Legislature(2015 - 2016)ANCH LIO AUDITORIUM
06/29/2016 10:00 AM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Aklng Update | |
| Project Manager | |
| State Gas Team | |
| Fiscal Team | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
Anchorage Legislative Information Office
June 29, 2016
10:01 a.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill - via teleconference
Senator Peter Micciche
Senator Bill Stoltze
Senator Bill Wielechowski
HOUSE RESOURCES
Representative Benjamin Nageak, Co-Chair
Representative David Talerico, Co-Chair
Representative Mike Hawker, Vice Chair - via teleconference
Representative Bob Herron
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Andy Josephson
Representative Geran Tarr
Representative Mike Chenault
MEMBERS ABSENT
SENATE RESOURCES
Senator Bert Stedman
HOUSE RESOURCES
All members present
OTHER LEGISLATORS PRESENT
Senator Mike Dunleavy
Senator Anna MacKinnon
Representative David Guttenberg
Representative Dan Saddler
Representative Charisse Millett
COMMITTEE CALENDAR
AKLNG PROJECT UPDATE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
STEVE BUTT, Project Manager
Alaska LNG, LLC (AKLNG)
Anchorage, Alaska
POSITION STATEMENT: Provided updates on the Alaska LNG Project.
KEVIN MEYER, President
Alaska Gasline Development Corporation (AGDC)
Anchorage, Alaska
POSITION STATEMENT: Provided updates on the Alaska LNG Project.
DAVID VAN TUYL, Alaska Regional Manager
BP
Anchorage, Alaska
POSITION STATEMENT: Commented on the Alaska LNG Project.
DARREN MEZNARICH, Project Integration Manager
Alaska North Slope (ANS) Gas
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Commented on the Alaska LNG Project.
BILL McMAHON, Senior Commercial Advisor
ExxonMobil
Anchorage, Alaska
POSITION STATEMENT: Commented on the Alaska LNG Project.
ACTION NARRATIVE
10:01:21 AM
CO-CHAIR CATHY GIESSEL called the joint meeting of the Senate
and House Resources Standing Committees to order at 10:01 a.m.
Present at the call to order were Senators Wielechowski,
Coghill, Costello, Stoltze, Micciche, Co-Chair Giessel, and
Representatives Tarr, Olson, Josephson, Johnson, Herron, Tilton
Seaton, Chenault, Co-Chair Nageak, and Co-Chair Talerico.
Representative Hawker joined the meeting by teleconference.
Senators MacKinnon and Dunleavy were also present, as were
Representatives Guttenberg, Saddler, Millett and Hawker (via
teleconference).
^AKLNG UPDATE
AKLNG UPDATE
10:04:00 AM
CO-CHAIR GIESSEL announced that the only order of business would
be an update on Alaska liquefied natural gas (LNG). She said the
last public update was in September in Palmer, Alaska, with over
80 people listening online.
CO-CHAIR NAGEAK introduced the members of the House.
CO-CHAIR GIESSEL said this meeting is to learn the status of the
Alaska LNG (AKLNG) integrated project, which is described in
Senate Bill 138 passed [by the Alaska State Legislature] in
2014. The project will convey natural gas from the North Slope
for residents of Alaska and for selling in the world market. She
stated that the Alaska Constitution requires the state to make
its resources available for maximum use consistent with the
public interest and for the legislature to provide for the
utilization, development, and conservation of natural resources
for the maximum benefit of its people. She noted that documents
from the meeting and a project summary written by Larry Persily,
former federal pipeline coordinator, are available on the
legislative website, BASIS, at akleg.gov under "daily schedule."
^Project Manager
AKLNG PROJECT MANAGER
10:06:13 AM
STEVE BUTT, Project Manager, Alaska LNG LLC, Anchorage, noted
that the Alaska LNG (AKLNG) project is tied to SB 138. The work
he is presenting is on behalf of the 100-person integrated
project team, and he will show what progress they have made
since January. He said the AKLNG team has been able to cut costs
and progress key deliverables around regulatory and design
issues, and he will show what the team and the "hundreds of
contractors" have done. He turned to page 2 of his presentation
and said most folks understand the project really well, but he
explained that the LNG project is intended to be an integrated
natural gas project to provide gas for export and for Alaskans,
using the economies of scale. It will connect to major source
fields, Prudhoe Bay and Point Thompson, on the North Slope and
will have significant infrastructure, primarily a gas treatment
plant, a pipeline, and a liquefaction facility. This project is
unique because it is the first time that the four fundamental
parties who own the gas rights on the North Slope are working
together. The producers purchased the right to produce the gas
in the late 1960s, but the state owns the gas in the ground and
has title to the royalty upon its production, he explained. He
said that the four parties have been working together under SB
138; therefore, the project has a chance to have little value
leakage and few commercial transactions with other parties.
MR. BUTT added that this project will provide about 2.4 billion
cubic feet (BCF) per day of gas for export, which is ten times
the amount of gas that the State of Alaska uses, and it equals
the amount of gas that Canada or Germany use. Alaska uses about
250 million cubic feet (MCF) a day, but the system has capacity
for about 500 MCF a day for instate use.
10:10:13 AM
MR. BUTT stated that as Alaska grows, that capacity is built
into the AKLNG system. He added that the system has some great
advantages: it is close to the market; there is economy of
scale; and Alaska's cold environment makes gas plants more
efficient, so AKLNG productivity will peak when market demand
peaks, which is a great advantage over projects in the southern
hemisphere. Those advantages are offset by some real challenges,
including the amount of CO2 that will be handled. The pipeline
will be longer than any other LNG project pipeline, he added,
and another challenge is that the gas is very lean, which is a
mixed blessing. Prudhoe Bay [operators] have used the gas that
they have produced, about 7-9 BCF per day, by reinjecting it to
extend oil production. The gas has been taken out of the ground
and put back in the ground more than three times, and the
liquids have already been removed and sold for the benefit of
the parties, he explained. Alaska LNG has a leaner stream that
has to handle a lot of CO2, and that creates some challenges.
10:12:22 AM
MR. BUTT said AKLNG personnel feel good about the project's
safety culture. There have been no recordable incidents this
year, none in 2015, and one in 2014, and being safe underpins
everything his team does. He said AKLNG spent $460 million
through the end of May and another $107 million on the concept
design. The concept [stage] is "What do we want to build? How's
that going to look?" Pre-FEED [Preliminary Front End Engineering
Design] is where the team gets more detailed and specific in the
design work, and then it moves into other phases in the gated
process. By the time the Pre-FEED deliverables are completed in
the fourth quarter, an excess of $500 million will be spent, so
the expenditures will be over $600 million.
10:14:21 AM
MR. BUTT said the design work is about 91 percent complete. He
said, "We have what are called Pre-FEED deliverables, which are
the agreements that we said needed to be defined to understand
what would be required to build a project this large," he
stated. There are 82 Pre-FEED deliverables, which are documents
regarding "how would you build this, how you would handle the
logistics, how would you operate this, how would you handle
people." For all of the critical questions, there are 82
deliverables, and each deliverable is a large document, and 65
of them are complete and about 91 percent of the engineering
work underneath those deliverables is complete. He said there is
more work in finishing the cost and schedule estimates.
10:15:20 AM
MR. BUTT said an important milestone was hit when the integrated
project design was finished and it was determined that the
project can be run at a global efficiency standard, which is
about 95 percent. That is really important, he said, because the
system is so large and complex with hundreds of pieces of
equipment that all have to be maintained in different cycles.
Over a 30-year period, it is important that maintenance cycles
and all the work will never be in conflict. The whole system
works as a chain, and if any piece does not work, the system
does not work, he noted. So every element has to be understood,
down to each individual pump, regarding when and how long it
will be down for maintenance. He stated that the project is
avoiding waking up one day and finding out a compressor station
somewhere in the pipeline needs to come down, and it holds up
operations. "What we do is we find out ways to match all that
up," he explained. In September he had talked about the
milestone where the team was able to balance the entire system
with three gas treatment trains and three LNG trains, so the
system can be worked on in a "very balanced manner." That work
has evolved in confirming that the system can run at least 95
percent of the time, he added. That is extremely important in
the LNG business, because LNG buyers put their economy in the
hands of the sellers, he said, and if they don't get energy
reliably, their lights go out. "We've been able to confirm that
we can design a system here in Alaska to export LNG and provide
gas to Alaskans in an extremely reliable manner, and that's a
recent breakthrough that we've accomplished since January," he
said.
10:17:11 AM
MR. BUTT said the pipeline design is completed. In January, work
was still being finished and there was a question where he had
been asked by one of the joint venture participants to revisit
the size and make sure it was appropriate for the concerns of
all parties. It is an important example of how the participants
can work together, he added, because they all have to share in
each other's concerns and address them efficiently. One of the
participants wanted to know if the pipeline was the right size,
so the team dedicated about $22 million and about five months of
work to revisit the hydraulics and sizing, "and we confirmed the
42-inch basis as the most efficient," because it lowers the
cost, provides the capacity, and it provides for expandability.
10:18:18 AM
MR. BUTT said the team is trying to finish all of the field work
for the resource reports, which are part of the FERC [Federal
Energy Regulatory Commission] environmental impact statement
process. It is a pre-filing process, and the "Draft 1s" or
"pencil versions" were filed in 2015. The project will now file
the "pen versions," which are much more detailed, he said. The
FERC resource reports, numbers 1 and 10, have been filed and are
available on the FERC website, he said, and they are great
reading. Reports 2-9, 11, and 13 need to be finished, and he
expects they will be done in July or August.
MR. BUTT said it is important to remember that the project needs
to compete with all other LNG projects; buyers only want the
utility value of gas. Competitiveness is measured by the "cost
of supply," where the capital and operating expenses of
delivering LNG to a buyer is divided by the amount of LNG. That
is the way the market judges the project's competitiveness, he
said. He reiterated that, as the lead party in the joint venture
agreement, it has committed to complete all 82 deliverables. The
final 17 are under a schedule to be completed between now and
the first of September, "so we think by September we should have
that work done, including all the cost and schedule estimates."
10:21:02 AM
MR. BUTT explained that the pipeline is only about 25 percent of
the cost, the LNG plant is about 50 percent, and the gas
treatment plant is 25 percent. The most critical message is cost
of supply, he said. "If we can't be competitive, if you can't
make money on every molecule of LNG we sell or every dollar per
million BTUs, if you're losing money on a unit-cost basis, one
of the old economic maxims is: if you lose money on a unit cost-
basis, don't make up for it on volume." The project is very
large, so it has to be effective and competitive, "and that's
our critical challenge." It is complicated by the change in the
market from two years ago when LNG was selling at double the
price of today. He said the project has made tremendous progress
on costs, driving them to the lower end of the team's $45
billion to $65 billion range; however, "we haven't cut it in
half, so competitively, we have some real challenges ahead of
us," and that is what AKLNG is focused on.
10:22:34 AM
MR. BUTT said the questions are if the risk can be driven low
enough that the return is commensurate with that risk and if
costs can get low enough to be competitive. He noted that $600
million has been spent to date through Pre-FEED, but "we have to
remember" that FEED exceeds $1 billion and the project will be
well in excess of $40 billion.
CO-CHAIR GIESSEL recognized Representatives Guttenberg, Saddler,
and Tuck.
MR. BUTT explained that the LNG plant is now dramatically
different from what it was in the concept phase. The team has
modified the liquefaction technology and advanced a system
design that will be very effective. He pointed to a photo in the
upper right [of page 4 of his presentation], which shows exactly
how the plant will be built. However, the image does not do
justice to the work that his team has done. Referring to the two
LNG tanks, he said they were seven times larger than the
existing tanks in Nikiski, Alaska. Two Boeing 787s would fit
into each tank, he said, and that shows how enormous the plant
will be. "It's a world-scale 20-MTA plant, and that economy of
scale is really important, because that's one of the things that
drives efficiency in the LNG business," he stated. "The first
molecule we create is, by far, the most expensive; it has to pay
for all the infrastructure to get it there." The last molecule
is the cheapest, he added.
10:25:24 AM
MR. BUTT said the team has done a tremendous job driving out
costs. The bottom left of page 4 lists the things that have
really driven costs out of the system, he noted. It includes
different ways to use power systems, and each "module" gets put
together like Legos. He pointed to a color-coded picture of when
each system would be built and said the design allows the
project to start manufacturing LNG with just a portion of the
plant built. He said it is called simultaneous operations, which
means that the project can generate revenue as early as possible
to help the project be competitive. He referred to the marine
design in Cook Inlet and said, "We all know the Cook Inlet is a
very challenging body of water to work." It has some of the
largest tidal changes in the world, and the tides are strong, he
noted. Also, there are important "species characteristics," and
it has all been considered in the design, including a jetty and
trestle system that he is confident will work effectively. It is
positioned outside of critical habitat areas, he stated.
10:26:54 AM
MR. BUTT said the team has also done extensive geotechnical
work. These plants are very heavy, weighing 250,000 tons, and it
needs to be determined that the ground will not move under that
weight. The LNG tanks are incredibly heavy when full, and after
tens of millions of dollars' worth of analysis, it was found
that the soils are excellent. "We feel really good about the
design work we've done and the way we've been able to position
that site so that it can be successful," he stated. He added
that there has been sea floor mapping for tens of thousands of
acres. Boreholes were drilled to sample the earth, and AKLNG
feels very good about its ability to build the facility at that
site. As to the pipeline, a big achievement was getting closure
on the pipeline size. Being 42 inches lowers execution risk, he
said, because it needs a narrower and shallower trench. Less
trucks are needed, because one truck can carry only two 48-inch
joints of pipe, but it can carry three 42-inch pipes, and all
that translates to hundreds of millions of dollars saved. The
most impressive work has been finishing all of the material
testing on the 42-inch system, he said, and it has been done in
conjunction with the regulators. It has confirmed that AKLNG
needs 300 miles less of "strained-based design," which is much
heavier pipe to handle loads where the ground might move. He
explained that between the Brooks Range and the Alaska Range the
ground moves from the changes in temperatures, and strain-based
pipe can handle that. Through a lot of great work with FERC and
PHMSA (Pipeline and Hazardous Materials Safety Administration),
which is the federal regulator of the pipeline, AKLNG has been
able to change the amount of strain-based pipe it needs and come
up with a model that satisfies all of the regulators.
10:29:17 AM
MR. BUTT said AKLNG has also extended that into the execution
phase, and he showed a map with potential compressor locations.
As AKLNG understands the system better, it is able to remove
redundancy, he said. It is important to handle the compression
properly and to keep the gas and the soils around the pipe at a
constant temperature so the pipe never moves. The [Trans Alaska
Pipeline] is 65 percent above ground, and about 60 to 65 percent
of the AKLNG will be below ground, he noted. The route is
confirmed and "we know exactly where each of the pieces would
work." The sea floor modeling is finished, so the AKLNG pipeline
team knows the best way to cross the inlet [shown on page 5] but
still needs to work on optimization of the construction and the
compressor station-"we think we'll get done."
10:31:57 AM
MR. BUTT stated that the gas treatment plant is always one of
most important and complex elements of the system. All engineers
know what a strange gas CO2 is; it behaves differently than most
fluids. When CO2 is under pressure, it becomes a liquid. It can
freeze at minus 50 degrees Fahrenheit. It is difficult to handle
as a fluid, it is a greenhouse gas, and it has no hydrocarbon
value. Removing the CO2 is important, and Prudhoe Bay has 11.5
to 12 percent CO2, one of the highest levels in world. He said
that there is only one LNG plant operating with anywhere near
that level of CO2, and it is in Western Australia. The CO2
should not be vented even though some other projects have done
so. The amount from this project would be enormous: 450 million
cubic feet a day of just CO2, twice the amount of gas the entire
state uses, or trillions of cans of Coca-Cola every day. "The
amount of CO2 is staggering," he emphasized, so to manage that
has always been an important challenge. The gas treatment plant
team has made tremendous progress; they have worked very closely
with the Prudhoe Bay operator to confirm that the site works and
it can be connected to the existing infrastructure.
10:34:38 AM
MR. BUTT showed a photo of the plant on page 6. The work
required a high level of integration with Prudhoe Bay people, he
said, and they have been excellent to work with. He stated that
"they've helped us really understand what would happen to that
CO2 when it's put back in the ground at Prudhoe Bay, which is a
huge challenge, and it's been a huge success for this team to
figure out how to handle this much CO2." Each year, when there
are ice-free lanes, some section of the plant would be brought
in, he explained. The first year, everything colored blue on his
diagram, like the modules for process equipment, utilities, and
the flare, would be brought in. In the second year, "we'd bring
in the first train to treat the gas, and we'd be able to begin
filling the pipeline with just that first train." He said that
the beauty of this system is that AKLNG may be able to operate
three LNG trains with two GTP [gas treatment plant] trains in
the early days when CO2 levels are lower, which helps the
project be more competitive. "So that what you build on the
North Slope is aligned and completely balanced with what's built
in the Cook Inlet," he added. There is work ahead on optimizing
the size and design of the gas treatment plant. The Pre-FEED
basis is much larger (as shown on page 6) than the current one,
and about 40,000 tons of equipment were cut out.
10:37:09 AM
MR. BUTT said that is a huge breakthrough. The plant dwarfs any
existing facility on the North Slope, and the vessels to remove
the CO2 from the gas are 105-feet tall. "So, we worked through
all of those challenges, and we figured out ways to do that with
machinery and electrical optimizations to really keep our costs
down," he stated. It is a very complex system with about 700
miles of pipe and cable inside the plant.
10:38:10 AM
SENATOR MICCICHE said there is more crossover between typical
Pre-FEED and early FEED, and he asked what the advantage was.
MR. BUTT replied that normal Pre-FEED can be less detailed, but
AKLNG had to go deeper in order to inform the resource reports
for FERC. Once the commitments are made to FERC, AKLNG did not
want to move the gas treatment plant. "We wouldn't want to be
uncertain in our ability to reinject all of the CO2 in Prudhoe
Bay, because that is a dramatically different environmental
impact," he explained.
