Legislature(2015 - 2016)BUTROVICH 205
01/29/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
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| Start | |
| Aklng Project Update by the State of Alaska Gas Team | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 29, 2016
3:31 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Peter Micciche
Senator Bill Stoltze
MEMBERS ABSENT
Senator Bert Stedman
Senator Bill Wielechowski
COMMITTEE CALENDAR
AKLNG PROJECT UPDATE BY THE STATE OF ALASKA GAS TEAM
- HEARD
PREVIOUS COMMITTEE ACTION
See 1/25/2016 and 1/27/2016 Senate Resources minutes.
WITNESS REGISTER
FRITZ KRUZEN, Interim President/CEO
Alaska Gasline Development Corporation (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Provided a summary of AGDC activities
relative to AKLNG.
MARTY RUTHERFORD, Deputy Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of the AKLNG Project
authorities for each state agency including the Department of
Natural Resources (DNR), the Department of Revenue (DOR), the
Alaska Gas Development Corporation (AGDC), and the Department of
Law (DOL).
ATTORNEY GENERAL CRAIG RICHARDS
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: Explained DOL authorities relative to AKLNG
under SB 138.
COMMISSIONER RANDY HOFFBECK
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Explained the DOR authorities relative to
AKLNG.
ACTION NARRATIVE
3:31:39 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:31 p.m. Present at the call to
order were Senators Costello, Micciche, Coghill, Stoltze, and
Chair Giessel.
^AKLNG Project Update by the State of Alaska Gas Team
AKLNG Project Update by the State of Alaska Gas Team
3:33:09 PM
CHAIR GIESSEL said today's meeting would conclude the opening
week of the Senate Resources Committee's AKLNG Project update.
She noted the packets included the PowerPoint, the report that
is required from Sec. 77 of SB 138, a copy of the draft
constitutional amendment language that was presented in the
June, 2015, update, an updated list of agreements for the
project and a graph of projected production of natural gas for
the AKLNG Project. She invited the state's gas team to the
table.
3:34:32 PM
FRITZ KRUZEN, Interim President/CEO, Alaska Gasline Development
Corporation (AGDC), Anchorage, Alaska, related his background.
He is an electrical engineer with 38 years of experience within
the oil and gas business, 36 and a half years with
ConocoPhillips and coming on a year and a half with the Alaska
Gasline Development Corporation (AGDC). Working for
ConocoPhillips, he spent more time offshore than his father who
was in the Navy in World War II, but well over half of his
career has been involved with LNG. Because he was involved in
gas gathering and processing work for a gas transmission
pipeline in the Lower 48, ConocoPhillips tapped him to go up to
the Kenai LNG plant in Nikiski where he was head engineer for
six years. He went on to be part of the team that helped design
the next generation of LNG plant that ConocoPhillips would
market across the world. From there he joined the licensing
team. He helped start up an LNG plant and then managed the
export engineers that really know the details of how to design,
construct and operate an LNG plant. He had been involved
directly with two previous attempts to monetize Alaska North
Slope natural gas: one was an LNG project and one was an attempt
to pipe gas to the Lower 48. He also helped staff a third
attempt.
MR. KRUZEN said he transitioned to AGDC as vice president of
AKLNG, so he is the corporation's technical person on LNG
matters and the Project Steering Committee (PSC) representative,
the technical governance body of the four co-venturers for the
AKLNG Project. He represents AGDC, the folks that brought the
ASAP project forward on schedule and within budget, the people
who now, with the TransCanada buyout, represent the State of
Alaska (SOA) on its full 25 percent of all the objects within
the AKLNG Project, and the people who are getting spooled up to
take on the task of instate gas.
3:38:28 PM
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources (DNR), Anchorage, Alaska, said she would provide a
summary of the AKLNG Project authorities for each state agency
including the Department of Natural Resources (DNR), the
Department of Revenue (DOR), the Alaska Gas Development
Corporation (AGDC), and the Department of Law (DOL). She would
also talk about their roles and focus areas within the AKLNG
Project. The team would discuss each agency's organization
associated with AKLNG and that entity's decision making process.
The team would explain the state gas team's organizational
chart, the matrix organization, and the coordination between the
state agencies and AGDC. They would discuss the work flow and
work teams and provide an update specific to TransCanada's
buyout, the AGDC's presidential search, and as well as AGDC's
instate aggregator function.
3:39:22 PM
ATTORNEY GENERAL CRAIG RICHARDS, Department of Law (DOL), Juneau
Alaska, said SB 138 creates the statutory framework in which the
SOA operates within AKLNG; in particular it defines the relative
roles of the various state agencies within that framework and
creates certain changes to what was then existing law. It also
creates an expectation of certain deliverables to the
legislature for final approval before the project can move
through various stage gates including into front end engineering
and design (FEED). It was passed by the legislature in April,
2014 and it is still the framework that is being used now. This
presentation focuses on the relative roles of the agencies in
executing their tasks within AKLNG and where they are moving
along in the various work streams.
