 |