10:39:20 AM
SENATOR COSTELLO asked what was learned by studying the 48-inch
line and if it delayed the Pre-FEED timeline.
MR. BUTT answered that the pipeline team spent four or five
months on the hydraulics, which cost $42 million, and "we're
always learning." The challenge was to keep that team on track
with all of the other teams, he added. The team is catching up,
but it did a tremendous job - all during the transition with
TransCanada, which entailed personnel changes.
10:40:52 AM
CO-CHAIR GIESSEL asked if the Alaska Oil and Gas Conservation
Commission (AOGCC) had to authorize reinjecting the CO2 and if
it did so in October.
MR. BUTT said yes, and it was a real milestone. There was
excellent support from the AOGCC, he added.
CO-CHAIR NAGEAK remarked that with regard to optimizing
resources, there is some land and resources to the west of where
the project will be, and he wants to make sure people in that
area will have the opportunity to work with this project "and
other things in the future."
10:42:53 AM
MR. BUTT thanked the Native corporations, villages, and
communities for all the support. The project team has had some
great conversation with the people of Ahtna [Inc.], and "their
ideas were better than ours."
10:43:50 AM
MR. BUTT said that each of the elements of the project have been
done "somewhere," but no entity has done something of this scale
altogether. There is a gas plant in the Middle East that is
almost as big, but there is no processing plant of this scope on
the North Slope. There are 800 miles of pipelines elsewhere, but
this 42-inch pipeline is unique because it is thicker and
heavier than any other pipeline. Pipelines vary in thickness
because of the fluid and the pressure that is handled. This pipe
will hold gas at 2,100 PSI [pound-force per square inch].
MR. BUTT noted that there was hundreds of skilled laborers
available, but the company needs thousands. Peak load-the
construction phase-will have a workforce of up to 12,000, he
said. If the number of trucks loaded with the needed pipe were
strung end-to-end, it would stretch from Anchorage to Los
Angeles, he explained, and the project will need about 190,000
gallons of fuel.
10:47:21 AM
MR. BUTT said the fabrication costs have been driven down by 40-
45 percent. Referring to page 8 of his presentation, he said
scheduling includes contingency analysis and schedule reserve
review. The "critical path" is made up of those activities that
cannot be recovered if they "slip." In this project, the
critical path is the regulatory work. Anything built to export
LNG becomes a "connected action to FERC." He said that anything
used to source gas to the facility is under a similar
environment review process to meet the standard of "least
environmentally damaging practicable alternative."
10:49:58 AM
MR. BUTT explained that on the schedule diagram, the critical
path is colored red. Somewhere at the end of 2016 there will be
a decision on whether to go to the next stage, because once the
draft 1 resource reports are filed, draft 2 reports are filed,
and then the application is filed. The FERC will then have a
public process to confirm that the environmental impact is
smaller than the potential socio-economic benefits. There will
be a decision in 2016/2017 that goes back to the applicants-the
parent companies-who will decide whether that FERC document
should be filed, he said. In the middle of page 8, "you can see
we'll kind of get to the end of 2016 with our Pre-FEED work." He
is confident that the deliverables will be done in September,
draft resource reports will be done in July and August, and the
work scope under the existing work program and budget will be
completed in 2016.
10:51:24 AM
MR. BUTT said there will then have to be a conversation on what
the regulatory uncertainty looks like and what happens next. A
project of this magnitude takes about a year to get ready to do
FEED, reestablish all of the people involved, get the basis of
the contracting done, and find out from the contractors how much
money they need to do the work. Between Pre-FEED and FEED the
project goes from "process flow diagrams" to very detailed
drawings, which will then go into ATC (Authorized To
Construction) drawings. Then there will be a final investment
decision-and then the initiation of execution.
10:53:28 AM
MR. BUTT said execution will take four to five years, because
the gas treatment plant needs to get the modules through the sea
lane to the North Slope. Once the gas is available, the pipe
should be ready and at least one LNG train should be ready to
liquefy it for export. He said start-up takes up to a year, but
getting things going is harder than keeping them running.
10:55:05 AM
SENATOR COSTELLO asked about the status of a labor study and
specific jobs Alaskans can prepare for. She asked if there are
labor strategies that the partners are looking at.
MR. BUTT said AKLNG has had conversations with the commissioner
of [Alaska Department of Labor and Workforce Development] on
"capability building." He wants to make sure that Alaskans have
the jobs with long-term operations impacts; "training people to
run welding machines on a project that has a three-year lifespan
is not as powerful as training people who can run that machine
for 30 years." A big concern is that crafts skills like welders,
electricians, and pipefitters are difficult to source. They also
need skills with heavy equipment and trucking and people to feed
and house staff. There is direct labor (welder for example) and
indirect labor (a person who supports that welder), and there is
at least a one-to-one ratio of those types. He spoke of the
cooks and the hundreds of pounds of eggs and other consumables.
Working with the commissioner, he said, he would like to
"differentiate those jobs, build capability for the long-term
jobs here in Alaska, look for the right ways to source craft
labor, and then use other places to fill the rest."
SENATOR COSTELLO asked about the report.
MR. BUTT replied that the labor study is complete, but the
resource report on labor is not done, but it will be given to
FERC who makes it public.
10:58:33 AM
MR. BUTT said AKLNG is finishing Phase 2 of the archaeology and
culture resource work. Archaeologists report discoveries to the
state historical preservation office, and the project is
rerouted. The work should be done by late August, he stated. The
contractors provide good support, and ACOM got the global safety
award from their corporation. He said there is a team working in
the AKLNG office on resource reports 2-9, which includes the
labor information. Also, the company is doing "stakeholder
input," which means going out to the communities and asking what
Alaskans think of the project. There have been excellent
interactions and consultations with the Native regional and
village corporations and good turnout at the meetings. There are
questions and skepticism as to providing jobs. "We respect
that," he stated, "and we give them the information we've got
and always try to be as clear as we can." He pointed to photos
on page 10 of his presentation and said this process is through
FERC, and they do a great job.
11:01:07 AM
SENATOR DUNLEAVY asked, "Are we are still on target for the Pre-
FEED wrap-up and the FEED decision?"
MR. BUTT answered that Pre-FEED deliverables will be done in
September, and the Pre-FEED joint agreement expires in June
2017. As the lead party, [his team] will put forward a work
program and budget in 2017, and if the parties decide not to
support it, the existing budget expires at the end of 2016.
SENATOR MICCICHE said the road realignment is in his district,
and the community is concerned since it is the artery of
transportation on the Spur Highway. "If there is a delay in the
project, does the road remain a priority issue for the community
to consider?"
MR. BUTT said, yes, the Kenai Spur Highway and a potential
reroute is one of the most critical elements of the LNG plant
design. Defining the reroute needs to be a public process, and
that cannot happen until the design work for each alternative is
complete. The team is spending about $1 million to look at all
options for each aspect of the work, and AKLNG wants to do it in
conjunction with the Alaska Department of Transportation, who
has been helpful and thoroughly involved. When AKLNG decides
what is best, it will go to the community, he said.
11:04:04 AM
CO-CHAIR GIESSEL noted that AKLNG is purchasing land for the LNG
plant. She asked about the status of the purchase and the
response from the community.
MR. BUTT replied that the "project" works with the AKLNG LLC.
"The land that gets purchased and is targeted is worked through
the project, but the project doesn't buy the land. The limited
liability company buys the land and owns the land." He explained
that the company was open to all four JVA (Joint Venture
Agreement) participants, but, at the time, only three were ready
to join, and it was critical to obtain the DOE [U.S. Department
of Energy] export authorization. The DOE authorization needs
three things: access to the supply, technical capability to
execute the project, and a physical place to do the work. There
was a time, he said, when the DOE was inundated with people
requesting export authorization who had no gas, experience, or
physical resources. To be successful, AKLNG made sure it had the
land, and it received export authorization in record time. "But
the land is owned by the LLC; we have well in excess of 600
acres." The number one principle when buying land is to be fair
and durable and use no coercion. For the most part, the
community is supportive, he said.
CO-CHAIR GIESSEL asked if the State of Alaska is one of the
entities that owns the land.
MR. BUTT said no.
REPRESENTATIVE HAWKER asked if Mr. Butt said that the sponsor
companies have been in charge of FERC and DOE compliance and
applications. He asked how much the state has been involved and
if Alaska is a party to the reports and processes.
MR. BUTT said it was great to hear his voice, and "my heart's
there with you." The state is one of the six applicants under
the FERC docket, which are the four JVA participants, the
Department of Natural Resources (DNR), and the Department of
Revenue (DOR). Applicants change all the time, but the existing
structure is those six applicants.
11:09:08 AM
REPRESENTATIVE HAWKER asked if the state is fully participatory
with the compliance work.
MR. BUTT said yes, state representatives are always present when
meeting with DOE and FERC. They are always in the room when the
project reviews resource reports, he added. They are very much
part of the process. He referred to page 11 of his presentation
and stressed the importance of discipline for such a big
project; "don't make mistakes when you're spending a lot of
money." He said the project spent about $30 million per year in
the concept phase and will spend about $30 million a day in the
execution phase.
11:11:55 AM
MR. BUTT said misalignment can burn through money, but the
project is in Pre-FEED now, and there are five requirements for
a FEED decision. The first is a viable technical option, and in
2011 there was a lot of uncertainty on the ability to execute
the project, especially with regards to the high CO2 content,
the length of the gasline, and the construction of the LNG
plant. "Our certainty and comfort with technical challenges and
viability is much higher," he stated. Getting key commercial
agreements is the second requirement, and that remains a real
challenge. The third requirement, government support, is still
an open issue. He said the fourth requirement is permitting, and
some companies have spent billions of dollars in the hopes of
getting a permit but have none. The fifth is commercial
viability, and this is the most important. "Can you get cost of
supply low enough that on a daily basis you can beat your
competition?"
11:15:11 AM
MR. BUTT summarized and said there is a great team, but it
always comes down to alignment, risk, and cost.
11:16:34 AM
SENATOR DUNLEAVY said the legislature will be the ones to
appropriate funds. He asked his confidence that this project
will move forward.
MR. BUTT answered that, at the right time, the known resource on
the North Slope will be developed, but the market has gone down
by 50 to 60 percent. "It's a really heavy lift," especially with
the uncertainties in the regulatory environment, and today might
not be the day to pursue this project.
11:18:16 AM
SENATOR DUNLEAVY asked if this will move forward.
MR. BUTT said he doesn't know what he doesn't know. Under the
JVA there is a Pre-FEED notice, and at the end of the completion
of the deliverables, all parties have 120 days (after September)
to decide if they want to move forward. "I don't know what all
the parties will do."
11:19:17 AM
REPRESENTATIVE TARR noted that the legislature funded the 2016
work plan, and she asked about the 2017 work plan.
MR. BUTT answered that all four participants have funded the
2016 work program and budget. What happens in 2017 is not going
to be known until November, because the work program and budget
will be filed with the participants on October 1. This July 1,
the project will put out a draft budget. All the parties look at
the draft and discuss it, and then there will be a final budget
in October.
REPRESENTATIVE SADDLER asked if potential changes of ownership
and structure caused Mr. Butt to "pull any punches or not do
work you should have done," and what the shelf life is of work
done to date.
11:21:06 AM
MR. BUTT said some products have a very long shelf life, like
the geotechnical work. The resource reports on socio-economic
benefits and community impacts have very short shelf lives.
Regarding project structure changes, he said he does not think
he pulled any punches. There is a lot of uncertainty ahead. All
of the parties have options, he said.
REPRESENTATIVE HERRON said there will be pieces of Pre-FEED that
will have a short shelf life, and Mr. Butt had testified at
another time that the shelf life would be about one year. He
asked for a couple of examples.
MR. BUTT said the best example of short shelf life deliverables
are the community impacts, because communities change. Soils
don't change, he explained.
11:24:17 AM
REPRESENTATIVE CHENAULT said he represents a community that will
be vastly affected by this project. One issue is rerouting the
current road around the facility, and numerous people are
concerned about where that is on the schedule.
MR. BUTT answered that the team is doing one million dollars'
worth of design work. There are eight different ways to move the
highway, and each has different impacts. He wants to do all the
analyses in conjunction with FERC in order to not "get in front
of our headlights on where the road would be," so that will be
done at the end of the year at the earliest.
REPRESENTATIVE SEATON asked if having commercial agreements and
commercial viability are requirements needed for the project
decision, or do individual partners [make that determination].
MR. BUTT answered that those items are owned by the parent
companies and the applicants. The project team facilitates work
to support that, but that analysis really belongs to the
individuals, and each must decide if the risk and return makes
sense. It is the same as the commercial agreements, he added,
because they are about making sure that risk and return are
allocated in a manner that the parties consider equitable.
REPRESENTATIVE SEATON said there has not been resolution on the
upstream work within Pt. Thomson. Are those questions that the
state should address to the individual partners?
MR. BUTT said yes.
CO-CHAIR GIESSEL said people on her committee have talked to Mr.
Butt often, but the public may be getting more interested in
this projects, so she asked him to explain his experience in
managing projects of this magnitude.
11:29:48 AM
MR. BUTT answered that this is the first project of this scope
that he has ever managed, and there are no other projects of
this scope. He related that he has been with ExxonMobil for over
30 years and has been involved in projects in multiple
countries. In Venezuela, he was involved in building a long
pipeline and a big treatment plant, and in Angola and Equatorial
Guinea, he was involved in large offshore processing facilities.
In Qatar, he was involved in the startup of the world's
currently largest gas treating plant. He listed others.
CO-CHAIR GIESSEL noted that he oversees the current project
team, who are specialists. Is anyone from AGDC a lead on any of
those teams?
MR. BUTT said, not at this time, but AGDC had the opportunity to
staff team members. In May or June of 2014, "we looked at some
staffing slides and talked about "how do we do this" and "our
core principles best-player play," so each of the JVA
participants put up people for roles." There were about 135
people at the peak, and they mostly came from ExxonMobil.
ConocoPhillips contributed about 25, TransCanada provided about
15, and BP provided about 10. They all did an excellent job. The
composition and size of the team changes as the deliverables are
completed.
11:32:04 AM
REPRESENTATIVE TARR asked who replaced the TransCanada staff.
MR. BUTT answered that there were 12 TransCanada people at time
of demobilization in June, but most of their jobs were complete.
Other staff just transitioned up, he added. A project always has
transition, because it needs the best person to do the job. It
was a smooth transition, he said, and TransCanada was dedicated
and handled the transition well.
REPRESENTATIVE SADDLER noted that low prices have created
challenges around the world. He asked if the "changed market is
offering Alaska's project an opportunity it might not have had-
lower labor costs, more availability of professional capacity?"
MR. BUTT answered that there has some "softening," but as
natural gas has become cheaper, the work has shifted. People who
used to be building plants to make gas available are now
building plants to use cheap gas, he said. The shift in the
market has helped drive down costs, but it is not consistent
with the shift in the value of the commodity.
^State gas team
STATE GAS TEAM
11:36:18 AM
CO-CHAIR GIESSEL announced that the next presenter will be the
state gas team, which is made up of four entities: The
Department of Natural Resources, the Department of Revenue, the
Attorney General, and the Alaska Gasline Development
Corporation. The team was formed to stand in for the state on
this project. Speaking on behalf of the entire gas team is the
new president of AGDC, Mr. Kevin Meyer.
11:37:59 AM
At ease
11:40:35 AM
KEVIN MEYER, President, Alaska Gasline Development Corporation
(AGDC), Anchorage, noted that his presentation was prepared by
AGDC under his direction. He gave an outline of what he plans to
discuss and noted that he is new to AGDC. He said he started two
weeks ago on June 15; however, he had a consulting role with
AGDC for a couple of months. He said he has 35 years in the
international gas and energy industry, mostly with natural gas
and pipelines. He started in the industry with a very large
pipeline company, owned by America Natural Resources (ANR) and
its pipeline company. It was when the industry went through an
unbundling and a deregulation period, and pipelines in the
United States went from buyers and sellers of natural gas to
transporters of natural gas, he noted.
MR. MEYER said that at ANR, "we were very instrumental in
helping shape the open-access transport regime that is in place
in the country today." The regime has been adopted by the world,
as well, and it is a good framework to have a pipeline serving
others-those who either buy gas or sell gas. He stated that he
is very comfortable in that arena, and that is the common
structure for a pipeline, where a pipeline company owns the
pipeline, as opposed to a producer-owned pipeline, like in
Alaska. He said he then worked 13 years for CMS Energy, which
was a holding company formed to hold a large utility in
Michigan. The utility was getting crushed under the weight of
the failed nuclear plant. Some people from ANR went to CMS
Energy and formed the holding company and developed a nonutility
side, but because of all of the debt at the utility, the
nonutility side had no capacity to borrow money or guarantee any
debt, so all of the projects had to be done on a non-recourse
project finance basis.
11:45:20 AM
MR. MEYER said the company eventually owned the largest power
plants on three continents: North America, Africa, and
Australia. "We also built the highest pipeline in the world at
the time," which was the Atacama, and it crossed the Andes. In
1998, CMS bought the Panhandle Company, and it came with the
Lake Charles LNG facility, which was one of the original LNG
import facilities built in the U.S. He said he then moved to
Cheniere as president of Cheniere LNG. "We built … the largest
import terminal in the Western Hemisphere," he said. It started
as a very small entity, but it persevered, and it developed and
secured two very good customers, which led to the financing that
allowed the company to double the size of the facility-at risk,
which was not a good decision. Today Cheniere is developing an
export project at Sabine Pass. When that facility is done, it
will be about 50 percent larger than the AKLNG plant. After
leaving Cheniere, he was out on his own, and he started on
global biofuel. At that time he thought the world had approached
"peak oil," but everyone had underestimated "the shale," he
said. Then the financial crisis happened in 2008/2009, and there
was little interest in startups and biofuel, including his
African biofuels project. That was when he heard about this
opportunity in Alaska, and he had heard about the project since
his first day in the industry and had watched it go through its
many phases. He is excited for this opportunity to move this
project across the goal line.