He said SB 138 provides, in particular, that DOR and DNR are
responsible for negotiating the commercial agreements on behalf
of the state that impact what has been referred to as the
"sovereign interests" - tax interests, royalty interests, and
other interests, whereas AGDC is given the commercial authority
over matters that relate to the infrastructure and instate gas
delivery. DNR handles the royalty side in the upstream issues
and the DOR is tasked with financing, developing financing
reports and matters involving the state's taxing system. The DOR
is also the lead in interacting with the Municipal Advisory Gas
Project Review Board, which was created for the state to
interact with the municipalities and the producers in terms of
an acceptable property tax structure.
3:41:37 PM
MS. RUTHERFORD said slide 5 is an overview of state authorities
under SB 138. DNR has the authority to negotiate the commercial
agreements, to market the state's royalty-in-kind (RIK) gas and
the tax-as-gas (TAG) volumes, and to modify certain lease terms.
Specifically, DNR, in consultation with the DOR, negotiates
agreements including the upstream gas supply and balancing
agreements, markets the state's share of LNG and the state's
portion of instate domestic gas (to AGDC).
3:43:20 PM
She said the DNR will receive the RIK (if that is the decision
by the commissioner of DNR) and the producers will have the
option to pay their production tax as gas (TAG). The department
would receive that gas and manage its sale to AGDC both for
instate use and for export.
MS. RUTHERFORD explained that the DNR commissioner may make
certain modifications to the leases, specifically the Point
Thomson leases. She explained that Prudhoe Bay leases are almost
all Division of Land (DL)-1 leases, the original leases sold at
Prudhoe Bay prior to TransAlaska Pipeline System (TAPS)
beginning operations. Point Thomson has new leases form - net
profit share leases and sliding scale leases. In those
instances, because the total royalty value of those leases can
change, SB 138 says that the DNR commissioner may modify them to
fix them at a certain rate so that can be used as the percentage
by which Point Thomson gas would be identified. DNR is in the
process of negotiating those modifications and is progressing
quickly with them.
SENATOR STOLTZE wanted to know specifically what the governor's
"must haves" are in reference to his January 18th letter.
MS. RUTHERFORD responded that the governor referenced eight
agreements in his January 18th letter to the producer companies.
The Governor believes these agreements are necessary for the
state to know if it's in its best interest to enter into RIK
versus taking royalty in value (RIV), and to allow the state to
feel comfortable enough to enter into a fiscal stability
contract with the producers. The producers have indicated that a
fiscal stability contract will be a necessary step before they
are willing to progress the project. The governor has stated
many times that he is concerned about "project slippage."
SENATOR STOLTZE asked what "slippage" means. Does it deal with a
timeline?
MS. RUTHERFORD answered yes. The Governor doesn't want the
project to miss the 2024/5 window to sell the state's LNG into
the export market and the Attorney General has determined that
the state cannot enter into a fiscal stability contract without
a constitutional amendment.
3:48:59 PM
She explained that you have to start with the fact that the next
opportunity for a constitutional amendment, which requires a
two-thirds legislative vote by both bodies, must appear in a
general election. That would be in November, 2016. Once the
legislature approves the constitutional amendment language, it
has to be certified by the Division of Elections by late June in
order to appear on the November ballot. If the legislature is to
have an adequate opportunity to review commercial agreements to
support that language, that would be in mid-March/early April or
early second quarter. The Governor wanted to emphasize that if
in fact Alaskans want to hit that timeline, then these eight
commercial agreements have to be in place and before the
legislature in a timely fashion. Then the FEED decision can be
made in early 2017, when an export window is available to the
Asian market. She could not speak for the Governor about what
will happen if parties are not able to hit that timeline, but
the state is well prepared to hit that date without partners.
3:50:31 PM
SENATOR STOLTZE asked what the options are for Alaska going it
alone.
3:50:56 PM
MS. RUTHERFORD said she didn't recall going it alone being part
of the January 18th letter. The Governor has said he is
committed to the AKLNG Project and he wants the department to
continue to work diligently to get the commercial agreements in
place so they don't have to do anything other than progress in a
more timely fashion on the project.
3:51:30 PM
SENATOR MICCICHE said he didn't count eight required agreements
for the constitutional amendment and asked her to list the eight
she felt were necessary to move forward with the amendment.
MS. RUTHERFORD listed them - commercial agreements/issues some
that role up into one agreement - adding that where they will
ultimately reside is still being sorted out. They are as
follows:
1. Gas balancing and supply agreement
2. Byproduct handling terms (the GTP CO2 disposal into
Prudhoe Bay)
3. Field cost allowance, which is the amount the state
will pay the unit working interest owners for its gas
4. Point Thomson lease modifications, which consist of
fixing the net profit share leases and the sliding
scale leases at Point Thomson, fixing the state's
ability under lease provisions to switch between RIK
and RIV. An aspect of that is also making a RIK
determination.
5. Marketing agreements. Right now the options
available to the state are multiple. SB 138 said that
each producer must make a bilateral proposal to the
DNR to either purchase or market for the state the
state's volumes of RIK and TAG gas under terms
generally equivalent to the terms under which they
market their own gas. The state has the option of
going as an equity marketer, which is basically where
the state would set up its own structure with all of
its own people to market the state's share of gas in
competition with the other producers on AKLNG. The
state also has the option of joining with one or more
of the producers in a joint marketing structure.
Everything is still under discussion at this point.