11:48:41 AM
CHAIR GIESSEL said there may be questions about Mr. Meyer's
resume from the members.
SENATOR STOLTZE asked about Mr. Meyer following the [AKLNG]
project his entire career, so he asked him for "a critique and
analysis of the high and low points" throughout Alaska's entire
gasline effort.
MR. MEYER said that by coming from a pipeline background, it
puzzles him why this project has been so difficult to achieve.
Although it is not the biggest or highest pipeline or the
largest LNG plant, it is a big project altogether. Through the
years, it has had fits and starts and originally was a pipe
through Canada to the U.S, which would not have been a good
move. By looking at it as an infrastructure project, he asks,
"How do we de-risk it? How do we get customers involved?" The
LNG industry, in the last six to eight years, went through its
largest demand pull in its history, he noted. Every project that
had been on the board, got constructed and got into service, so
why not this one? He said he was in Alaska in 2011 looking at a
small-scale LNG project as a means to increase the Southeast
Alaska market for the benefit of the Cook Inlet producers. One
of the problems in Cook Inlet, he said, is the lack of demand if
gas is found, so he looked at a smaller scale project. As part
of his strategic plan document, he noted the need to consider
what happens with the small plant when the LNG pipeline comes
in. "I was sort of laughed at by these producers, saying 'Well,
that pipeline's never going to get built.'"
MR. MEYER said he disagreed-it is a very viable project-but he
developed a plan that worked with or without the pipeline.
Recently, he has spoken with some engineering companies who
shake their heads asking why this project is so difficult-it's
not a difficult construction project, but it has a lot of moving
parts. He explained that, generally, the steel and concrete are
easy; it is the paperwork that is difficult, and that is true
for this project. He said he is hoping to figure out how to get
the paperwork done, including the commercial, technical, and
construction paperwork. It is important to recognize that the
project is high cost today and that it missed a small window a
few years back. Right now it is high cost, so the focus needs to
be on how to get the costs down, he added, and the technical
team has done outstanding work by beating the costs down, and he
has been told that there is still more room to go down.
11:53:52 AM
MR. MEYER said now it is the time to look at other costs, and
that includes financing, taxes, and other aspects. He said he
has always been puzzled that the pipeline is not advancing more
rapidly. He said he is anxious to assess if "we can do something
differently that actually gets this project on track."
SENATOR STOLTZE said maybe his expectations were too high, and
asked him his view on what the mistakes have been, "where we've
just thrown money into a pit hole, or where we've gotten some
value from it and how it builds on to where you're looking ahead
right now."
MR. MEYER said the work done to date has significant value and
shows that this project can be done. The cost parameters are
getting narrower in terms of its risk of variability. It is
clear that the cost is a bit high to clear the market, so the
project is slowing down. Now we need to figure out what else we
need to do. He is not suggesting that the work done to date was
a mistake; it's very good work. The costs need to come down, so
it is time to look at costs other than those of construction, he
stated.
SENATOR STOLTZE said he expected more detail and more clinical
analysis. Getting a penny out of a dollar is value, [but not]
comparative value. He asked Mr. Meyer about the virtues of sole
state ownership or of having a significant majority role.
11:57:37 AM
MR. MEYER said he intends to address that in his presentation,
and he told Senator Stoltze to feel free to let him know if he
has not made it clear, but he noted that this is in a formative
stage, and it is about what can be done differently to keep this
project on track.
SENATOR STOLTZE said, "I tried to narrow it to one comment: the
AGIA [Alaska Gasline Inducement Act] TransCanada." If it has
value, "are we talking Greek currency or are we talking deutsche
marks and American dollar value?" He said he is trying to get
some perspective, "even on a broader more-even a little bit of
subjectivity." He added that he is just trying to know where
[Alaska] is going with this new step. He said that Mr. Meyer did
not have a lot criticism for everything, so it all had value.
So, he said, he is not going to be as active in this process
except as a citizen and a stakeholder. "I'd like to know where
the pro from Dover wants to take us," he added.
11:59:10 AM
MR. MEYER said he is not intimately familiar with the AGIA
project, but a line through Canada to the Lower 48 probably
would have been a mistake, given gas prices today. The shale gas
production in the U.S. caught a lot of people by surprise, he
explained. It is a shift in the E&P [exploration and production]
industry by shifting the focus to the production side. He said
that the amount of production out of shale has astounded
everyone. A few years ago he was asserting that the country was
running out of gas, and "right under our feet we have not only
have found gas but, by golly, we found the third largest
producing country in the world in this shale." Decisions made
several years ago may have been reasonable in that time, but the
outcome may have been quite bad. "When I say I followed the
[AKLNG] project over my career, I've known about it … it doesn't
mean I intimately followed every decision," he clarified.
12:01:14 PM
SENATOR STOLTZE said he will lower his expectations-"the
interview process is over. You've already got the job, and I
guess we're looking for more candor."
REPRESENTATIVE HAWKER asked who Mr. Meyer worked with in 2011 on
Alaska gas, and what his previous consulting role was with AGDC.
12:02:02 PM
MR. MEYER said in 2011 he was on his own as L&G America, and he
came to Alaska under the banner of LNG Alaska and met with
Buccaneer [Energy Ltd.], a small Cook Inlet producer. He gave a
presentation to the Senate Resource Committee and talked about a
small-scale LNG program for the Southeast Alaska market, and he
offered an initiative to get gas to Fairbanks. He explained that
he looked at high horsepower markets for LNG as a fuel, such as
the marine market, which is converting to LNG. He noted that
Tote [Maritime] is converting its ships to LNG, two of which
serve Tacoma and Alaska. He had hoped to provide LNG from
Alaska, but there was none available, so TOTE elected to get
their LNG in Tacoma. He said he thought the Alaska Marine
Highway ferries were ideal for using LNG, and he promoted the
potential export markets. He said he consulted with AGDC for
about two months "prior to the June 15th date."
12:04:42 PM
REPRESENTATIVE HAWKER asked what he did at AGDC.
MR. MEYER said he had not been appointed, but he was in an
unofficial capacity helping understand where AGDC was, starting
to see about developing a strategy that puts the project more
into a traditional infrastructure context, and "that type of
thing."
REPRESENTATIVE HAWKER asked who hired him.
MR. MEYER said AGDC.
REPRESENTATIVE HAWKER noted that Mr. Meyer talked about the
traditional infrastructure framework and that he said he shaped
the open-access framework in his earlier career that is now the
standard of service in the world today. "Congratulations on your
fatherhood there." He asked if Mr. Meyer is prejudiced against
producer participation and pipeline ownership.
12:06:31 PM
MR. MEYER said he did not single-handily shape [open-access
transportation regime], but America Natural Resources was one of
the major companies in the U.S. helping shape it. That
transition went on for a number of years, and the regime set up
by FERC is the model today in the world. He said he is not
prejudiced against producer-owned [pipelines]. An equity-based
model, when all of the participants contribute their share of
the project, works very well in certain regimes. It certainly
works well for the project participants if the project clears
the market, as it gives them more control, but he does not
necessarily support it for a major gas transmission
infrastructure in a state like Alaska. If the pipeline is built,
it becomes the way to open the North for additional exploration-
it's not just a way to monetize Prudhoe Bay and Pt. Thomson. A
pipeline will significantly lower the barrier to developed North
Slope reserves. Today there are very high barriers; if someone
finds gas, they are somewhat stuck, he explained. Since this
will be such a significant transportation corridor for the
state, "I think the state will be well-served to have … somewhat
of an open access regime," which does not mean going all the way
to a FERC Section 7, which is full FERC regulatory authority,
but it does mean providing capacity for newcomers. "I don't have
a bias against a producer-owned or an equity-based model," but
if costs are high and times are tight, the equity-based model
has a higher hurdle to leap, because the equity participants
generally have a higher cost of capital than an infrastructure
investor.
12:09:42 PM
REPRESENTATIVE HAWKER asked what structure Mr. Meyers is going
to move this project to and what is the authority for that.
12:10:24 PM
SENATOR MICCICHE said he does not want to sound confrontational,
but he asked who he was working for when he received the
industry's "LNG Company of the Year" award.
MR. MEYER said that was on behalf of Cheniere.
SENATOR MICCICHE said he does not subscribe to the "build it now
or die" mentality, and Mr. Meyer was cavalier in saying it is
just a paperwork issue. Alaskans cannot afford a mistake of
holding the bag on a $45-60 billion project, and Mr. Meyer
received that award for building North America's largest LNG
receiving terminal. He asked how many cargos the Sabine Pass
terminal received.
MR. MEYER said cargos were very small, and Cheniere secured two
long-term customer commitments, one with Chevron and one with
Total. They were 20-year, corporate-guaranteed commitments for
about $125 million per year each, regardless of whether they
shipped a cargo, he told the committee. That is an
infrastructure project-financed type of investment where the
developer secured two long-term customers. He explained that the
customers have the right to use the terminal or the pipeline,
but they have no obligation to use it. It is almost like an
option, and the company was paid regardless of whether they
shipped the cargo.
SENATOR MICCICHE said he thinks that his point is that of the
$20 billion in infrastructure, "we underestimated the amount of
supply that the U.S. would produce immediately upon completion
of those facilities." It sounds like the project had some
protections, he said, with a "take or pay." Eventually, if no
one takes, Senator Micciche said he would not call it a
successful project. It sounds to him like Mr. Meyer is
celebrating a severe underestimation of what the needs would be
on imports. A lot of people do that; there were several
facilities built that will never be used unless they are turned
around for liquefaction. He said he wants to recognize those
fundamental mistakes in the evaluation of AKLNG going forward
and not make them.
12:14:38 PM
MR. MEYER said he agrees. It is not build-or-die, and it is not
build-it-and-they-will-come. He said if this system is not
contracted for its capacity, it will not be built. "I am not
suggesting this gets built at risk."
REPRESENTATIVE SADDLER welcomed Mr. Meyer. He asked what his
charge is from Governor Walker, and why Mr. Meyer is shifting
the project structure.
12:16:08 PM
MR. MEYER said Governor Walker wants to get this project moving
in a sound manner, without an undue burden on the state.
Currently, it is slowing down-if not coming to a crawl. "Is
there an opportunity to pick up the pace, and let's see if we
can hit the next market window," which Mr. Meyer believes may be
the mid-2020s. It is the same project, but there may be a
different structure that may lend itself to federal tax-exempt
financing, for example, like infrastructure financing. He wants
a change that all parties can agree on. He stated that he is not
coming with the exact game plan, but some concepts. "What we
know is, something has to be a little different," and he
believes there are things that will make the project more
attractive, and there will collaboration with the producers. He
has more detail in his presentation, he noted.
SENATOR MACKINNON asked if Mr. Meyer sees himself as working for
Governor Walker or the AGDC board.
MR. MEYER said the AGDC board.
SENATOR MACKINNON said Mr. Meyer's AGDC employment agreement
discusses his previous ownership interests and [allows for]
"reasonable activities associated with the transfer or windup of
activities." Pursuant to the Alaska Executive Branch Ethics Act,
outside activities will be subject to review and approval to
ensure they are not in conflict with the duties owed to AGDC.
She asked about his ownership interest in that particular
project and how he sees that transition, and it appears that Mr.
Meyer may be continuing to seek outside employment.
12:20:49 PM
MR. MEYER noted that the small-scale LNG project had an
arrangement with Cheniere to get supply from the Sabine Pass
facility, and the focus was domestic, high horsepower activity
in the Gulf Coast. "We also initiated the development of a
receipt terminal in Panama," he added. He said his agreement
with AGDC is that he must step out of that entity within three
months. The major part of the activity was with Cheniere, and
his main support was from the Chair of Cheniere, but the company
has undergone some changes, "so we've decided to back away from
that arrangement. Cheniere was going to put in a truck rack at
Sabine; they had filed for that, but they've now withdrawn that
just recently." That relationship is ending on its own, he
added. Regarding the Panama facility, "we're in discussions
right now with somebody to take that." He said that he does not
anticipate any activity at Amasia LNG America that he would be
involved in. There is no contemplation for other activity, but
his understanding is that while he is employed by AGDC he will
not engage in other activity. Subsequent to his employ at AGDC,
he is restricted from engaging in any large-scale LNG facilities
in Alaska, he said, but there is an allowance for a small-scale
facility, like what he worked on in 2011.
12:23:13 PM
SENATOR MACKINNON asked what interests he will maintain in other
companies and she said that on page 2, the document reads:
"subject to the Alaska executive branch ethics Act, the board
does not object to the president serving on civic or charitable
boards or committees or managing personal investments." That
statement raised a flag for her and she wants to publicly raise
the question of "how we're resolving your interest." She asked
if Mr. Meyer will become a silent partner or if someone else
will control the LLC.
MR. MEYER said that clause is not intended to involve LNG
activity-just his personal stock accounts, not LNG America or
its holding company. "We're in discussions now with a partner to
take the Panama project, and that will be it." He does not
intend to engage in activities under LNG America in the LNG
arena, he stated. His understanding is that he will not be
engaging in LNG activities while at AGDC.
SENATOR MACKINNON asked if there is a specific way that Mr.
Meyer is defining a small-scale project.
MR. MEYER surmised that she was referring to the non-compete
[clause] for post-employment after ADGC, and he believes that
small-scale is defined in there as less than 2 million tons.
12:25:38 PM
SENATOR MACKINNON said she is pressing the issue because on page
5 of the employment contract, there is an "inference with
relationships," and, "I just hadn't read one that said director,
copartner, or any other individual representative capacity."
Referring to AGDC's master service agreement contract, 16083,
between Mr. Meyer and AGDC, she said she has read the amendments
and reviewed the dates of the amendments. It does not appear
that Mr. Meyer was under contract when she met him in March.
"You're not new to the job," she said, "you've been working
since April for the AGDC in some capacity." She asked if he
attended the [18th International Conference and Exhibition on
Liquefied Natural Gas] in Perth on behalf of AGDC.
MR. MEYER said yes.
SENATOR MACKINNON asked if there is a report or briefing of
benefits obtained.
MR. MEYER said he did not prepare a formal report, but he is
including some of what he learned in a strategic plan document.
SENATOR MACKINNON asked about "MFA 16083 Amendment 1 for this
representation of AGDC at this conferences in Australia. We were
looking at information about the Canadian project, Pacific Rim
LNG projects, Gorgon, [unclear], and other Asian Pacific
theater," she said. She asked if those LNG projects are similar
to what he described as the common ownership structure.
12:29:46 PM
MR. MEYER said that what is common to him is an infrastructure-
type finance project, and producers would say that the equity-
based model is common; the two sides of the industry are very
different, and they do things very differently. He noted that he
is not very familiar with the Russian project. Gorgon, the big
Australian project, was equity-based. The Canadian project has a
mix of infrastructure-based financing projects, and he believes
there are also projects intended to be equity-based being
developed by "some of the majors."
CO-CHAIR GIESSEL said Mr. Meyer visited her office on March 30,
"and yet as I look at your contracts, it actually began March
15, and so that is a question I will ask the board members."
SENATOR COSTELLO said the framework "for the project that we're
talking about" is set out in state law. She asked Mr. Meyers
what he will do if that vision differs from Governor Walker's
vision.
MR. MEYER answered that state law would rule. No question. One
of the first documents he looked was SB 138. "I think what we're
doing is squarely within 138." It sets the project up, and ADGC
is the enabler to create a gas treatment plant, upstream
pipelines, and an LNG plant, he stated. He sees a lot of
latitude in SB 138 for finding the best approach, and AGDC is
exploring ways to structure the project to make it more
competitive, focusing on reducing the cost of supply in this new
market environment.
SENATOR COSTELLO asked if it is the right time to increase state
ownership, considering Alaska's budget challenges.
12:33:01 PM
MR. MEYER stated that there is not a strong link between
ownership share and the amount of funds that have to be
invested. On an equity-base project, that is the way it works,
but for an infrastructure-based project, the state may own 100
percent of the infrastructure, but it may only invest a very
small amount, because the majority of funding can come from
large infrastructure funds that accept a lower rate of return.
He stated that if this project is properly structured, it will
be very attractive. He said he has told the producer parties
they are certainly welcome to be owners, and this project would
love to have them, but he believes that the project is not going
to meet the hurdle returns-their internal hurdle returns-for
investment. However, for an infrastructure fund, like a pension
fund, these returns will be very attractive. He said he wants to
clarify that suggestions of increased ownership do not mean
increased investment in the project by the state.
REPRESENTATIVE HAWKER said he appreciates the discussion about
getting out of the SB 138 box; however, the administration
engaged Lummus for an evaluation of other state pipeline efforts
to date. That report was never released and he said that Mr.
Meyer reviewed it and returned it to Lummus for revisions. He
asked him if he returned the report for revisions and why.
MR. MEYER said that the report will be finished this week. He
reviewed it and thought it was somewhat light and erroneous in
some of its statements. He stated that the report indicated that
the project was so tough, "only a major could do it." He pushed
back on that, "and you don't have to look any further than
Cheniere's Sabine Pass project," which is a bigger facility. He
said he firmly believes that the project does not have to be
done by a major, and part of his passion probably comes from
when people said that Cheniere was too small to build a big
terminal, "but we did it anyway." He said he suggested to Lummus
that it ought to look at an alternative. It is important to
recognize that none of the sponsor parties construct anything;
it is done by large construction companies, he explained. He
said that when he talks about the paperwork being important, it
is really managing these large contracts-like a large EPC
[Engineering, Procurement, and Construction] contract. The
contractor takes a lot of that risk, so when it comes time to
build this project, "we're not going to be out there with
trenches and trenching machines and welders; we're going to hire
a very large construction firm." He said his pushback to Lummus
was not recognizing that other companies can manage construction
contractors. He added that he does not know what the final
report will say, and it might not be changed.
12:38:44 PM
REPRESENTATIVE HAWKER said some members in this room have been
in the legislature for 15 or more years and have been engaged in
the details of the state's efforts. He said that Mr. Meyer told
him he was intimately familiar with "all of our efforts," but
then backed off of that statement. Representative Hawker said he
is really wondering if Mr. Meyers is "counseling us to realize
that all we have done was truly mistaken," where they have come
to understand the importance of the alignment of parties in a
complete value-chain project, "that you're counseling that we've
really done this entirely wrong from the very beginning and,
really, it is nothing more than a very large construction
project, and basically the markets will take care of
themselves."
MR. MEYER disagreed. He did not say he is intimately familiar
with every action that Alaska's taken over the last 40 years. He
has watched this project-everyone in the gas industry has
watched it. He is also not saying that the current path is
wrong. However, it should be recognized that this project is not
going forward. This is an attempt to ask if the project should
be slowed down or if something should change. The producer
parties are very willing to work in a collaborative manner to
figure out how to get costs down financially or tax structuring.
Right now the project is in a phase of asking what can be done
differently. He is not suggesting, at all, that the work done to
date was wrong. The state has to recognize that the market has
changed, rather significantly, so there are two choices: delay
or change. He said he thinks there is enough support among the
parties to look for something different. The path the state has
taken was right at the time, but the market has changed.
12:42:26 PM
SENATOR DUNLEAVY asked him to explain how he concluded that this
project is not moving forward. He referred to the previous
presenter who said the project is not even done with Pre-FEED.
MR. MEYER said his impression is that this project is not moving
forward. He said he recognizes that the decisions to go to FEED
are not yet called for; however, he believes there is enough
information to recognize that the producers have a disagreement
on the pace of FEED. By probing a little deeper, one will find
that there is not alignment on the parties going to FEED, he
said. The timeline shown earlier [by Steve Butt] has a diamond
that indicates the decision to go to FEED, and each party has to
consider whether it is ready. The probability is that it will
not proceed to FEED on the anticipated timeframe, he opined.
SENATOR DUNLEAVY said the law that governs this process is SB
138, "so will you be coming back to this legislature for
revisions of 138?"
MR. MEYER said he does not see any necessary revisions. He said
he sees full collaboration, and ideally, cooperation, with the
producer parties to reduce the cost of supply, which is the
collective challenge. That is the mission ahead, he stated.
12:45:28 PM
SENATOR DUNLEAVY suggested that Mr. Meyer "really dive into" SB
138, which is the governing law. He spoke about confidence and
said, "There's somebody new sitting at your seat every time we
have a meeting." He said there is a man, and he cannot even
pronounce his name, but he said Rigdon Boykin, and he asked if
Mr. Boykin is still part of the [AGDC] office.
MR. MEYER answered no.
SENATOR DUNLEAVY said there are others with names he cannot
pronounce that have come and gone. He said his confidence in the
process is waning, and if SB 138 has to be modified, there needs
to be a discussion. If Mr. Meyer is not using SB 138 as a
template, "I don't know what you're following."
MR. MEYER responded that he has read SB 138 many times; he
didn't write it, but "all of our activities are well within
138." He added that he thinks the project is getting back to its
original intent, which was to figure out how to get the project
done. He said he wants more transparency for AGDC and to lift
the coat of secrecy a bit. He said he spoke with reporters and
was quite open about what ADGC is doing, but there are
confidentiality agreements that restrict a lot of information,
but to the extent that he can be open, he will be. He added that
any of his suggestions have been squarely within SB 138, and any
deviation from it would come back to the legislature.
12:50:46 PM
CO-CHAIR GIESSEL said Mr. Meyer is experiencing evidence of
highly informed legislators who have been working on this type
of a project for a long time. Confidence and trust are in
question, she said.
MR. MEYER referred to his AGDC objectives, listed on page 4 of
his presentation. He said he would like to operate more as a
corporation rather than an agency. Every decision is going to be
based on sound business principles, which will make those
decisions defensible and able to stand up to challenges. He said
he wants more transparency with the public, the legislature, and
the market. This project needs a cooperative relationship with
producers, whether they are partners or customers, he said. Mr.
Meyer stated that he wants to look at the project as a structure
for third-party finance, meaning that the risks of the project
are borne by others, and that will make it attractive to third-
party finance. He explained that he wants to secure long-term
customer commitments, which may be with the producers as
shippers, or they may be with an Asian utility, for example, as
a buyer. For instance, a large utility in Japan could hold
capacity in the LNG plant, hold pipeline capacity, and purchase
gas from one of the producers-or from the state or a new party
in the state.
MR. MEYER said maintaining a 2023-2025 project in-service window
is an objective that is important, and the window is largely
subject to perception. Currently, the market is oversupplied and
the next demand pull will come in that window. "Let's get
prepared so that we can convey a high degree of confidence to
our potential new customers," he stated. Another objective is to
expand in-state gas availability-a mission of SB 138 and AGDC,
which can be part of this project and additional to it, he
suggested. He said he would like to see Alaska re-established as
an LNG leader.
MR. MEYER added that AGDC will not be responsible for the
RIK/RIV [royalty-in-kind/royalty-in-value] election, which is a
decision for DNR and is outside of AGDC's purview. He said AGDC
is not interested in assuming any Alaska agency statutory
responsibilities. He noted that state funding and credit support
is the Department of Revenue's responsibility.
12:55:31 PM
REPRESENTATIVE TARR noted that people are not remembering
correctly what was in SB 138, as opposed to what came after
through various documents and agreements, like the Heads of
Agreement and the JVA. She understands that SB 138 specifically
expands the power of AGDC to determine ownership. She asked how
other agreements would be impacted, like the JVA agreement that
expires in July 2017. "How will those agreement be influenced by
potential changes in ownership structure, and at what point
would the legislature be made aware of those?"
MR. MEYER answered that the other agreements, the JVA and MOU,
have their own lives and sunsets. He explained that the main
function of the JVA was the Pre-FEED deliverables, which have
been done, and the agreement is coming to a close. The parties
are now confronted with what to do next, and the agreements do
not define the next step. They do not define a governance
structure for the FERC application, which needs to be kept on
track. "New agreements are needed regardless of what we do
here," he said. He stated that he is hoping to come to an
agreement with the producer parties this year to discuss the
next phase. To the extent there is an agreement that precedes
the sunset date in those other agreements, he assumes that it
must come before the legislature. In the spirit of openness, he
wants members involved. A lot of communication will take place
in the development and certainly the finalization of that
agreement, he explained.
REPRESENTATIVE TARR said that is where they want to pay
particular attention to understand any shift in the current
structure. She said she was not sure where things stood on the
confidentiality issues. Legislators were not previously involved
in the development of the JVA that is governing decision-making
now, and so they would likely not be in the upcoming one;
however, as funding is related, the legislature would have to
pass a budget for it. "Has that been an issue that's come up so
far in your tenure as to … how legislators might be involved in
seeing that progress?"
MR. MEYER said confidentiality is a big issue. The agreement
that he has signed is one of the most restrictive of any he has
seen. Believe it or not, he may have even breached the agreement
by stating that there is an agreement, he said. There are
reasons for confidentiality, but it needs to be recognized that
the inability to discuss these big arrangements more openly
leaves a big knowledge gap, he said, and that gap is filled with
the worst possible imagined outcome scenarios.
1:01:53 PM
MR. MEYER said the new agreement is being discussed with the
producers in the same sort of privacy; however, a party that
brings something to this group can deem it not confidential. He
maintains that the framework, at least, of this concept should
be put out there so the legislature can see it. "Once we start
to incorporate producer comments into that, it falls back into
this cloak of confidentiality," he stated. The window of time is
now for talking about this framework more openly. To be clear,
he said, it is a concept; it is not a hard-and-fast, agreed to
plan. He said it would be a benefit to talk more openly,
particularly with the legislators.
1:03:06 PM
SENATOR STOLTZE noted that Mr. Meyer said he is not responsible
for state funding or credit support. He asked if he has a
consultant or advisory role, because he seems to have distanced
himself by emphasizing that he is not responsible [for state
funding or credit support]. He asked if it will be handled in
the governor's office.
MR. MEYER said he added that bullet [in his list of objectives]
to recognize that the Department of Revenue is responsible for
state funding, because AGDC does not have the authority to bind
the state. However, AGDC can arrange third-party finance, like
pension funds, but if the state has to contribute funds or make
some kind of commitment, DOR will be responsible. He said it is
similar to the royalty decisions, and SB 138 does not give AGDC
that authority, and he clarified that AGDC will not try to take
that authority.
SENATOR STOLTZE referred to Mr. Meyer's salary and said,
"Sometimes I wonder, gosh, how much a minute is it costing me to
ask these questions." He asked if [DOR Commissioner Randall]
Hoffbeck, [DOR investment manager, Deven] Mitchell, and [DOA
Director Ken] Alper are making "these" decisions. He said there
is a group of expert Alaskans, and some not from Alaska, and
then he asked, "Do you have no role in saying what's a good
financing package, … and it's going to be to the governor's
office and his commissioners to make comments and
recommendations on finance?" He said he is somewhat puzzled.
MR. MEYER answered that AGDC very much has a role; and he was
referring to the authority for decision-making. The project
needs to be structured so that it works for everybody in the
state. "To me, we need to structure this project so that when it
comes time to make a decision on whether we invest in one aspect
or another … or whether we have to do some kind of agreement on
credit support or taxing decision, yes, our role is very
instrumental." He said AGDC will be lining out the agreements,
identifying the risks, and identifying third parties that can
help explain that risk. He explained that the Department of
Revenue will have its own set of models, advisers, and
consultants to assess that risk and will not just take AGDC's
word for it. The corporation will be instrumental in trying to
get the state's role quantified, clarified, and calculated, but,
again, he said, AGDC has no authority to bind the state.
1:07:19 PM
SENATOR STOLTZE said there is a statute and a quasi-independent
body to provide more objective information. A carpenter starting
a quarter-inch off will have a crooked roof and an unlivable
house, he said. "If you're off by percentage points or pennies-"
He then stated that he and others have gone to seminars on mega-
projects, and he would have hoped that there would be a more
assertive role for Mr. Meyer being the voice of business reason.
He said that perhaps Mr. Meyer is a "political guy" and yielding
to the political side of the process. He said he has "pretty
good" confidence in members of the board, and he hoped "they've
hired a guy who's going be a very objective, independent-at
least for Alaska-and not take orders from the body politic on a
mega-project." He said that Mr. Meyer has acknowledged the
perils of small factors destroying the viability [of a project].
He explained that he has "already adjusted [his] expectations
from your backing off from how involved you've been in Alaska
projects now, and I hope I don't have to back off on how much I
suspect you, through your leadership on this professional staff,
is going to look out for Alaska's interest and not political
interests. I'm going to keep absorbing it."
MR. MEYER asked if he could comment.
CO-CHAIR GIESSEL said briefly because she has others lined up
with questions.
MR. MEYER said he was told that AGDC does not have the authority
to take DOR's responsibility. "We do not have authority on
upstream issues; that's DNR," and the Department of Law has
certain legal authority, he clarified. He added that AGDC will
be very instrumental in getting the state to the proper
decisions.
1:09:49 PM
REPRESENTATIVE NAGEAK said that whenever natural gas or LNG is
talked about, "everything that comes out of everybody's mouth in
this building and other buildings is that it's along the road
system" or places with easy availability. But the places "in-
between and outside are just an afterthought," he added, because
the cost of doing business on the road system is much less than
in rural Alaska. He noted that he is from rural Alaska, and
things are easier for him because it is where the oil and gas
come from, "and we make a living operating our villages and our
government as such." Every time [the legislature] talks about
projects that are going to be available for Alaska, it is to the
areas that are along the road system, he reiterated, because
getting all the goods to rural Alaska is cost prohibitive. Gas,
fuel, food, and other things cost a lot more. "Now they're
talking about LNG and to the market, and 'to the market' usually
means Outside," he added. He stated that there is new technology
allowing the delivery of LNG in huge tanks along rivers and
coasts. When the state had a lot of money, things were built
without the thought of the costs of maintaining them. "They made
huge Taj Mahal-types of structures in villages, and you see a
lot of people who, in the villages, who can't operate some of
these things, and they send in people from the population
centers in Alaska," he said. Those benefits do not really go to
people in rural Alaska, he explained, so when talking about
projects such as this, there needs to be discussions on
delivering the same thing to rural Alaska and reducing the cost
of doing business there. Otherwise, people will move to the
population centers, causing school closures and other things. If
the desire is to keep people in rural Alaska, "we need to start
investing and thinking about those people when we start talking
about these projects."
MR. MEYER responded that one of the responsibilities of AGDC is
to provide gas to the state. He said he spent a lot of time
looking at moving LNG by tank-by tank truck. Many vendors
manufacture ISO-tanks, which have the same dimensions as a
shipping container and are a great way to move LNG down the road
or by railroad. He noted that many countries allow LNG ISO
containers to be used on railroad, but the U.S. does not allow
that "just yet." He views that as a way to serve rural
communities. The best example is China. In China, it is called a
rubber pipeline, and that means moving gas by road (rubber being
the wheels). "That's the way they gasify their local
communities. He said LNG is a very safe hydrocarbon; it's just
methane. "You can put a tank there; you warm it up to vaporize
it, and then you've got gas for the community" and for power
generation. He said it is a good way to displace oil. It is
cleaner, and other countries are using it that way. It is a
little early to look at that aspect of it if it has to be linked
to the larger project, he stated.
1:17:41 PM
REPRESENTATIVE CHENAULT said he has almost forgotten what he
wanted to ask, because at this rate "we'll be here Sunday." He
said Mr. Meyer is surrounded by good people at AGDC, but he does
not want to say whether they are on the right track or not.
Representative Tarr was speaking about the ability to work with
the legislature, which was on a funding issue. He said he thinks
there is a piece of legislation on the governor's desk, which is
SB 125, which also dealt with legislators sitting on the board
of AGDC as non-voting members. He asked what Mr. Meyer's
position is on that.
MR. MEYER answered that he believes that is an issue for the
board; however, having legislators on the board really will not
change his behavior one way or the other. He repeated his pledge
to see much more communication with the legislature.
REPRESENTATIVE SADDLER said the administration has given the
legislature somewhat vague intimations of what might be a
potential policy, and then it is later characterized as an
expression of intent. He stated that he has heard Mr. Meyer say,
"If we transition to a state-led project" and about exploring
alternative concepts that could include increased state
ownership. He asked if AGDC or Mr. Meyer already made a decision
on a new structure, "or is it still up to [a] decision in the
future, with as much kindness as I can muster."
MR. MEYER said AGDC has not made a decision yet, but "what we
have is a concept." This concept has been floated by the
producers and is described in his presentation ahead. It will be
a collaborative process, and there is a framework set out, he
stated. He has told the producer parties that he wants it to be
a joint document that everybody can be happy with. That is what
he wants, he added, but that does not mean it can be achieved.
He is hopeful that everyone will be happy with it, and there is
nothing that tells him otherwise, but the concept is at an early
stage, he added.
REPRESENTATIVE SADDLER said the governor firmly denied that
there is any intention to use the Alaska permanent fund to help
finance the LNG projects. He asked Mr. Meyer for that assurance.
MR. MEYER said that is not AGDC's authority at all. There have
been no discussions about involving the permanent fund, in fact,
he has heard that the governor advises against it. "There is
nothing in my planning that has even hinted at that," he added.
1:22:42 PM
REPRESENTATIVE HAWKER applauded greater legislative involvement.
He asked him to provide any documents and communications he has
provided to the producers describing these new concepts.
MR. MEYER said there will be a document, and his presentation
will provide the broad framework.
REPRESENTATIVE HAWKER said, "These documents with the producers
are confidential, and you're going back and saying you do want
to maintain a veil of confidentiality on them?"
MR. MEYER said the documents that AGDC can provide, that AGDC
has forwarded as a concept, can be provided. "I want to reserve
a little bit, because our team at AGDC doesn't want to be held
to a specific clause of a concept, and if we don't achieve that
we're going to look like we lost something." He stated that he
wants to provide enough information of what they are going for,
but he does not necessarily want to provide the blow-by-blow
negotiating documents. He reiterated that once the producer
comments are incorporated, they become confidential.
REPRESENTATIVE HAWKER said he is a little confused. "Is there or
is there not a written proposal to the companies?"
MR. MEYER said there is a concept document, and he has that
framework on the slides of his presentation.
1:26:09 PM
REPRESENTATIVE HAWKER said frameworks are frameworks. It sounds
like the concept is more into specific negotiations and he said
the legislature would benefit by being involved. He said he
wants the specific proposal that has been made to the producers.
MR. MEYER said he has heard that request and will take it under
advisement. His intent is to make enough information public to
get the full flavor of that framework, but he wants to reserve a
little maneuvering room internally, but nothing that would be
material from legislative review.
CO-CHAIR GIESSEL said she appreciates Representative Hawker's
question, because committee members have received a copy of a
letter that she provided to the producer partners and ADGC with
three questions. The second question was to AGDC asking if the
board was pursuing a different configuration for the project.
The answer was not provided in writing, so she is looking
forward to Mr. Meyer's presentation if it will answer her
questions.
1:27:24 PM
MR. MEYER said slide 5 is a map of world activity, and Alaska is
not on the map. He noted that when he entered the industry,
Alaska LNG was something to be revered; Kenai had the largest
plant in the world and Alaska had 100 percent of the Asian
market. It strikes him as a little sad that Alaska no longer
makes the government LNG map.