6. Members agreement and associated governance
agreements (managed by AKLNG). These are the terms
under which the state participates as a joint venture
member in the infrastructure and kit. This is where
issues such as third party access into the facilities
and expansion prerogatives reside.
7. The system use agreement which is about how the
owners of the gas will be able to access their
capacity rights.
8. Domestic gas sale terms to ensure that Alaskans get
access to gas for its own uses.
SENATOR MICCICHE asked if she didn't see a withdrawal agreement
as being a part of the overall requirement.
MS. RUTHERFORD responded that the Governor's January 18th letter
specifically said that he is satisfied with the letters he
received from ConocoPhillips and BP indicating that they would
make their gas available under commercially reasonable terms
should they decide to withdraw from the AKLNG Project.
Subsequently, in conversations with ExxonMobil, Jim Flood and
associated letters, he has also determined that he is satisfied
with the commitments that ExxonMobil has made.
3:57:16 PM
MS. RUTHERFORD continued on to slide 6 that outlined DNR
statutory responsibilities in key areas:
-Negotiating commercial agreements
-Managing the risk/reward balance that are inherent in the state
moving out of a pure sovereign role (the taxation/royalty side)
and into a commercial role as an equity owner in the project and
receiving and selling its own gas.
-Ensuring certainty of the upstream gas supply so that the state
in turn can satisfy the buyers that it can access it. She
explained that basically the state will never be a working
interest owner, but it has to look synthetically like one so
that it has the same prerogatives as the actual producers to
ensure its gas is available when needed and so that certainty
can be passed along to the gas purchasers.
-Marketing structure, ensuring that the state negotiates a
reasonable risk/reward position.
-Determine how the state will function as a shipper on the AKLNG
Project system (which will take a little longer than the next
two months)
-The primary focus is the state's RIK versus RIV decision. It is
also trying to protect the sovereign state's interest in the
governance structures in expansions and third party access,
because the state will continue having lease sales in both the
North Slope and the Foothills and other areas of the state that
might actually have gas, too.
Slide 7 illustrated DNR's functional organization for AKLNG. The
North Slope gas commercialization area is where various subject
matter experts are involved to lead the work streams and team
discussions. Anthony Scott is the commercial lead, Steve Wright,
a retired Chevron employee who dealt with upstream issues, is
the upstream lead, David deGuyter, who used to work for BP and
extensively on TAPS, is midstream lead. They are also about to
hire a new short term contractor for marketing issues for the
negotiation purposes and some support people under North Slope
gas commercialization. She said they also work very extensively
with resource evaluation people and other technical experts
within the Division of Oil and Gas (DOG) to ensure that the
right expertise is at the table to ensure that the synthetic
working interest owner's capacities are fully identified and
protected in the negotiations.
MS. RUTHERFORD said that is basically DNR's organizational
function and that they all answer up through her and she answers
to DNR Commissioner Mark Myers.
4:01:36 PM
She explained that the decision making is basically done by the
state gas team, a multi-agency matrix organization that uses
internal subject matter experts and external consultants. They
work issues subject to a lot of policy and terms sheets that
were developed to support the discussion with the parties across
the table. They are not static. As new complexities and
alternatives present themselves, they have to be vetted with the
policy makers: not only the commissioner of DNR, but the
commissioner of DOR, AGDC, and the Department of Law. They have
these discussions and then go back to the teams and they develop
the positions that in fact are negotiated by the state's two
lead negotiators, Ken Minesinger with Greenburg Traurig and
Manzer Ijaz with Millbank, Tweed, Hadley & McCloy. At the end of
the day, the final policy decisions that are associated with the
DNR commissioner's statutory authorities are made by the
commissioner.
CHAIR GIESSEL asked where the lead negotiators are located.
MS. RUTHERFORD answered that they are not located in Anchorage,
but they travel to Anchorage fairly regularly for ongoing
meetings. One or both are there constantly and both fly in
Sunday night this week. Given the state's financial situation,
they are trying to optimizing the ability to use video
conferencing, teleconferencing, and electronic exchanges to the
maximum degree. People in other law firms support them, but not
much agreement writing is happening right now.
4:04:55 PM
COMMISSIONER RANDY HOFFBECK, Department of Revenue (DOR),
Juneau, Alaska, explained the department's authorities under
AKLNG. The SB 138 structure says the producers can elect to pay
their tax as gas (TAG) and it would be set at 13 percent of the
gas. However, that particular component is awaiting on the
state's RIK decision. If the producers elect to pay their tax as
gas, then the state also has the responsibility of determining
how the revenues that are received when the gas is delivered to
the state eventually flow back into the state and finances the
project.
CHAIR GIESSEL said her understanding of the state's 25 percent
ownership is that 13 percent would come as tax as gas and 12.5
percent would be the royalty if the lease modifications arrive
at 12.5 percent. She asked if that 25 percent is actually
somewhat of a moving target until it's nailed down.
COMMISSIONER HOFFBECK said that is correct; the state's
percentage ownership will be consistent with what its gas
ownership is after the royalty modifications.
He went to slide 10 and said the DOR is focusing its efforts on
reporting on the range of financing options available. Lazard
delivered a preliminary report in the last legislative session
and they will deliver a final report when the first contracts
are delivered to the legislature. He said the department is also
participating in negotiating the contracts primarily with DNR,
but also with AGDC. The team's focus is on keeping all of their
options open. They want to make sure that none of the fiscal
agreements and the governance and commercial agreements would
actually preclude any one of their financing options, and if
they do, what the impact is on revenues and what mitigating
position needs to be taken in negotiations.
DOR has a couple of deliverables: one is how communities,
regional corporations, or individuals can participate in the
project. That will be in the Lazard report. It is a difficult
component of the project just because of the risk associated
with those types of investments, but the structure would be put
in place. Smaller investments would probably come later on in
the project when it has more certainty of completion.
COMMISSIONER HOFFBECK said one thing that is not listed is the
continued analysis of the commercial agreements for state
funding options. Slide 11 indicated that DNR is carrying the
load of the negotiations. DOR has a much more limited scope in
the project and doesn't need that level of additional expertise.
Deputy Commissioner Keppers is essentially 100 percent assigned
to AKLNG and is DOR's face in the negotiations. Working with her
are two audit masters out of the Tax Division and two commercial
analysts out of the Economic Research Group.
He said the department also has subject matter experts and uses
contractors when needed to provide additional information.
Deputy Commissioner Keppers reports to him and the decision
making process is exactly the same as with DNR. Decision points
will be brought to him for guidance and then they will take that
back into the process. He would make the final decision that
would be taken to the executive committee for its final
decisions.
4:10:58 PM
MR. KRUZEN said with the buyout of TransCanada, AGDC became the
state's 25 percent equity participant in the GTP, pipeline and
LNG plant, otherwise known as the AKLNG Project. He said AGDC
set up the project funds so that the legislature's
appropriations can be used to pay cash calls that come from the
lead party, ExxonMobil. AGDC has a role in assisting DNR and DOR
in maximizing the value of the state's gas and a role to also
figure out the systems to get gas to instate customers from the
AKLNG pipeline at commercially reasonable rates, which the ASAP
mandate says is "the lowest rate."
4:12:49 PM
He displayed an organizational chart and said AGDC is the
transporter; the molecules belong to DNR, the shipper, and that
it is all sort of managed in FERC Sec. 3.
AGDC is a public corporation with a board of directors; Dave
Cruz is the chairman; Mr. Short is the vice chair. Mr. Kruzen
said he is interim president; Miles Baker is the External
Affairs and Government Relations (EAGR) representative; Ken
Vassar is the general counsel. Lieza Wilcox leads their
commercial function and Bruce Tangeman is leader of finance and
administrative functions. Frank Richards, who led the ASAP
effort, is now the Program manager over the technical aspects of
AGDC's support of the AKLNG Project.
4:14:35 PM
The decision-making process is a little different for AGDC. It
has a "squad" of technical experts to call upon. Mr. Kruzen said
that for pipeline matters they confer with Mr. Richards and then
make the technical decision; if it's a gas treatment plant or
LNG plant matter they confer with himself and then make the
technical decision. If it's just a matter of technical
assurance, it ends there. But if it goes on to inform a
decision, then it's taken to the Management Committee (ManCom),
the decision-making body overseeing the AKLNG Project. Frank
Richards is the AGDC representative on ManCom.
MR. KRUZEN explained that in accordance with their authorities,
if it's appropriate the decision elevates to the president or to
the board and if it's a policy matter he talks to their partners
within the State of Alaska. On the corporate side, they follow
their delegation of authorities.
CHAIR GIESSEL noted the pot of money AGDC has in its budget
structure for ASAP and asked what it is being used for.
MR. KRUZEN answered that AGDC has two funds, an instate gas fund
which is intended for ASAP, and the LNG fund for the AKLNG
Project. Those are blended together in a formula to finance day-
to-day activities.
CHAIR GIESSEL asked what work is being done on ASAP at this
point and why.
MR. KRUZEN answered that no technical work is being done on
ASAP; it's on the shelf. However, they are progressing the
permitting side to get to the end point of the supplemental
environmental impact statement (SEIS), which gets a record of
decision, which gets the permits and right-of-way along federal
lands. It requires a little money, but not a lot. It seems to be
going well and by the end of the year, AGDC, and by extension
the State of Alaska, will have an asset that is useful for both
projects (because ASAP and AKLNG have the same route). This is
an example of doing work that advances both ASAP and AKLNG.
SENATOR STOLTZE asked if the activities and benefits of both
projects are commensurate.
MR. KRUZEN said he couldn't specifically answer that, but he
could say that ASAP has valuable assets - bore holes along the
pipeline route from NW of Fairbanks down to Southcentral - and
AKLNG has also done a lot of bore holes from Fairbanks to the
North Slope. So, they compare notes and try to establish who's
got what and what they do in common. If it's something that has
commercial import, that gets negotiated and they arrive at a
fair value exchange of the data transfer. There have been three
or four episodes of that and it is going well. AGDC also serves
as a subcontractor for AKLNG for things they are good at like
knocking on doors and getting permits. The process seems fair to
him and he hadn't heard the AKLNG Project management team
express any concerns about unfairness.