1:28:56 PM
MR. MEYER said the next page talks about the project. Steve
[Butt] already did a great job on that. He emphasized the
statement: "Alaska's LNG project lowers the barrier to open up
the north for new exploration and production." Once the pipeline
is built, it becomes the highway for natural gas, so he expects
more activity once that is in place. He turned to page 7, which
shows the long history of the LNG project. It has the typical
paradigm of demand heats up, project ramps up, demand captured
by others, and project ramps down. He said that this project has
been in a cycle for 40-plus years, and he suggests changing the
paradigm to prepare in the downturn to capture the upturn. He
said to recognize that LNG is a cyclical industry, and just
because things are down now, does not mean Alaska should slow
down on preparing for the upturn. "The upturn is coming, but
we've got to be there with enough confidence so that when the
buyers decide to buy, they look at us." He pointed to the
historical price chart and its fluctuations. He said CMS was
prepared in the downturn back in the late 1990s and became the
largest LNG importer in the country. During early 2003, prices
were down, but Cheniere was preparing for the imports, and a lot
of people did not think imports would be needed, but when the
demand came back, Cheniere was there to contract, he stated.
During the 2009 downturn, that was the time to prepare for the
2010 demand pull.
MR. MEYER turned to slide 9 and said Australia is a case study.
He said Alaska is like Australia, stable and with a history of
resource exports, including LNG, and a small domestic demand.
During the 2009 downturn Australia positioned its resources for
global competition, and when the demand cycle came back, the
country captured a significant share. Next year Australia will
be the number one LNG producer in the world, he said.
SENATOR DUNLEAVY asked if Australia's model is similar to the
model in SB 138.
MR. MEYER answered that Australia has a mixed model and a number
of different projects. The western projects are more like the
equity-based model and eastern Australia has more equity-funded
models.
SENATOR DUNLEAVY asked what percentage of the projects the
sovereign owns.
1:33:24 PM
MR. MEYER said he does not know if the sovereign owns anything
in those projects and he does not know the exact royalty share.
"I don't know that the sovereign, on these future projects, took
a role," he said, but on the initial project, the sovereign
built the pipeline that let the gas be produced. The Northwest
Shelf project was the most complicated project in its time; it
was a very large off-shore LNG project, and it had Japanese
buyers as interested parties, but there was concern about
whether the gas would actually be developed and produced, so the
government stepped in and built the "Dampier to Bundbury"
pipeline, which gave the buyer confidence that gas would be
produced. The LNG plant was then built, he said.
SENATOR DUNLEAVY asked if there is any model in the world, other
than places that have nationalized the industry, where the
producers do not want to produce but the sovereign does, like
what Alaska is looking at.
MR. MEYER answered that in most places the sovereign wants the
producers to produce. The level of encouragement or pain may
vary. Often a producer will lose its license if it does not
produce, so there is often a significant cost of not doing so.
In much of the developing world, he said, the sovereign does not
have the funds to participate, so they use royalties rather than
investments. Places like Qatar-and Exxon can speak to this-have
more sovereign participation. He said it is somewhat of a mix.
In Norway, the state-sponsored entity is a significant party in
the development of Norway's LNG resources, but Mr. Meyer does
not know the exact financial structure.
1:36:32 PM
MR. MEYER referred to slide 10, LNG Market Changes. He said the
LNG industry experienced its largest demand pull in its history,
and it was met with the largest supply response in its history,
so the world liquefaction capacity doubled in the past 10 years.
That has created a soft, oversupplied market, he said. Some of
the Asian contracts have an oil price link and have lower
prices, but the new market is because of the oversupply. High-
teen LNG prices have dropped to single digits. It is a bear
market, he explained. Just like Alaskans are not afraid of bears
but only show a little caution, the "don't run from a bear"
saying applies here. Now is not the time to run from it, he
said.
MR. MEYER said that page 11, LNG Market Changes, shows LNG
supply, demand, and future forecasts. Forecasting is difficult,
but there is a general feeling that equilibrium will occur in
the early 2020s, and there will be a growing demand gap of about
40 to 100 million tons in the mid-2020s, but there are over 800
million tons of projects that want to capture that demand. There
are opportunities coming, but we should recognize that there are
eight times as many projects that want to capture that same
demand. Alaska has to get out there and fight for that market,
he said. He explained that the buyers are sophisticated and
recognize there is a surplus, so they want more destination
flexibility and different reopeners, and that can make a project
more difficult to finance and to make a go-forward decision.
Another change is multiple projects competing for scarce
internal capital, so Alaska's project not only competes in the
world, but it will compete with the internal queues of the
producer and joint venture participants. He said page 12
focusses on Asia-Pacific demands, and he noted that Alaska is
not competing in Europe. The chart shows that there will be
demand from growth and demand due to expiring contracts, which
are within Alaska's purview to go after. He noted that Alaska
has an advantage with proximity to the Pacific market, and we do
not have to go through a third nation to get there.
1:41:35 PM
MR. MEYER said page 13 lists Alaska's strengths, including
massive proven gas resources, enormous undeveloped potential,
stable government, installed oil and gas production
infrastructure, and four decades of safe, dependable LNG
exports. He stressed that the value of Alaska's history in
providing very reliable LNG deliveries cannot be understated-
most buyers will be utilities where reliability is often
superior to price. He said Alaska has broad local support,
market proximity, no technical barriers, low technology risk,
and low domestic demand. A domestic need will not likely take
over the export demand, he added.
1:43:17 PM
MR. MEYER said there has been excellent technical progress. He
noted that he has worked on FERC projects for his entire career,
and he attests to the exemplary work done by the technical team,
as shown on page 14. He said the commercial progress is slow;
low oil prices and a soft LNG market create challenges. He said,
"We're seeking alternative means to reduce the cost of supply
and to conduct FEED activities; there is no consensus around
starting FEED mid-2017 as we sit here today," he stated.
MR. MEYER said that AGDC sees two options. One is to take the
lead and find ways to reduce the cost of delivered supply, which
can involve the following: 1) An increase in state ownership to
enable a lower tax cost structure. 2) Opening up project
participation to a broader market, which could include
infrastructure funds or "that type of thing." 3) Create project
momentum in the market to facilitate offtake contracts-Alaska
wants customers, he said, good Asian utilities in Japan, Korea,
China, and Vietnam. It is important for the buyer market to be
interested in this project, so when that 100 million tons of
demand meets up with the 800 tons of supply, buyers should be
looking at Alaska LNG and saying "that's the one we want." The
second option is to delay FEED and potentially delay the
project. In summary, he explained, AGDC needs to figure out a
new way or delay the FEED, "and in my mind" that would delay the
project even though a FEED delay decision does not automatically
delay the project, but he sees a strong link between the two.
1:45:35 PM
CO-CHAIR GIESSEL asked if our other three partners see these
options as well.
MR. MEYER said he did not know if they were looking at other
options, but they have discussed these two options with AGDC.
CO-CHAIR GIESSEL asked what the state has done to fulfill its
responsibilities for Pre-FEED. Last year, "we actually had a
timeline" and a list of deliverables that the state was
responsible for, including property tax determinations and RIK
[royalty-in-kind] decisions. She asked if the state would be
paid the value of the gas that was its royalty share, or if
Alaska would take those molecules as molecules of gas. She
inquired as to what the state has delivered during Pre-FEED.
1:47:00 PM
MR. MEYER said that his understanding is that there were a
number of agreements contemplated that were not done. When
agreements are not done, there is typically blame on both sides.
They dragged on for quite a while, and he believes that the
agreements mainly dealt with upstream issues, but he is not
sure. Some of those have to get done, he explained, but [the
parties] should first figure out if this is a project that is
competitive in the global arena and that it works for the
producer parties. He said there should be an agreement in place
to say "here is how we are going to conduct this project, here
is how it's going to be governed, here's how we're going to move
it forward." He continued to say that he has told the producers
that "if we get happy with this agreement," and all it needs are
these several other agreements that have to get done, "I'm going
to be there right with them advocating … that we need these
agreements done." Right now, he said, he wants to put [the other
agreements] at the end. Part of the problem is that those were
put at the start, and a lot of time was spent on those
agreements-maybe under a presumption that the project was going
to move on these stage gates very fluidly. But the state is at a
point where it has to pause and figure out how to make this
project work first, and save the upstream agreements-some are
out of AGDC's purview-until the end, "and then, by golly, I'll
be arguing right with them that we need the state to do these
things."
CHAIR GIESSEL said she really appreciates the fact that he is
new. The two [agreements] she was referring to are actually
fiscal certainty terms, and Mr. Meyer has mentioned the word
"certainty," and companies like to have certainty with their
partners. She asked why companies should think a reconfigured
project won't also be changed downstream. "We have an agreement.
We have a plan in place, and aren't we reneging on what we've
already crafted in Senate Bill 138," where Alaska said it would
produce some kind of RIK decision, which gives [the producers]
fiscal certainty and a property tax-type decision? These are
just two factors, she stated. She asked why they should see
Alaska as trustworthy and stable.
MR. MEYER answered that trust has to be earned, and it can be
lost, but "trust" has not entered the discussions with the
producer parties relative to the state, but fiscal certainty
has. He said he is not sure what fiscal certainty is, exactly,
to the producers, and whether it means tax certainty forever,
but he is looking at what other regimes have offered, like
Texas, Australia, and Papua New Guinea. "I think that having the
state surrender its ability to change taxes … is not
constitutionally allowed, so certain things that the producers
may want may not be achievable," he explained. [That kind of
certainty] would take a vote of the people. "What I do know is
if we put those things first, we're never going to focus on
getting this project to the point where it competes in the
world," he stated. He hopes to get clarity on the project
structure and cost, and clarity on what the state ownership may
do, because having the state own this entity-even though it
doesn't invest all of it-may lend itself to federal tax
advantages. Right now, he said, we need to figure out what the
project will cost, and he said that information is necessary for
DNR to make its RIK and RIV decisions. There are large,
sensitive issues, but they should be saved until the end. If
those issues are all it takes to get this project to happen, "I
will be advocating right alongside [the producers]." But he
wants to get to a point where AGDC and the producers all commit
to do "these things" and then he will be arguing in line with
the producers.
1:54:31 PM
SENATOR MACKINNON asked him how he can sell gas without knowing
the cost of supply. "How will we secure a contract-we have 18
trillion, 33 trillion cubic feet of natural gas stranded on the
North Slope; how do you sell that in the market when you don't
know the supply costs?" It sounds like the infrastructure costs
are coming to light, she added.
MR. MEYER said to look at the things we know. The market price
can be determined very quickly by looking at what the utilities
in China, Japan, and Korea are willing to pay. The LNG market is
becoming relatively liquid and transparent, and the U.S. LNG
contracts are basically public, he said. So it is easy to get a
very good handle on the market price, he said. So he suggested
taking the market price and the lowest cost possible for the
infrastructure in order to determine the net back price. If the
net back price is X and if X is not high enough for the state
and the producers, then there will be no project. It is as
simple as that. However, if the cost of supply can be low enough
and the market price is not great today, but it may improve and
it is good enough to do this project, "I believe that once you
put this project into service, the benefits to the state are
going to be significant and they're going to go beyond this
single project, because you're going to have that further
development." He added that we do not have influence over market
price, and the infrastructure cost can be lowered in both
capital costs and financing costs.
1:56:56 PM
SENATOR MACKINNON said, "We've had several symposiums on natural
gas worldwide, and those markets do not align … each one of
those regions set their own price and negotiate their own
contracts in very distinctive ways." She said she is having a
hard time thinking anyone will buy gas if they do not know the
cost of the supply. It doesn't go backwards; there needs to be a
firm transportation agreement to get financing, and that cannot
be attained until the cost is known, she explained. She said she
has a problem on how one goes to the market to secure firm
transportation commitments when the upstream cost is unknown.
MR. MEYER replied that part of the challenge is to figure out
the capital and financing costs. When there is a cost estimate
it starts to get factored into the buyers' decision process. For
instance, Alaska decides that the cost of supply to Kenai is X,
based on the estimated costs of the LNG plant, pipeline, and gas
treatment plant, and there will be a little variability, which
will be gone by the time construction begins-the variability
will be pushed to construction contractors and others. "And then
we're going to have to commit as a system" to the price, he
stated. The purchaser will not accept a price range of between
$5 and $15 today, so they will need more price specificity that
they take the risk. Prices fluctuate, he noted, and different
parts of the world have bought at different price regimes, but
those are starting to blend together-the U.S. shale supply has
been a game changer, he told the committee. Before U.S. shale,
most of the LNG supply into Asia was sold on an oil-link basis,
so it had variability on oil price, and with the U.S. projects,
it is more of a tolling arrangement so that the projects under
construction today, the customer pays a certain amount for the
toll, LNG facility, and liquefaction. They buy gas on a Henry
Hub basis, so the buyers take some Henry Hub market price risk,
but they know that the cost of the liquefaction is certain. Mr.
Meyer said Alaska has a little bit of an advantage in that a lot
of the cost is infrastructure cost, "so we can actually take out
a lot of the variability in the mind of the buyer by saying a
big chunk of your pricing is going be infrastructure cost-that
contract that we do with the buyer is going to have to fit with
the lenders and the equity investors to make sure that it covers
the cost of the project."
2:01:46 PM
SENATOR MACKINNON said that does not make economic sense to her,
so she will move on. She asked him how a resource owner is
aligned with a transporter.
MR. MEYER said the alignment is in the relationship, and there
is always a bit of tension, but he looks at a resource owner
from a pipeline or LNG facility perspective; "I look at the
resource owner as a customer." So to reframe the question: How
does the pipeline company get aligned with its shippers and
customers? There is always a give and take and a bit of tension;
the pipeline company would like to have high rates and the state
would like to have low rates, he said, and somewhere in the
middle there is a happy ground. On this particular project,
because we are starting with a high-cost framework, we're going
to have to beat the project down to a relatively low rate of
return. The pipeline will want a higher price, but it cannot
justify a higher price, he explained. The state will have to
decide that it wants this project done and decide the netback to
the royalty owner and the resource owner or [it will have to
decide to not do the project].
MR. MEYER, in clarifying an earlier remark, said that Alaska
will need to know the pricing before it gets any customers. It
is time to gauge customers. Customers needing gas in 2023-2025
will start contracting in 2017 or 2018, and at that time Alaska
will need to know, with a reasonably high degree of certainty,
what the project will cost, he stated. At that point the parties
enter into a "proceeding agreement," where there are conditions
for both parties. If costs do not align, customers are allowed
out of the agreement.
2:04:49 PM
SENATOR MACKINNON said she is not a customer, and the people of
Alaska are not customers, but resource owners. "We are a partner
or participant in the joint venture agreement, and there is a
tension between the carrier-this is an integrated project-the
people at this table who voted for this project advancing
thought the people of Alaska could derive benefit all along the
process as integrated partner." Alaskans expect to receive a
return on the investment at the gas treatment plant and on the
pipeline. She noted that the pipe is much more stable with a
guaranteed rate of return, and that is why the legislature
engaged TransCanada. Although TransCanada left, "we still had a
25 percent expectation of a return to the people of Alaska on
that pipeline, and we expected a return on investment for the
hydrocarbons that are pulled out of the ground." She said her
concern is that there should be a tension, and she is afraid
that there will not be a tension between the carrier and the
resource customer. There are four people that will derive
benefit, and the big ones who are at risk are the producers in
meeting their internal rate of return, "which I am probably the
least worried about-I think they can fight for themselves," but
if the State of Alaska has already made a deal with the market,
"how do we assure that Alaskans get a good return for our
money?" As project manager, "how are you protecting the people
of Alaska's resource so that we derive the greatest benefit for
the people of Alaska?" She said she is waiting to hear Mr. Meyer
convince her of the reason to go to the market first before
taking care of the gas sales agreement at the top. She added
that "right now we can't even balance two major fields. Pt.
Thomson and Prudhoe Bay have to come to an agreement on how
we're going to move gas out of there, otherwise we lose value on
our oil that is four times more valuable than the gas." She
stated that she wants to support a project and she is ready to
listen, but there should be tension between the resource owner
and the transporter, because the transporter wants high tariff
rates and lots of hydrocarbons moving through the pipeline, and
"we want lots of hydrocarbons at a low price; those who own the
leases and the lease-to-produce, they want high money, and the
market wants the lowest dollar available. We seem to be
competing with ourselves," she said.
MR. MEYER said that the project economics have to work for all,
but one of the important ones is the market. "If we don't clear
the market we won't have a project," he stated. If we can start
with the thought that we have to clear the market, then we look
at the cost of the infrastructure using other people's money or
the state's money, if the state wants to invest. He said he
would welcome both the state and the producers as investors. The
state could be happy with the return on this project, he added,
but he is not sure that the producers can be happy with the
return. The producers do not have to invest if the project can
find lower-cost capital. He said that the cost of service is
deducted from the market price, and that is the netback.
2:09:06 PM
MR. MEYER stated his belief that if there is a good buying
customer willing to pay market price for LNG, and if there is a
commercially reasonable price after deducting the costs, there
will be willing sellers: the producers. "If we had that real
buyer now," there is much more incentive to figure out the
balancing, he stated. "How can you negotiate the price of
supply, if you don't know the market and you don't know the cost
of the infrastructure to get there?" His view is the opposite of
Senator Mackinnon's view. He referred to a study the legislature
[commissioned] by Black and Veatch that had $2 for GTP, $2 for
pipe, $4 for LNG, and $1 for shipping, which translates to a $9
price to Japan. "Guess what. The market's $8, so it doesn't
matter," he said, because that will not clear the market. He
said not to start with all of those components, but start with
Japan wanting an $8 price of LNG, and then figure out how to
meet that price. It fluctuates, but some of the toughest
competition comes from the Lower 48. It is a tough price to
compete with, he stated, and it is a tough structure to compete
with, because it is not an oil-linked price-it's a cost-plus
price, meaning that it is Henry Hub plus the cost of
liquefaction and shipping. He noted the Panama Canal has been
widened to aid LNG ships, so the Lower 48 is Alaska's
competition.
2:11:27 PM
MR. MEYER reminded the committee that there are 800 million tons
of projects that want to come on line, and most are from the
Lower 48. Therefore, we know that we have to reduce the cost of
this project, he said.