SENATOR STOLTZE asked who would complain from within the
administration and how a complaint would manifest.
4:21:19 PM
MR. KRUZEN answered that the administration recognizes a
fiduciary duty to get fair value for State of Alaska assets.
"So, we would complain if we thought we were hosed. Certainly,
AKLNG chooses not to participate and go do their own thing if
they feel we're charging too much."
SENATOR STOLTZE asked where you complain if you are an ASAP
cheerleader.
MR. KRUZEN didn't have an answer to that.
SENATOR MICCICHE said the firm transportation services agreement
(FTSA) is out into FEED and asked, as contentious as
negotiations have been, if that concerns him.
MR. KRUZEN answered now that TransCanada is out of the picture,
the firm transportation services agreement would be between DNR,
the shipper, and AGDC, the transporter, to move the state's
molecules through the AKLNG pipeline. Some people think the FTSA
should be advanced before the FEED decision and others think it
can wait until after the decision. He didn't know the answer.
The good thing is that FERC Sec. 3, the permitting process that
AKLNG is being regulated under, allows the shipper and the
transporter to talk without fire walls, which leads to more of a
collaborative approach, and he is quite optimistic about it
getting done.
SENATOR COGHILL said it became clear in the TransCanada buyout
that AGDC has some valuable assets and asked if they become part
of the value set that is brought into the 25 percent of the
state's ownership or if they got lost in the blended package of
cross funds.
MR. KRUZEN answered that those assets didn't get caught up in
the blend. This sort of information is more of a "below the
bottom line transaction" that was negotiated. They are not
talking about big dollars, maybe $100,000. He added by
comparison that the typical monthly cash call for the state's 25
percent is maybe $6 million.
SENATOR COGHILL said if it became clear that the AKLNG project
just can't make it for whatever reason, then the state has an
asset, but he wanted to know if the state is giving it away or
if it is part of the 25 percent value chain.
MR. KRUZEN answered that they are certainly not giving away any
value of assets. He explained that sometimes people are steered
not so much towards the proprietary information within ASAP but
towards the publically available information that one gets from
the permitting process. If they are talking about proprietary
information, they have a discussion and capture value for it. It
really isn't part of that 25 percent math.
SENATOR COGHILL observed that AGDC worked very hard to get the
property information from north to south and asked if it could
be used with other options.
4:27:54 PM
MR. KRUZEN answered yes; but he didn't know how big of a toggle
that information is. The right-of-way for ASAP is going to be a
major, major, State of Alaska asset and it is something they
believe can be transferred to the AKLNG Project if that is the
right thing to do.
SENATOR COGHILL said he just wanted to make sure that if these
assets are under both the permitting and under ASAP money that
the asset is not going to be given away.
MR. KRUZEN said his message was heard and he agreed that the
property, and the right of way that the property provides, is a
valuable asset and said that it will be treated accordingly.
CHAIR GIESSEL said last year a bill for a right-of-away passed
the legislature and asked if they have the complete right-of-way
now and if not, where the gaps are.
MR. KRUZEN said he couldn't answer that at the moment, but he
would get that information.
4:30:47 PM
ATTORNEY GENERAL CRAIG RICHARDS said that SB 138 provides that
the Department of Law (DOL) and the attorney general are
ultimately responsible, in consultation with AGDC, for providing
legal counsel for the commercial agreements and their contracts,
whereas litigation and internal corporate counsel, even for
AKLNG, remains within the purview of AGDC's corporate counsel.
Three assistant attorney generals do the work - Jerry Juday
works with AGDC, and Martin Schultz and Elena Romerdahl are the
two full time DOL attorneys who are part of the DOR/DNR teams. A
few other attorneys do part time work. The DOL has a suite of
outstanding counsel that is used for AKLNG, particularly
Greenberg Traurig and Millbank, Tweed, Hadley & McCloy, that
have different roles in the different work streams.
4:32:41 PM
SENATOR STOLTZE asked if there is 100 percent certainty that the
constitutional amendment is an absolute necessity.
ATTORNEY GENERAL RICHARDS answered there is an absolute
certainty that a constitutional amendment is necessary if the
fiscal agreements the producers want contain provisions in it
where the legislature suspends its power to tax. Article 9 of
the Constitution, like most state constitutions, has a provision
stating the legislature cannot surrender the power to tax. So,
if the legislature's constitutional authority to change taxes is
surrendered, then the constitutional amendment is needed.
SENATOR STOLTZE said he couldn't remember the fiscal terms in
previous gas line agreements requiring a constitutional
amendment and asked if this issue has undergone an evolution in
the DOL. He also wanted to know if it is being used as
motivation to bring Alaskans in as part of the discussion.
ATTORNEY GENERAL RICHARDS replied that it is a strictly legal
issue. The Stranded Gas Development Act (SGDA), which was
another fiscal certainty arrangement, had a little debate, but
from the beginning of its enactment there was basically an
assumption by the DOL that a constitutional amendment was
necessary. The Alaska Gas Inducement Act (AGIA) didn't contain
terms relating to the legislature surrendering its power to tax,
and therefore, there wasn't a requirement for a constitutional
amendment.
COMMISSIONER HOFFBECK added that SGDA had embedded language that
gave protection by taking away more and more of the state's gas
if the legislature changed its tax structure. So, there was
concern even then about changing the constitutional and
statutory structure.
4:36:40 PM
MS. RUTHERFORD added that slide 18 is the overall high level
AKLNG structure but she directed them to the bottom tier, the
State of Alaska Gas Team made up of the DOR and DNR, their
experts and consultants, as well as a combination of North Slope
gas technical experts that are embedded in the Division of Oil
and Gas, Resource Evaluation, and their associated North Slope
gas consultants that they use outside expertise on. Then there
are the AGDC subject matter experts and consultants, all
supported by the DOL and their outside counsel. These are the
people who do the day-to-day work; they develop the state's
positions, analyze the options and assist the actual
negotiators, and who attend the negotiations to support the
negotiators.
But when issues that haven't been addressed through existing
term sheets or policy directions arise, they elevate to the next
tier, the commissioner of DOR, herself in DNR, the AGDC and
legal support from both DOL and the Attorney General. When there
are policy questions a dialogue occurs. If there is disagreement
among these people, then it can be elevated to the governor, or
if an issue has statewide implications, the governor is
involved.
SENATOR MICCICHE said he appreciated the organizational
evolution since November and thanked her for demonstrating it up
to this point.
MS. RUTHERFORD accepted that on behalf of the people who are
working hard on the technical and coordination issues.
4:40:07 PM
MR. KRUZEN said slide 19 was AGDC's version of the slide that
was presented on Wednesday by the producers. The two anchor
fields - Point Thomson Unit and Prudhoe Bay Unit - were on the
left. The gas molecules that are owned by the state are DNR's
molecules. Those molecules move out of the field facilities and
into a 60-mile transmission line from Point Thomson Unit or a 1-
mile transmission line from Prudhoe Bay into the gas treatment
plant (GTP) where the CO2 is taken out, and in through an 800-
mile pipeline to the Nikiski LNG plant at tidewater. Those
molecules are under the purview of the AGDC. The DNR then
markets the LNG to buyers out of state.
He recalled that Mr. Butt said a 10:1 ratio of gas is going down
to be LNG versus gas that is used in-state, but when those
instate molecules turn the corner and go to instate markets
(instate aggregator box) they are still DNR molecules. The AGDC
is responsible for figuring out the aggregation systems so that
small communities don't have to deal with it. The large users
are able to manage weekly/daily temperature type swings and
inform the LNG plant of what is coming off the line so that
their operation is not impacted.
MS. RUTHERFORD said slide 20 talks about the State Gas Team that
manages approximately 20 project work streams that are
subdivided into two aspects. One is the commercial work that
involve the negotiations required to develop the commercial
agreements to advance the project and the other is the technical
work which is really the upstream work (getting certainty of
supply off of the two units and how that is going to evolve into
certainty of our molecules so they can be sold to the market).
Slide 21 talks about the organizational framework of the teams.
It's a multi-discipline matrix organization; each state team is
either led by a state agency (DNR or DOR) or AGDC. It is based
upon the organization of the statutory authorities associated
with that particular issue or agreement. Each team includes
representatives from other agencies as appropriate according to
interest and effect to ensure that there is full coordination
and integration.
4:43:10 PM
MS. RUTHERFORD said that each team includes state agency subject
matter experts, legal support both from the DOL and external
legal firms, and hired expert commercial or financial
consultants. These teams work internally and sitting across the
table from the joint venture sponsor companies. For every hour
spent across the table with the people you are negotiating
against you should be spending at least seven in getting your
act together internally: understanding the evolution of the
issues, the positions of the various parties, working to
determine whether nuances need to be elevated for policy
direction, and ensuring that everyone has looked at it from the
various perspectives that are at play in the decisions. She
explained that you are always trying to find that sweet spot
that satisfies every party's interest. There is never a time
when one of the lead negotiators attends a meeting that isn't
supported by these technical and commercial teams.
CHAIR GIESSEL asked if DNR, AGDC and DOR all have legal
consultants or if they rely on the DOL and its consultants.
MS. RUTHERFORD relied that the DNR relies on the DOL that has
both internal legal support and externally from the firms of
Greenberg Traurig and Milbank, Tweed, Hadley & McCloy that bring
a larger expertise to the discussion. It's always a constant
determination by the team as to who the appropriate legal
counsel is to participate in the discussion.
Slide 22 provided AGDC, DNR and DOR jointly integrated work
processes. Clear statutory responsibilities have been identified
that often times requires coordination, but Ms. Rutherford
hastened to add that they work very hard not to be duplicative.
She said they have full State Gas Team meetings at least weekly
to ensure that they don't have gaps in what they are working on,
that everyone is covered and resources are committed to it. DNR,
AGDC and DOR have bi-weekly meetings to coordinate on specific
issues and decisions. She turned the talk over to Mr. Kruzen to
walk the committee through the essence of this presentation.
4:47:45 PM
MR. KRUZEN started with slide 23 and the acronym "RACI:" "R" for
responsible, "A" for accountable, "C" consulted, and "I" for
informed.
Who is responsible? If he was given the task of pulling this
presentation together, he is the one who has to get it together.