2:12:00 PM
SENATOR MACKINNON said the resource owner wants the lowest cost
and highest value to purchase our gas. She asked who is
responsible for financing the project, because if another entity
takes profits away from the project, [it will be] another cost.
"So is it AGDC? Is it the Department of Revenue? Is it a third
party?"
MR. MEYER answered that if it is third party financing, AGDC
would take the lead on arranging it. If it is state funding,
state credit support, or something similar, the accountability
will be with DOR; although, AGDC can help to structure it. But,
sitting here today, we do not know "what we would be expecting
of the state as a state entity with regards to funding,
financing, credit support, or that type of thing."
SENATOR MACKINNON asked if AGDC has statutory authority to
arrange third party financing.
MR. MEYER said he understands that AGDC has the authority to
discuss arrangements, but when it comes to the actual funding of
the project, it will involve the legislature and others. It is
not a decision that AGDC would make on its own, he added.
2:14:22 PM
SENATOR MICCICHE said he is hearing some things that somewhat
worry him regarding the roles of state agencies, because he is
not sure that the agencies have been provided the funding to
cover those roles. The legislature, in defense of the framework
under SB 138, needs clarification by legislative or DOL
attorneys about the authority of AGDC to act before compromising
a project that currently has alignment, he said. "It almost
seems like we're aggressively sinking this alignment in this
process." He would like to better understand the legislature's
role and the authority of each department and the AGDC.
2:15:52 PM
CO-CHAIR GIESSEL said the legislature can request that from the
Department of Law.
MR. MEYER said the action plan on slide 15 emphasizes reducing
total cost of supply. There is alignment on that, but it needs
to be looked at. It is important to the state to maintain pace
in order to have an opportunity to contract for the next demand
pull, he said. That is not universally shared by all of the
parties, but from AGDC's perspective, it is very important, he
noted. There are multiple LNG projects chasing the same buyers,
and all participants in this project want to monetize the
resource, he stated. It is a significant resource base and
material to the participants to "see something work." So the
summary of the action plan, as stated in the presentation is as
follows:
Work in a collaborative manner to explore alternative
concepts intended to enhance the project's global
competitiveness. These concepts include various
ownership and financing structures and could include
increased ownership of the project by the State and
with third-party financing.
MR. MEYER emphasized that AGDC does not have a hard and fast
action plan, but something has to be developed and he wants it
to be collaborative. The collaboration is now in process, and he
hopes to have something that is really successful and that is
embraced by all.
2:17:54 PM
CO-CHAIR GIESSEL asked what increased ownership means.
MR. MEYER said, different from investment, increased ownership
might be the state owning the entity, but a third party may
provide the funding. He said AGDC is still investigating the
benefits of that ownership, but there may be some significant
federal tax benefits associated with a state-owned project.
Ownership does not mean funding, he clarified.
CO-CHAIR GIESSEL asked what the tax benefit is.
MR. MEYER said federal income tax on a private project may be
more than on a state-owned project, but that needs to be
investigated. There is some hope that a proper structure may
lend itself to some federal tax benefits, "but we do not know."
2:19:22 PM
CO-CHAIR GIESSEL asked if this kind of investigation actually
invites the IRS to consider whether the income from this project
should be taxable, even if the state were to own it.
MR. MEYER said he would anticipate a lessor ruling from the IRS,
and there may be some opinions on that already that give enough
confidence, but because of the magnitude, "we" would most likely
have to have a lessor ruling from the IRS indicating the
structure is not subject to a federal tax.
REPRESENTATIVE HAWKER said he has a zillion questions that he is
trying to distill down. "We just specifically heard the
statement that the state would own the entity, a third party
would fund it, and that would decouple the state from the risk
of the cost of the project." He said he was most concerned about
the risks of ownership, and AGDC has presented two choices: A
cautious and deliberate approach, which is the current framework
but would delay FEED, and the other is a much more aggressive
approach for the state to take the lead, and "we end up in this
scenario with the state owning the entity." As a legislator
managing the risks of the project, construction, financing, and
resource, he said all of the risks have been carefully evaluated
and the state had postured itself to minimize its risk and
maximize its benefits, "but I'm not hearing anything here about
how you want to change risk position." With ownership comes
risk, and he asked if Alaska will take all of the risk.
2:22:10 PM
MR. MEYER stated his belief that this project finance structure
results in reduced risk, but it can be argued otherwise, because
there are good and bad points on both sides. Under an open-
equity structure where everyone contributes their share, there
are significant overrun risks, and he noted the Gorgon project
as an example. It went from a $37 billion estimated cost to a
$54 billion completion cost, "and it didn't quite work right
when it was done." He said that is a lot of risk. In a project-
finance structure, the risk would have probably been taken by a
contractor or by some other party, otherwise the project would
not have been financed. He said that does not mean that the
project would have gotten off the ground with less risk-it may
have meant that the project would have never been constructed.
He said he is not claiming that ownership without the financing
increases the risk-there are many risks in this project. The
risks to Alaska will have to be acceptable at the time the
decisions are made to go forward. That date is the final
investment decision (FID) date, he said, and the state, lenders,
customers, and contractors will all have to be comfortable with
all of the risks.
REPRESENTATIVE HAWKER said risk-hedging is a very common feature
in capital markets, but it means the owner transfers the risk to
someone else, and a price must be paid to offload the risk. He
said he is concerned about the cost or compromise coming from
the state. "The contractor's going to take all the risk of $60
billion construction project that they do not own the resource
that ultimately is going to profit from it?" He said he really
wants to know what kind of a hedge fund Mr. Meyer will be
working with.
MR. MEYER said Representative Hawker has some really good
points. There are costs to giving risk to somebody; however, one
contractor will not take all of the risks of this project. The
project will need multiple contractors, and some will be
prepared to take some risk in the construction. There will be
risks that contractors will not take, he stated, like avalanche
risk and government stoppage. He said some risks will be passed
to others, some may be insurable, and some might have to be
taken by the state. He said, yes, contractors take risks and
charge for that. He explained that Cheniere had no balance sheet
when the import terminal was built, but it turned to Bechtel to
give them a "lump sum, turnkey number," and Cheniere paid a lot
for it, but had it not, the lending community would not have
funded the project. There is a balance between the risks and who
is most likely to bare them, he explained. Building an LNG plant
on the Kenai Peninsula is a manageable risk, as is constructing
a pipeline. Under a proper structure, the costs of moving those
risks and the cost of insuring them, basically appeasing the
financial community, and "you put that altogether and we figure
out, have we got a project or do we not?"
2:28:10 PM
REPRESENTATIVE HAWKER said the construction risk is very
tangible, but "this project has a complete value change; has
huge risk in the resource itself, the market, the financing, and
I'm very concerned that I'm hearing an approach-this new
concept-that is absolutely obsessed with just the construction
and building of a pipeline, but not necessarily a pipeline that
has, as guaranteed as possible [and] as risk-minimized as
possible, commercial viability." He said he would be more
comfortable if he could hear about commercial viability "from
you folks in the near future."
2:28:44 PM
MR. MEYER said commercial viability is key. Without it there is
no project. Slide 16 addresses equity versus project finance
structures. In an equity structure, everybody contributes. In
the project finance structure, there are project sponsors, and
there are third-party equity providers. Akash Deep, a professor
at the Harvard Kennedy School of Government, defines project
finance as one that
"involves creating a separate legal and economic
entity with the primary role of setting up an
organizational structure and obtaining the necessary
financial resources to develop and manage a project.
The main, and crucial, distinction from conventional
corporate or public financial structures is that
repayment to debt and equity providers depends solely
on the capacity of the project to generate cash flows,
with typically no recourse to the balance sheets of
the sponsors or the resources of the government."
2:30:45 PM
MR. MEYER showed a representative structure on slide 18. The
"project company" is a new entity that would be the FERC
applicant and hold the assets and contracts. There are off-take
contracts, which are significant commercial underpinnings for
the project company, he said. The suppliers would be the gas
resource owner, and there would be government involvement, like
a concession agreement. The contractor has a very significant
role in an infrastructure project, as does the operator. The
finance includes equity investors and lenders, he added.
2:31:26 PM
MR. MEYER moved to slide 19, showing the trends in
infrastructure finance. The slide is from an OECD (Organization
for Economic Cooperation and Development) survey. The OECD has
34 nations and did a survey of a cross-section of infrastructure
institutional investors, and the survey represents 28 entities
and about $1.5 trillion of assets under management. The survey
found that infrastructure investments are not recognized as a
distinct asset class, infrastructure projects are long-term
investments that match the long duration of pension liabilities,
infrastructure assets are linked to inflation and could hedge
pension funds liability sensibility to increasing inflation,
governments have started to recognize that they need to
reconsider their approach to financing to secure new sources of
capital to invest in infrastructure, and developed and
developing countries are in effect competing to attract
institutional investors to infrastructure. "And I say this
project can be set up to be a very attractive infrastructure
investment." He said a U.S. project-LNG in Alaska-is very
stable. Instability in Europe has been introduced with Brexit
[Great Britain voting to leave the European Union], and pension
and infrastructure funds do not like volatility. Alaska's
project has stability, government support, and community
support. This is a good project, he stated.
2:33:50 PM
REPRESENTATIVE JOSEPHSON said SB 138 outlines AGDC's authorities
as expanded in 2014, and he sees broad powers that allow it to
pursue a different path. Regarding the 120-day window referred
to by Steve Butt, he is concerned that this project is not
likely to go forward. Rather than watching it go into dormancy
for umpteen years, he sees that Mr. Meyer is looking at a whole
new path, which is allowed by SB 138, he proffered. In reference
to anxiety about the rate of return, one of the things that has
given him comfort about the original plan is if the three major
[producers] saw merit in moving forward, then the plan had
merit, and if they did not [move forward], the plan likely did
not have merit. He asked Mr. Meyer to dispel that general
concern of his.
MR. MEYER answered that he agrees that if the producers say the
project has merit, it does have merit-"I'm right there with
you." However, if the producers do not think the project will
clear their hurdle rate at this time, it does not mean that the
project does not have merit-it means that it does not have merit
for them to invest. "But I can almost guarantee you, if we
deliver these folks a gas pipeline, they're going to love it;
they're going to love to use it." He said he does not think the
investment will move up in their queue or clear their hurdle
rate or clear their internal barriers, but that does not mean it
is not a good project. He noted that when he looks at the
project he does not look at it as just an extension of the
production unit, he looks at it as a pipeline that will be a
very attractive investment for pension funds and life insurance
companies, which have lower return hurdles than oil and gas
companies, especially the E&P [exploration and production]
companies. Pipeline companies, he said, have a much lower return
threshold, and from a pipeline standpoint, that is why "we" got
to be in business. "We were willing to put in pipelines based on
contracts that did have a lower return, and it was better for
the high-return companies, the E&P companies, to contract with a
lower-return service provider than it was to take their capital,
which is much better spent drilling holes than it is laying 800-
mile pipelines." He strongly agrees that if the [producer
partners] all said this is going forward, Alaska should be right
there with them, but if they decide that they do not want to go
forward now, it does not make this a bad project.
2:38:16 PM
SENATOR MACKINNON asked where Mr. Meyer got his presentation
slides, one of which [is attributed to] Harvard Kennedy School
and one that refers to the OECD.
MR. MEYER said he stole them off the Internet, and he can
provide the site addresses and the reference to the OECD study.
SENATOR MACKINNON said she has seen the study under the
sovereign wealth model, and the Harvard Kennedy School was
quoted in those reports also.
MR. MEYER said, yes, it is part of a broader presentation, not
for Alaska. He said it provides a description of project finance
from someone other than those at AGDC.
SENATOR MACKINNON asked Mr. Meyer if he is purporting that
Alaska's PERS system would be a likely candidate for investment
MR. MEYER said it very well could be, and the Native
corporations could be very interested in this as an investment
and maybe should have the first opportunity.
2:40:25 PM
MR. MEYER showed a slide (page 20), titled "Required State
Response." Alaska needs to be singularly focused on moving this
project forward in order to not miss the next demand cycle, he
said. Alaska has only one LNG project and does not have multiple
projects, like E&P projects, to compete with; therefore, Alaska
does not have the luxury of a queue to pick from, "so we've got
to make this work." To help ensure momentum, AGDC will take the
lead on project development and marketing, in compliance with SB
138 and in consultation with DNR. He said he is not suggesting
doing anything that does not comply with SB 138 or tries to take
authority from any agency that has authority. Alaska LNG must
have a higher profile to compete in the global arena, he added,
so it must actively engage buyers, solicit investors, and
outmaneuver the competition. It is important to appreciate that
Alaska LNG, as a project, is really not out there in the market
today; it is not marketing itself and has relied on the project
sponsors to do that. He explained that the joint venture
agreement, itself, does not really provide for marketing, so it
is time to raise the profile and get it in the minds of the
buyers that this is a real project to consider.
SENATOR MICCICHE said all of the funding for AKLNG was
appropriated to AGDC, so he asked if Mr. Meyer is adequately
sharing that funding with the state agencies through an RSA
[Reimbursable Services Agreement], or if Mr. Meyer is making it
more difficult for the agencies to have the talent available for
those deliverables.
MR. MEYER said he thinks AGDC is doing both, and that
perspective depends on who you ask. There are a couple of
categories of expenses, and one is for staff and contractors and
another is for outside legal expenses and consultants. He said
he wants to pay for the employees in DOL, DOR, and DNR for at
least three months and then figure out if AGDC can incorporate
those people into working together as a team. It could be a
second structure where AGDC pays for people through the
agencies, but they would actually work at AGDC, he said. For
outside contractors, he suggests that they be paid for as
needed, and "we may need them differently than we needed them in
the past." There is about $15 million of expenses, he said,
"that we are talking about in this bucket," and most are
associated with outside companies. Rather than just shoveling
all that money over, he assumes that the intent of putting the
funds into AGDC was to shepherd and steward them, as needed, in
the development of this project.
MR. MEYER said AGDC will need legal services, financial
analysts, and that type of thing, and those will be funded as
needed. There was pushback from the DOR people who said they
needed an outside modeler, and that was settled by paying for
the modeler, but he would like AGDC to have its own access to a
financial model. He stated that he has never been anywhere where
the company does not have its own financial model of a project.
There is a cost-of-service model developed for the ASAP [Alaska
Stand Alone Pipeline], which is inadequate for this project.
"What I'd love to have is one model that all the agencies
share." He said that he understands that some private
information may have to go into a DOR model, but all he really
wants is a model structure, so when looking at how interest
rates shape a cost curve, for example, AGDC will have its own
model. There has been some angst from some of the agencies
regarding funding, but he believes this is getting settled. He
said he needs to be more judicious with third party expenditures
to focus on this time of increased austerity and increased
demand on AGDC, and he wants the resources funneled toward the
execution endeavors.
2:47:00 PM
SENATOR MICCICHE said Mr. Meyer missed a few recent discussions
about "org charts" and project team responsibilities. The
alignment concerns of his are not only external with partners,
it is also internal alignment with some talented departmental
folks. He stated that if Mr. Meyer is open to it, "I would
certainly be interested, if the chair is in agreement, you can
provide, sort of, as you develop that concept, an org chart
[with] some of the expected cost burden and how you intend to
share that with the agencies." Becoming fully independent when
there is internal talent will not lead "us" to a successful
relationship, he stated. He said he would like see how those
relationships are going to continue with the agencies he has
grown to trust over the years. He asked Mr. Meyer if he would be
willing to provide that information.
MR. MEYER said absolutely. He is new to the structure, but when
he looks at the agencies, he sees law, finance, and upstream
departments, and he really wants to draw on those people and not
duplicate workers. There is duplication going on that could be
managed better, and the way to do that is to bring people into
AGDC, where they would still work for their agencies, providing
an open line of communication. This is a team project, so
definitely he will disclose that as it gets developed, he said.
2:49:41 PM
REPRESENTATIVE OLSON asked if the state would pay property taxes
if it was the owner [of the pipeline].
MR. MEYER said he is still getting up to speed, but the entity
would pay property taxes. Under this kind of structure, the
project entity would most likely be the payer, because it would
hold the assets. He is not clear on prior understandings, but
this entity, in his mind, will be paying property taxes.
REPRESENTATIVE OLSON asked for information in writing.
2:51:27 PM
REPRESENTATIVE HAWKER said he is hearing that this new concept
has three significant elements. If the state owns the project,
it would hedge the project risk through an artificial entity
that was set up, and that that entity would be managed on the
basis of securing financing on a nonrecourse basis. That is a
wonderful thing when you can get it, he said. If the project
utterly fails, the state can walk away from it, free and clear,
and the investors all lose, "so sad, too bad." That is not an
uncommon structure in the corporate world, but can a government
sovereign abrogate that much risk, and what would it do to the
credibility of Alaska in all other matters? He asked if Mr.
Meyer is setting Alaska up for a huge risk in the case of a
failure for the nonrecourse financing entity, whereby the
injured parties would readily pierce the corporate veil and
basically go right after the only source of cash the state would
have, which would be the permanent fund.
MR. MEYER said he believes that the risks will be manageable,
but AGDC has not quantified them. The concerns are valid. The
risks would have to be identified, quantified, and acceptable to
the state, or there will be no project. The DOL and outside
experts will need to assess the risks. The risks the state takes
have to be acceptable under either structure, he explained.
REPRESENTATIVE HAWKER asked if Mr. Meyer has proposed these
risks to the producer partners.
MR. MEYER said he has only proposed a concept document, and the
highlights are described in the next few pages of his
presentation. He said he sort of suggested that he does not
expect the state to take on a disproportionate amount of risk-
not that this will be risk-free. Alaska may be investing funds
as though it were an equity project, which is up to the state,
but he has never suggested that the state take a
disproportionate amount of risk.
2:55:59 PM
MR. MEYER showed slide 21, "Commercial Framework Concept." He
said AGDC will form the special purpose entity that will be the
"project company"-the entity that does the activity, holds the
assets, is the FERC applicant, and that type of thing. The
project company will have a set of overarching principles
designed to keep the project on track with competitive rates,
and it will engage competent technical and commercial advisors.