If he does a bad presentation, he's the one who is accountable
and he gets fired. Who is consulted? Who is an expert that might
be able to give advice that you really ought to consider? You
advise back what you like and don't like. It's a two-way street.
Who is informed? Hello press; there is a presentation that you
might be interested in at 3:30 p.m. on Friday.
He said they sort of divvied up what the major functional
responsibilities were in what was called the Functional RACI
Matrix on slide 24:
Resource ownership: Deputy Commissioner Marty
Rutherford, DNR, is responsible and the DOR
commissioner is accountable.
Sovereign taxation: Deputy Commissioner Donna Keppers,
DOR, is responsible and the DOR commissioner is
accountable.
Project ownership and governance: Frank Richards,
AGDC, is responsible and Mr. Kruzen is accountable.
Project financing: Donna Keppers, DOR, is responsible
and the DOR commissioner is accountable.
LNG marketing and marketing of the instate gas
molecules as they turn the corner from the pipeline:
Marty Rutherford is responsible and DNR commissioner
is accountable.
In-state gas delivery (which is figuring out the
details of the infrastructure, the aggregation and
that sort of thing): Brad Chastain of AGDC is
responsible and AGDC's Mr. Kruzen is accountable.
FEED decision support package: AGDC will advise on the
kit; DOR will advise on the money; but since most of
the commercial work is with DNR, Marty Rutherford is
responsible and the Governor is accountable.
4:51:11 PM
Slide 26/27 broke functions down into 10 task streams and sub-
streams. Mr. Kruzen said this will probably evolve a bit, but
this is the administration explaining to the legislature and the
public the division of labor amongst the major tasks.
MS. RUTHERFORD added that this chart is a reflection of the
authorities the presenters have talked about as well today. It
is the first step in providing some granularity on how some of
the functions break out and it will become more granular over
time.
CHAIR GIESSEL commented that this really is a breath of fresh
air in comparison to prior AKLNG updates, notably the one held
in September, 2015, in Palmer. She appreciated the hard work
that went into it.
MS. RUTHERFORD said Mr. Kruzen came up with the idea of using
this structure that is well understood in the project world.
4:54:02 PM
MR. KRUZEN noted some target dates on slides 26/27 and proceeded
to slide 28.
MS. RUTHERFORD noted that slide 28 talks about slides 29-42.
Basically it identifies the various work stream teams for
everything from the fiscals to the property tax, the upstream,
the midstream use and the marketing of LNG. The next 13 slides
give more information about each of those elements: the lead
agency for each work stream, what their primary duties are, and
who the team members are. She offered to take questions before
skipping to slide 43 and finding none, Mr. Kruzen took over.
4:55:29 PM
MR. KRUZEN said slide 43 contains the update on the TransCanada
buyout. The legislature appropriated money that is getting used
to cover the state's cash calls. He said the AGDC board will
dissolve the entity called TC Alaska Mid-stream Limited
Partnership at the February 11 meeting. All the assets are now
with AGDC. He said, although the shell company will disappear,
many of the fifteen TransCanada employees primarily involved on
the pipeline project team are still there through an arrangement
between TransCanada and ExxonMobil. Key TransCanada employees
were hired by a contracting firm and then ExxonMobil, the lead
party, would hire them. This has worked really well and there
are no gaping holes. A few people actually moved on, because
some of the projects were on or approaching the downward arc of
pre-FEED.
MR. KRUZEN said that TransCanada had submitted a final report,
which Deputy Commissioner Keppers is auditing and that should be
finished soon. It looks like TransCanada may owe the state about
$220,000. He could not say enough nice things about TransCanada.
"They were a super co-venturer on this project."
MS. RUTHERFORD pointed out that the $220,000 identified on slide
43 is the estimate that TransCanada has as its final cost report
that was provided in mid-January. An outside audit contract with
Ernst & Young is being overseen by Donna Keppers; it will
determine if that number is accurate. DOR and DNR will follow up
to ensure that any monies owed to the State of Alaska are
returned as quickly as possible.
4:58:21 PM
MR. KRUZEN said slide 44 was the update on the search for an
AGDC president. In November they engaged B+R Consultants, a
boutique search firm out of Houston, Texas, for a sum not to
exceed $170,000 and for which there are progress payments as
various milestones are met. AGDC Vice Chair Hugh Short is
masterminding the process as a board issue. Originally, they
thought that this would take 120-180 days, but it's going faster
and B+R is turning up some interesting candidates. He said they
are looking for some pretty special people: people with
demonstrated leadership skills, with a good solid technical and
project underpinning, who know something about gas pipelines or
LNG or both, who know the commercial stuff, who know the
regulatory and permitting stuff, and people who are good at
stakeholder engagement, such as with the legislature. These are
pretty high powered people and it will probably take some money
to land such a person - just a heads up in case they come back
to the legislature to approve a signing bonus or a retention
program of some sort.
CHAIR GIESSEL asked when the next AGDC meeting is being held.
MR. KRUZEN replied February 11.
He went to slide 45 on the instate aggregator corporation that
was set up late last year as allowed in SB 138. Right now it's
just a name and they have to ask permission of the board to do
the next steps, which are things like what the corporation will
look like, how the small quantities of instate demand will be
pooled and how it is going to work with the large users to
schedule such that the LNG plant operation isn't impaired, and
things like that.