He said he hopes that some of those advisors will be the
producers, but he has not asked for a commitment, and some
advisors will be outside of the joint venture parties.
MR. MEYER noted that AGDC aims to keep project participants
together; however, producer party roles may change and some may
choose not to invest in the next stage. The parties should have
the ability to participate or exit with minimal impact to the
project's pace, he added. The parties could be owners of the
project company if allowed by tax laws, but they do not have to
be, and they do not necessarily have to make that decision
upfront. He wants to leave enough leeway so if they cannot make
a decision to invest today, that does not mean they are closed
off in the future. He said he would like some of these producers
to be able to have the opportunity to change their decisions
down the road.
MR. MEYER stated that, in this framework, project ownership may
not equate to gas ownership. "So you may be an owner of the
project but just because you're an owner doesn't mean you have
capacity, and, further, not being an owner does not mean that
you won't have capacity." A shipper would be fine and would not
need to have ownership in this structure in order to get
capacity, he said.
MR. MEYER said page 22 is a continuation of the framework
concept. The project company will be a midstream business, so it
is not an extension of Prudhoe Bay or Pt. Thomson. It is the
pipeline and the LNG, and it can provide an unbundled service to
the producers, to AGDC, and to third parties, he added. So, a
utility company in Asia may want to hold capacity on the LNG
plant but not on the pipeline, for example, or they just want to
buy from one of the producers at the tailgate of the GTP. The
concept is to have service agreements that support the
particular segment of the project, and those service agreements
are entered into with credit-worthy counter parties.
2:59:38 PM
MR. MEYER said the project company will levy transport tolls in
line with midstream businesses to clear market and maximize
upstream revenues, so the tolling structure will be relatively
transparent and not unduly discriminatory. There will be similar
rates for all as long as there are similar terms, but early
shippers may get a better rate, for example, but it will be a
transparent toll structure. He said there is potential for
alternative financing in this framework, such as federal tax
reduction options, lower cost third-party equity investors, and
nonrecourse debt to minimize financial exposure. Referring to
page 23, he said AGDC would be the single point of
accountability for the midstream portion, which is the GTP, the
pipeline, and the LNG facility. Also, AGDC could become a
shipper, so if DNR, for example, elects to take royalty in kind
and agrees to sell it to AGDC as a commercialization service, it
could be a shipper. Or DNR may want to sell it to an Asian
utility, and then they will be the shipper, or DNR may want to
sell it to one of the producers or a third party. If one of the
producers wants to sell the gas without being a transport
customer, for example, and suggests selling the gas together to
a buyer that AGDC finds, "we could be a shipper," he said. If
ADGC were a shipper, it would be treated like all shippers, he
added, and it would not necessarily have preferential status.
3:02:29 PM
MR. MEYER said AGDC and others will market the project as a
service provider. He said he wants to market the LNG outside of
Alaska. Customers can buy it at the beach at Kenai or in the
north as gas-"tell me how you want to buy it, but put Alaska in
the planning horizon." He turned to page 24, which charts out
"who does what." He said he added a role called project
marketing, where AGDC will take more responsibility. Financing
has two options: state participation, where DOR is accountable
and AGDC will help structure it, and third-party financing,
where AGDC will take the lead.
REPRESENTATIVE HAWKER said, regarding financing, he has recently
raised questions about AGDC's ability to finance, and the
statute that basically allows it unlimited ability to finance
the purchase of product and resell it. "We were given absolute
assurance, at that time, that AGDC had no intentions of … buying
and selling of gas. That is, becoming … the person who, at the
end of the day, takes the full take-or-pay contract for … the
load that a pipe would require." He expressed concerned that
this proposal contradicts everything he has been told about this
administration's intent to respect the original structures of
AGDC, and he understands the right to change it, but this is a
massive change of direction, he noted.
3:05:24 PM
MR. MEYER told the committee that before anyone jumps to a
conclusion, he would like to dispel the idea that AGDC will be
taking on take-or-pay, purchase, or credit obligations. He said
he is not saying that AGDC would not, he is saying that is not
the intent, but some customers may want a bundled service. He
added that AGDC does not have the balance sheet to provide
sufficient credit support to engage in a long-term purchase or
even a long-term tolling contract, so AGDC is not going to be
all that attractive to the financial community; however, to the
extent that it is required to help facilitate by bundling
agreements on behalf of the producers and the buyers, he expects
that AGDC will be able to do that.
MR. MEYER gave the example of an aging utility and a producer
not wanting to hold upstream capacity, [then] maybe AGDC has to
step in and help, but it will be "back to back," he said. There
is going to be a limited capacity to do that, as it will not
have the balance sheet to guarantee it. However, by looking at
some LNG projects under construction that have more of a LNG
sales model, the LNG sales contract is the commercial
underpinning for the facility-not a tolling contract. So, he
explained, what the service provider provides is a bundled LNG
sale delivered at the dock, which is very similar to the way
many of the other LNG projects around the world are structured
as opposed to a simple tolling arrangement. The credit support
that the financial community will look to is that purchase
agreement from that large credit-worthy utility, global trading
company, or "what have you." He said he hopes he has not left
the impression that this is a massive change and that AGDC is
going to be stepping into big purchase or sale commitments-it is
really a facilitator, "but we are going to need to find large
credit-worthy entities to either purchase LNG or to hold tolling
capacity."
3:08:19 PM
REPRESENTATIVE HAWKER said Mr. Meyer is clouding the water by
describing AGDC as a shipper, and its value will be underpinned
by someone else's contract to buy. "There still has to be-AGDC
has to have established credit with wherever its source of
product comes from, basically its own gas." He asked if Mr.
Meyer is intending that it be backed by the full faith and
credit of the State of Alaska out of the treasury or permanent
fund. At the end of the day, he said, there is the ultimate
credit worthiness. "You look not only at the actual value of the
product itself moving through, and that would be the credit from
somebody else agreeing to pay for the transportation, but for
that and the product, you always have to look to that alternate
means of repayment, and I have a hard time believing that
contracts of this magnitude, the ultimate sellers at this point,
would not be expecting a guarantee from the State of Alaska,
itself, in order for AGDC to operate in this capacity." He said
the legislature would require a great deal of time considering
this type of thing.
MR. MEYER said he does not expect AGDC to be requiring
significant credit support from the state, because he does not
envision AGDC stepping into that role in a significant way. One
thing that AGDC will probably have to do is to help aggregate
the in-state demand, because it may be difficult for some of the
small utilities in the state to be small shippers, he added. As
he reads SB 138, AGDC has a responsibility to be an in-state-
demand aggregator, and that may require that it step into a
shipper role for that as well. He said he does not want to leave
the impression that AGDC will be completely risk free, but he
does not expect it to step into big risk profiles with respect
to the LNG export sales, he clarified.
3:11:32 PM
MR. MEYER turned to slide 25 regarding the AKLNG completion
timeline, and he said that AGDC would like the Pre-FEED
completed and the FERC application filed by 2016. The state is
not a party to the land ownership [for the LNG plant], and it is
the landowner who makes the Section 3 application to FERC. He
added that the applicant does not have to actually own the land,
but it has to show it controls it. Before the FERC process gets
moving, "we have to reach an understanding" of what rights
Alaska has with regard to the land where the LNG plant is to be
sited. He said he would like to see a financial investment
decision in 2018, because it will take that much time to put
AKLNG in service for the 2023-2025 demand window. He said that
he believes, although it is arguable, that if the project is not
ready for the next demand window, it will miss it.
REPRESENTATIVE SADDLER said he read the "mega projects book,"
and learned that one of the big risks is a schedule risk.
"Managers of the program might feel a need to get something done
by a date certain, so you can throw money and resources at a
project and never make the clock run slower or faster," he said.
He added that he is hearing Mr. Meyer say that one of the
dominant drivers is meeting that next window or market
opportunity without considering the risk or whether it is an
advantage to the state. He said there has been a pattern of
opacity by the administration, and Mr. Meyer has a tall mountain
to climb to earn the trust of the legislature and of Alaskans.
He said he has long been a supporter of a natural gas pipeline,
and he wants to be aligned with the producers, share the
ownership risk, and be pulling in the same direction, he noted,
and there is a pattern of being in opposition to the producers
and nudge them out of the way. "You have a long way to go to get
my confidence [unclear]," and he has heard a lot of information
that causes him "great pause."
MR. MEYER shared his concerns on trust. He needs a little bit of
time to earn it, and he has not tried to hold anything back. He
believes that AGDC has been hindered by the lack of openness,
and he pledged more openness. With respect to being driven by a
schedule, some people feel that a project needs to mature
whenever the time is right, but he said he comes from a
pipeline/midstream background where there was always a customer
with a time demand that his project had to hit. "I tend to be
much more schedule-driven," he explained. He said, "If you shoot
for nothing, you are sure to hit it," so it is important to
recognize that there is a window to shoot for, but he is not
suggesting the project must get built regardless, that it be
built at risk, or that it be built with market. There is a short
amount of time-maybe 18 to 24 months-to figure out a structure
that will work from a cost-of-supply standpoint, he said.
Additionally, the project must be de-risked so that it is
acceptable to all parties, and there is the need to communicate
and convince the markets that this project will be there for
them in the future as a long-term, stable supplier.
MR. MEYER said he understands that schedules can lead to risks
that should not be taken, and that is not his intention. This
project is so big that no risk will be allowed that is not
reasonably understood by the party taking it. He noted that
there is no real technical risk, because no new technology is
needed, but there is some construction risk. Putting all the
components together makes it a big project, he added, but there
is an opportunity to decide to pull out the stops and work
together with the producer venture parties. He stated that he
has not come today with all of the answers but quite the
contrary. "I come to you today admitting that we don't have the
answers. We don't have them all, but I know from my history of
project development and infrastructure development that there
are tools that we draw from; there are resources outside of the
state that we can draw from that will help this project, and
what I'm hoping is, with a collaborative working relationship
with our producer folks and with you folks, that we can pull
enough of those tools together to make this work."
3:20:27 PM
MR. MEYER turned to slide 26 regarding budget implications, and
said "this is nothing new," as it was seen in the budget
process. He pointed out that right now, it is not known which of
the parties are in and for how much. If the state had to go it
alone, which he does not expect, the FERC process would cost
much more, he noted. In summary, he provided the following:
Market conditions and lack of consensus among
participants is leading to a project slow down.
AGDC can step into the lead to maintain momentum and
focus on cost reductions through structure and
financing changes.
Alternative venture structures could keep all
participants engaged and create flexibility to allow
Alaska LNG to compete in the mid-2020s market window.
AGDC will ensure the legislature is kept well-informed
throughout the process.
3:22:52 PM
SENATOR COSTELLO said Mr. Butt told the committee that the
measure of competitiveness is the cost of supply, and he
explained the efforts to reduce it. You tell us that the project
is not going anywhere, but that the two options are to delay the
project or ownership. She asked if the work that Mr. Butt has
done is not significant or warrants a change of direction.
MR. MEYER said his statements do not conflict with Mr. Butt's
statements-they are saying the same thing in a different way.
The work that Mr. Butt and his team has done is exemplary. The
resource reports and other things are "just beautiful." He
stated that FERC probably has never seen an application as
thorough as that. However, Mr. Butt did point out that they need
to reduce the cost of supply to get into the next phase. The
cost of the project needs to be reduced or it will not move at
the pace that people had expected, he explained. He offered that
AGDC has been part of the technical work product, and the work
that it did on the ASAP line was very good-they got an EIS
through the process. The whole team has done an amazing amount
of work on how to reduce the capital cost and how to put the
project in phases, so train 1 can start up without having to
wait for all trains to be done, he said. There is more they are
doing-they are still beating down capital costs, but even with
those efforts, there is more to be done to clear internal
hurdles and the market.
MR. MEYER said that the challenge now is to reduce the demands
on the balance sheets of the producer parties and the state and
to put the capital costs of the project in the hands of somebody
that likes a low infrastructure return, like the pension funds.
"What if we structure this so that the state took more and we
took out some of the federal taxes?" Does adjusting the property
tax or the local payments help, he asked. All of the aspects
need to be assessed to get this project where it competes in a
very competitive world market for a long time. The current
effort is very collaborative, and it is a concept that he cannot
yet determine if it will work, he stated. It is worth the try,
he said, because he firmly believes that Alaska has a very good
project-the LNG project is extremely good and will be very
attractive to the infrastructure fund and to the market, as long
as that cost of supply is in line. He added that he wants to see
happy producers on one end, happy customers on the other, and a
happy state in the middle. "Whether we can get there, I do not
know, but I know that we have enough tools that I think we can
make a difference and I think we can keep this project on track,
and I want to do that in a collaborative manner, and I think we
can," he concluded.
3:27:24 PM
SENATOR COSTELLO asked about the first bullet that stated a lack
of consensus among participants.
MR. MEYER said he was talking about a lack of consensus on the
FEED decision, but that decision is not required now, so he
cannot say for certain. He said he has heard the governor
publicly thank the producers for letting Alaska know now that
there is a good chance that the project is not going to FEED,
rather than waiting a year to tell us. The forewarning is
appreciated because the next 12 months are very critical.
SENATOR COSTELLO expressed concern that he is making an
assumption based on a press conference about Alaska's important
mega project.
MR. MEYER responded that he is not making an assumption based on
a press conference. There have been other data points as well.
The producers are looking forward to working in a collaborative
manner to help reduce the cost of supply for this project, and
no one has been asked to vote yet, so there may be room for a
positive FEED. He said he has received enough information from
producers and others that indicate that the project is not
moving quickly. One "data point" is that the major contractor
for this project told him that the project is not moving
forward-it needs more study, he said. If the major contractors
are being told that, it gets out in the industry. He is not
basing his perception on one press conference, he stated.
3:31:03 PM
REPRESENTATIVE TARR observed that the governor has long stated a
preference for a go-it-alone project, and she wants to
understand where people are "out of sync," "Where we're hearing
from the project that things are still under consideration, but
the presentation from you, even though it's suggested to be in
concept form, seems a lot more permanent." She wants to know how
to do a cost-benefit analysis on the points where there is no
consensus to better understand why the new concept would be
preferable to the existing structure, she said. "Many of us"
supported the existing structure initially. She said "people
like Larry Persily," who worked as the federal pipeline
coordinator, said the previous arrangement "was the closest
we've ever come-that's how it was characterized." It was
characterized as the project arrangement that had the highest
likelihood of success, so to shift gears into a fundamental
overhaul of the structure-. She said if other sponsor parties
speak positively [about the new structure], it would probably
change the reaction of a lot of people around the table. She
added that she wants to hold back on her position until she has
heard all of the information and really understand everyone's
position. It would be helpful to see the structures in a
comparative way to understand how the new concept might lead to
success, she stated.
3:33:52 PM
MR. MEYER clarified that he was not involved in upstream
negotiations on those arrangements, but he understands they took
a lot of time, and some agreements were not reached. A number of
the agreements can come later, rather than up front. The cost of
CO2 disposal is an issue, for example, but it is unknown-"you
may get something, you may not," but what is known is that the
project has to compete in the market, and the costs have to come
down. The netback will determine whether there is a project or
not. He said he is sure there were great efforts getting the
agreements to the point where they are, and he would like that
effort to pick up from where they left off, but settling on one
thing up north does not change the market price and it does not
change the need to reduce big chunks of costs. He added that he
is also anxious to hear from the producers and is hopeful that
they will be receptive to look at alternative structures that
will help reduce the total cost of supply.
3:36:54 PM
REPRESENTATIVE TARR surmised that under the existing model,
"we're trying to get the lowest cost of supply before we go out
and find buyers," and what Mr. Meyer is suggesting is to find
out what the buyers are willing to pay and fit the structure
around that.
MR. MEYER said maybe it is sort of in between, because the
market price is known right now, and he would like to assess
other things to reduce costs. All parties know there are
different ways to do that, he said. The current framework of
everyone just kicking in their share probably is not going to
work, and he noted that Mr. Butt touched on that very tactfully,
but that is where we are at.
3:39:36 PM
SENATOR MICCICHE said that Mr. Meyer recognizes a fundamental
difference between the comparisons with commodity prices in 2009
that resulted in limited success for Australia and the market
conditions of 2016.
MR. MEYER asked what the question is. "Do I recognize the
difference between the '09 environment and 2016?" He went ahead
and explained that the fundamental difference is the shale,
which was a true paradigm shift. When he entered this industry
35 years ago, he was told that all of the big fields had been
found, and the emphasis was on exploration. Now the emphasis is
on the production side, because shale development is more of a
mining activity. The cost structure and long-term costs are more
well-known, and without the exploration component, it is less
risky. Additionally, large tolling plants in the U.S. are being
built on a tolling model, which is like the model he is
describing, so that cost is very predictable. He noted that oil-
linked pricing is changing, and Japan who is a historic oil-
linked buyer is wanting something different.
SENATOR MICCICHE said he was in Tokyo for a meeting, and he was
trying to understand "cocktail pricing," and a polite Japanese
gentleman said, "When oil is cheaper, we buy oil." Senator
Micciche noted that Mr. Meyer said to be prepared for the
turnaround in the mid-2020s. He said he assumes that the lack of
consensus has to do with market conditions. "If the people who
have the most experience in the planet are concerned about the
viability of this project, I think we should share in that
concern." Oversupply and the issue of conversion is a serious
concern, and when buying a vehicle in 2008, a person could get
floor mats and a fancy stereo, because it was a buyers' market,
"and I don't think that that's going to be a short-term impact,
so I hope you carry that conservatism with as you seem to be
somewhat marching forward," he stated. If the discussion is
internal versus external capital, he is open, he said, but if
the conversation is somewhat rogue, "I remain concerned."