MS. RUTHERFORD noted that slide 47 indicated the fully
integrated State Gas Team with the governor at the head. This
project is very much in development. Issues such as the major
appropriations, the fiscal durability proposals, structural
issues associated with marketing, and a state gas company are
all yet to be determined. The governor is going to have to carry
those proposals and all the commercial agreements to the
legislature.
Slide 48 contained acronyms so that Alaskans can figure them
out, and slide 49 contained the legislature's authorities.
MS. RUTHERFORD said the DNR provided the TransCanada quarterly
report that broke out the final costs and how the Alaska Gas
Inducement Act (AGIA) reimbursement was involved. There was a
total payment of $64,590,000 and she had already discussed the
audit that will be occurring. The other item that was made
available to the committee was requested at Wednesday's meeting,
an update of all the agreements that are being negotiated that
both do and do not require legislative approval. TransCanada has
been removed from those future agreements where they are no
longer a party, but it is still listed for those agreements that
are completed already.
CHAIR GIESSEL asked her to clarify: in the governor's January
18th letter to the producer parties, that not all of the
governor's eight items will require the legislature.
MS. RUTHERFORD said that is correct; not all of them will
require legislative approval. She also corrected a statement she
made on Wednesday. She told them that the state was a party to
the Gas Balancing Supply Agreement, but not a signatory. That is
incorrect. The state is both a party and a signatory to that
agreement. She explained that their understanding of the state's
role in the Gas Balancing and Supply Agreement has evolved over
time and it is fairly clear now to the state as it is to the co-
venturers that the state has to be a signatory.
CHAIR GIESSEL said that was a huge deal. She thanked her for the
Division of Oil and Gas' production chart that demonstrates the
state will be looking for additional explorers to produce gas in
the North Slope and Middle Earth areas.
MS. RUTHERFORD responded absolutely; the profile indicates a
wedge to be filled starting around year 2018. It is both the
opportunity for where they think additional gas has been
identified already, but also for where new third parties can
monetize the found gas. She said that Paul Decker with the DNR
Division of Oil and Gas could discuss this topic in the future.
5:07:49 PM
SENATOR COSTELLO asked the Attorney General what the governor's
January 18th letter means.
ATTORNEY GENERL RICHARDS said the letter lays out the governor's
expectations: that they will achieve a series of agreements in
time to make the timeline that allows them to get the agreements
before the legislature in time for the constitutional amendment
to get on the ballot; so there is no slippage if the producers
are unwilling to go into FEED without a fiscal agreement.
SENATOR COSTELLO commented that it's being talked about as an
ultimatum.
ATTORNEY GENERL RICHARDS responded that he didn't know why
people were characterizing it as an ultimatum. It just lays out
expectations as to a schedule if everyone is going to make the
timeline for this project.
SENATOR COSTELLO guessed that when that word is used perhaps it
means if a certain action doesn't happen that there will be
consequences. The letter says he would consider other options,
and that is disconcerting to her.
CHAIR GIESSEL asked the exact date for achieving the
constitutional amendment language for the November ballot. She
heard it is June 25th.
ATTORNEY GENERL RICHARDS said he didn't know the exact date, but
it's within a few days of that range. It involves the amount of
time the Lieutenant Governor would need to get the ballot
certified under the regulatory structure.
CHAIR GIESSEL said there is also a public opportunity to view
that and asked if it was 90 or 60 days and asked if the
legislature has to wait for that time period to end before it
can act.
ATTORNEY GENERL RICHARDS said he must review the mechanics and
procedural process of how it goes to the ballot.
CHAIR GIESSEL asked him to do that and send the information back
to her office. She would distribute it to the committee and put
it on the legislative website.
ATTORNEY GENERAL RICHARDS said he would be happy to do that.
MS. RUTHERFORD asked for clarification, because she might be
referring to two different things. Is it the length of time by
which the public and legislature must have access to the
commercial agreements before acting or is she asking about the
constitutional amendment provisions.
SENATOR GIESSEL answered the commercial agreements, and thanked
Ms. Rutherford for that clarification.
SENATOR STOLTZE complimented Chair Giessel for conducting the
hearing and for the information received. He said to not judge
the community of Palmer by the activities of the September,
2015, meeting when the former head of AGDC, Mr. Dan Fauske, "was
asked to walk a flea infested dog at the last minute." It's
truly a great place. He was pleased that Ms. Rutherford is in
more of a leadership role now.
5:12:55 PM
ADJOURNMENT
There being no further business to come before the committee,
the Senate Resources Standing Committee meeting was adjourned
5:13 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AKLNG State Gas Team organization Final 1-27-16.pdf |
SRES 1/29/2016 3:30:00 PM |
AK LNG |
| SRES-Sec 77 -SB 138 Report -01-29-2016.pdf |
SRES 1/29/2016 3:30:00 PM |
SB 138 |
| AK LNG- Placeholder Constitional Amendment Language (June 2015)-01-29-2016.pdf |
SRES 1/29/2016 3:30:00 PM |
|
| AKLNG-Offtake Profiles-01-29-2016.pdf |
SRES 1/29/2016 3:30:00 PM |