3:43:20 PM
MR. MEYER said he is not sure [about that comment], but his
conversation is not rogue. He told the committee that the market
conditions are causing misalignment or different perceptions. In
a recent article from Natural Gas Week, "Market Doldrums Knock
Alaska LNG Further Down in Exxon Priorities," [ExxonMobil chief
executive Rex] Tillerson said Alaska LNG is still important to
ExxonMobil, but the market has changed, consequently the company
has to set priorities, and those priorities start with the
lowest cost of supply. Unfortunately other ventures have greater
certainty in the near term. Mr. Meyer said that the Alaska
project is challenged by alternate projects, but everyone is
aligned in wanting to see the Alaska project become more
competitive and reduce the cost of supply. He said it will not
be easy, it will not be a free market, and when demand comes up,
there are eight times the number of projects that are needed to
capture that demand. Those projects are telling their investors
that they are going to capture it, and he is hoping the Alaska
project will be one of those, but "we have to fight."
REPRESENTATIVE TARR said that she wants to feel like Alaska is
not forcing a project at a time that it should not happen. She
said some of the producers want to slow down, and maybe the new
concepts will alleviate this problem, but it is not clear to her
whether the state is forcing a project that should not go
forward or using new opportunities to enhance a project that
should.
MR. MEYER said he shared that completely; the project should
work and not be forced. He believes there are different tools in
the tool box that are common in world infrastructure projects to
make it work without forcing any particular party.
3:46:44 PM
CO-CHAIR GIESSEL said that the people sitting at the table
represent the people of Alaska, but speaking for herself she is
concerned about Mr. Meyer's concept and is discouraged to hear
there is an idea to start all over again. "We've tried this
project several times, and it hasn't penciled out and with good
reason," she stated. There is a gas offtake authority "from our
conservation commission, so that's an exciting thing. It sounds
like you agree with us that the cost of supply is a critical
driver for this project," she commented, "and yet you want to
drive toward a final investment decision by 2018. That's very
concerning." She said it is a conflicting message, but she does
appreciate him coming today.
^Fiscal Team
FISCAL TEAM
CHAIR GIESSEL said the next agenda item is to hear from the
producers, who represent three of the five members of the fiscal
team-the others are AGDC and the Department of Natural
Resources.
3:48:46 PM
DAVID VAN TUYL, Alaska Regional Manager, BP, Anchorage, said he
has been working for BP in Alaska for almost 32 years, and many
years have been dedicated to getting gas to market. He works on
the fiscal team and is also on the management committee of the
Alaska LNG project. He stated that the success of this project
is absolutely critical to BP's business in Alaska and to the
future of Alaska. The scale of the project is unique for BP, and
the corporation would like to see Alaska LNG move to market in
the 2020s. He said 2016 is a challenging year, and "currently
we're all living that reality." In the low-price environment,
there are over a trillion dollars' worth of projects that have
been shelved, he stated. "It's tough out there." The Alaska
project is also challenged, he added, but it is not unusual for
LNG projects to go through evolutions. The good news, he said,
is that the Alaska project has not been shelved. He stated that
BP and Alaska know what it means to face challenges-"challenges
are nothing new to us." The January 2014 Heads of Agreement
envisioned a path to face challenges together. It was also the
path that was forged by this legislature, and BP is committed to
progressing "in an aligned way forward."
3:51:50 PM
MR. VAN TUYL said the Pre-FEED phase is 91 percent completed to
deliverables, and BP will have spent $600 million gross to
advance Alaska LNG once the work is done. He estimated that FEED
will cost over twice that amount-maybe three times that amount.
That kind of commitment deserves a careful evaluation and a
thoughtful decision before BP commits its resources or before
the state commits Alaska's resource, he stated. He said BP has
found that the cost of supply is the most meaningful benchmark
to measure how LNG competes with other projects. He explained
that it is the cost at which a project can sell product to a
buyer and is typically quoted on a discounted basis. Higher-cost
projects will struggle to find willing buyers, he said. In fact,
BP has commissioned a study to evaluate the competitiveness of
Alaska LNG, and he expects the results of the commissioned study
next month.
MR. VAN TUYL told the committee that at last month's Alaska Oil
and Gas Association's conference, Daniel Yergin, an energy
consultant who is the industry authority, reminded people that
the world LNG market has changed dramatically. Yergin's firm,
IHS, sees a tremendous supply of LNG from the Gulf of Mexico, he
said. That supply is more than 10 times the volume of known ANS
[Alaska North Slope] gas. That's the reality against which
Alaska LNG must compete, he explained, and even with the great
work of Steve Butt and the project team, "we're not there yet."
He said he understands and appreciates the state's desire to
move its project ahead, and BP understands the state's fiscal
need for a new revenue source. The state is a vitally important
co-venturer for BP, he noted, but BP does not want to move
quickly into the largest energy project in North America that
will only end up losing lots of money "for all of us."
MR. VAN TUYL said Alaska LNG must successfully compete in the
global marketplace. He added that LNG is a commodity, and buyers
have many choices as to where they purchase it. He noted that
buyers want to pay as little as possible. He said BP wants to
make a competitive offer, and before BP makes an affirmative
decision to enter FEED, it will want to make sure of a few
things. It wants to make sure that the cost of supply is
competitive, he explained, and it wants to follow project
management best practices. Once BP has found that the project is
competitive, it needs fiscal and commercial terms sufficiently
defined to feel confident, and those terms will need to be
finalized, including continuation of FERC Section 3 regulation
of the Alaska LNG project as what was outlined in that Heads of
Agreement. He added that all of the participating co-venturers
will have to commit their share of funding for FEED, and BP
envisions that any resulting agreements that have a term in
excess of two years would be made available to the legislature
for approval as provided in SB 138. He said some terms will
require confidential treatment. Once BP confirms that Alaska LNG
can be delivered at a competitive cost of supply, it will want
to move forward quickly. "We will all be highly motivated to
minimize the time we have capital tied up that's not generating
cash," he clarified. Some genuinely good news, he said, is that
the Alaska LNG combined venture continues to offer many
significant advantages. The Prudhoe Bay field is one of the
world's most prolific basins, he said. In 38 years it has
produced over 12 billion barrels of oil, and he expects there
are at least another 2 billion barrels along with a massive gas
resource of over 4 billion barrels of oil equivalent. "That's a
lot to play for."
MR. VAN TUYL said that Mr. [Keith] Meyer showed a slide
referencing efforts since the early 1980s to get Alaska's gas to
market. He said that he thinks it is important to remember that
since that time, the Prudhoe Bay working-interest owners have
made good use of that gas through gas cycling, enhanced oil
recovery, and other efforts, allowing them to produce over 3
billion barrels of oil more than was originally expected.
3:58:54 PM
MR. VAN TUYL said BP continues to focus on using BP's gas
resource to BP's best benefit in Prudhoe Bay, and the Pt.
Thomson gas condensate field has been placed in production with
ExxonMobil as the operator. It contains a gas resource of a
billion barrels of oil equivalent, and the companies "sitting
before you" have world class experience in development. They
have successfully built mega LNG projects around the globe-
"that's a good resource to have," he added. They have financial
and technical capabilities, he noted, and are essential to a
successful LNG project. "We have a host government that's highly
motivated to get our Alaska gas resource to market," he stated.
He added that all of those things are wonderful. He noted that
"we're aligned on our need to continue to look for opportunities
to reduce the cost of supply for Alaska LNG."
MR. VAN TUYL said, "We're actively discussing alternative ways
to continue to advance the project" and working cooperatively to
reduce the cost of supply. He added that BP needs the Alaska LNG
project to be successful, and a successful project would provide
a major step towards commercializing oil and gas resources on
the North Slope and around the state. He added that a successful
Alaska LNG project will mean a stable revenue source for BP for
decades to come and a source of gas for Alaska users. It is
worth working hard to achieve, he added, and that is the future
of Alaska that BP is working for.
REPRESENTATIVE SEATON asked if the Wood Mackenzie study will be
made available.
MR. VAN TUYL said BP would certainly intend to make it
publically available.
4:01:19 PM
REPRESENTATIVE SEATON said if a gas project does not take place
in the mid-2020s, how will the gas impact Prudhoe Bay operations
and its economics? Will it negatively impact gas handling?
MR. VAN TUYL answered that the timing of a major gas sale at
Prudhoe Bay is an outcome and is not a target that BP shoots
for, but once BP identifies a viable project with partner
support and regulatory approval, it will maximize the resource
offtake from Prudhoe Bay. If the project were delayed, BP is
going to continue to work to optimize the resource, and there
may be an impact, "but we don't see that today," he explained.
4:03:21 PM
DARREN MEZNARICH, Project Integration Manager for Alaska North
Slope (ANS) Gas, ConocoPhillips, Anchorage, said his team is
responsible for integrating the technical, commercial, and
marketing aspects of the project for ConocoPhillips. Its
objective is to monetize ANS gas resources, and ConocoPhillips
remains committed to the completion of the pre-FEED technical
deliverables in 2016, "but we have to be realistic about the
project in the current price environment." The industry
continues to face weak oil prices that have not been seen for
more than a decade and weak global natural gas prices that have
not been seen for 15 years or more. He said this has created
challenges to the industry as it deals with greatly diminished
revenues from their producing assets. He noted testimony in
January, showing that AKLNG project faces economic headwinds,
and low oil and gas prices have depressed Asia LNG prices by 60
percent since 2014. The global LNG market is oversupplied, and
analysts believe the LNG market will remain under pressure as
projects in Australia and the Lower 48 come on line and ramp up
to full production, he explained. He said that ConocoPhillips
expects the market to strengthen at some point, but that timing
is difficult to predict. Additionally, the AKLNG project is not
ready for a FEED decision, and components of a successful
project ready for FEED stage gate will include demonstrated gas
resource, reliable fiscal terms, and sufficient resolution of
commercial and technical issues that result in a competitive
cost of supply and acceptable risk.
MR. MEZNARICH said ConocoPhillips is unlikely to be ready for
FEED decision in 2017, but it is open to evaluating any credible
option and willing to hear more about the approach described by
AGDC's Keith Meyer today. The opportunity to improve project
competiveness is beneficial to all, he said, and ConocoPhillips
will not stand in the way of a project should the
administration, legislature, and others want to proceed without
it. "We will make our gas available on commercially reasonable
and mutually agreeable terms," he said. ConocoPhillips signed a
gas availability agreement with the state in December 2015, and
it has since had preliminary discussions with the state to
progress terms by which ConocoPhillips would make its gas
available. He said he has reviewed the list of questions
supplied by the chair and would be pleased to address them.
4:06:35 PM
REPRESENTATIVE TARR said she appreciated his specificity on not
being ready for a FEED decision in 2017 and his interest in the
new concept described by AGDC. She asked how to approach
ConocoPhillips in the potential transition to a new arrangement.
MR. MEZNARICH answered that he had heard about the new concept
only recently, so ConocoPhillips is looking forward to learning
more about it. He does not have enough details to comment but is
looking forward to working collaboratively, "but we'll just have
to see where it goes."
4:07:55 PM
BILL McMAHON, Senior Commercial Advisor, ExxonMobil, Anchorage,
said he has worked on the commercialization of gas for over 20
years. He noted that ExxonMobil has worked under each framework
established by Alaska, including the Stranded Gas Development
Act approach for a pipeline to North America. In 2007, there was
the Alaska Gasline Development Act, and ExxonMobil aligned with
TransCanada to advance a pipeline and LNG project. In 2014, the
Heads of Agreement was executed and SB 138 was enacted, he
explained. ExxonMobil entered the Pre-FEED phase and committed
resources with the understanding that fiscal and commercial
agreements would work in parallel. He said, "That has been a
disappointment for us to expose that money without having those
completed." The company has continued to advance the Pre-FEED
deliverables, and those will be wrapped up this year. It is
important to note that the agreement under which the Pre-FEED
works was done is scheduled to expire next year, he added.
4:09:44 PM
MR. McMAHON said that ExxonMobil will continue to support a
project that takes an aligned approach with the state, BP, and
ConocoPhillips to commercialize the gas, such as they are doing
under the Alaska LNG project; "however, we need to recognize
that the LNG project is global-the LNG market is global-with
many potential supply and support sources competing for
available demand." He explained that projects need to have a
competitive cost of supply to remain viable throughout the
market cycles. All major projects within ExxonMobil's portfolio
are evaluated on fiscal terms, stability, and political and
regulatory frameworks. "We remain committed to commercializing
the natural gas resources on the Alaska North Slope and are
willing to work with any interested parties, including our
coventurers, AGDC, and the state of Alaska to explore options to
commercialize the gas." In January, the governor provided a
letter outlining all of the agreements and actions needed to be
completed prior to the end of the regular session, or he would
have no other choice but to consider other options to
commercialize the gas. Mr. McMahon said that the letter failed
to include a fiscal agreement, and ExxonMobil wants the
assurance of predictable fiscal terms. When it became clear that
the governor's plan was not going to be met, other concepts to
progress the project were discussed in February with the Alaska
LNG project "sponsors." One concept was working with the
administration to explore other options, he stated, and taking a
"paced" approach to "our current Alaska LNG project."
4:11:51 PM
MR. McMAHON said that approach would continue to advance to
regulatory permitting, target potential cost reductions, and
develop fiscal and commercial agreements that ExxonMobil
expected. To be clear, he said, ExxonMobil has been willing to
have group discussions about any modifications, "and ExxonMobil
didn't request that those discussions cease." He added that his
company has not been having one-on-one negotiations with the
state, and this all changed last week. The administration shared
an alternative concept for commercializing ANS gas as well as a
potential plan to move from a project structure based on the HOA
and SB 138 to a state alternative project structure. ExxonMobil
is working to understand it better so it can evaluate the
concept, he stated. He said it is exploring all options.
4:13:24 PM
CHAIR GIESSEL said she pulled up the last presentation that Mr.
McMahon gave, because it was so easy to follow. She said he had
five elements, and she asked for a review of "where they are at
from the perspective of the three companies." The first element
is gas production-"so we can check that one off," she said.
Prudhoe Bay and Pt. Thomson development plans and AOGCC offtake,
"so we can check that one off, [because] AOGCC has given
authorization for offtake." She asked if that is true.
MR. McMAHON said yes.
CHAIR GIESSEL said the next criteria is deliverable, and "it
says key agreements, lease modifications, governance, gas
supply, firm transportation services agreement." She asked where
the commercial negotiations are now.
MR. McMAHON said that those discussions have been suspended.
CHAIR GIESSEL said she sent a letter to each of the companies
asking them to answer three questions, although the second
questions was only relevant to AGDC. The letter asked how things
are going, and in each response [the producers] "call out" that
commercial agreements and fiscal agreements necessary for a FEED
decision have been suspended. "How did that happen?"
MR. McMAHON said ExxonMobil did not support that cessation.
MR. VAN TUYL said BP is ready to engage at any point in time and
did not anticipate the suspension.
MR. MEZNARICH said ConocoPhillips is ready to engage, but, in
fairness, it had not made a lot of progress either. It is also
ready to engage if the legislature and the administration want
to go a different direction.
4:16:08 PM
CHAIR GIESSEL said the fiscal elements are property tax (PILT),
royalty-in-kind decision, predictable and durable terms, and a
constitutional amendment. There is an opinion from the Alaska
attorney general, and it is on [the legislative website],
indicating that the state would need a constitutional amendment
to provide a predictable tax structure. She said the next
category includes regulatory elements, progressing FERC, and
pre-filing NEPA. She believes the companies are working on the
FERC process.
MR. McMAHON said that is correct.
4:17:27 PM
CO-CHAIR GIESSEL said the last element is government relations
and broad support for the project. She stated that she is very
supportive of this project, but she is concerned about the cost.
"Our job is to make sure that the benefit of this resource is
maximized for the people in the state," she said. It is not the
legislature's job to provide the buyers with the lowest priced
product, but the most competitive price that brings a return,
and that is the self-interest of [the oil companies].
4:18:27 PM
REPRESENTATIVE JOSEPHSON said he has been working on this topic,
and he has found the witnesses to have impeccable integrity, and
everything they have told him has been accurate. He noted that
everything the three men are saying supports Mr. Meyer's
position that this project will have to be shelved unless there
is an alternative. It is imperative to fix Alaska's fiscal
problems, and it could take years. There is an implication about
a willingness to continue to engage in commercial agreements,
and there is an implication that the state is not willing to
engage in some way. "That's a pretty powerful implication to be
left with, and I think the record needs to be made perfectly
clear," he stated. Perhaps the administration does not see the
project as coming to fruition in 2017/2018 moving into FEED. He
wants to know what factor caused the suspension.
MR. McMAHON told him to ask AGDC.
MR. VAN TUYL said if he is asking if the state is willing to
engage, then he agrees with Mr. McMahon. He added that BP is
willing to engage on any discussions to advance the project, but
the common thread is the cost of supply and more needs to be
done so that the project can compete. There are a lot of ways to
approach that; the project team work is essential, and there are
other things that might be possible, like tax efficiency. He
said he is always willing to hear a good idea.
4:22:32 PM
SENATOR STOLTZE said he is trying to buttonhole the lack of
consensus and asked if there is consensus with the industry.
MR. MEZNARICH said ConocoPhillips needs to have technical work
done and a reliable cost estimate. Additionally, there are the
fiscal terms, the commercial terms, and the market. The
technical piece is going well, but "the fiscal and the
commercial are not ready and obviously the market is not ready,"
and that is why ConocoPhillips indicated that it is unlikely
that it would be ready for FEED in 2017.
4:24:26 PM
SENATOR STOLTZE said, based on his readings, that he has been
bombarded by a lack of consensus in the administration. "We
don't usually have four commissioners appointed during one day,"
he stated. The most prominent litigator in his memory against
the industry resigned, and "there's a lot of almost coded
message on the DNR departure about the plan of development and a
move to put that in default." He added that around 2005 or so
there was litigation on a field, Pt. Thomson, with only one
player, Exxon, through three governors, "and I think finally
about half way through former Governor Parnell's administration
there was a resolution or some type of closure on that, so seven
years just on a litigation issue on a plan of development with
only one player involved." He asked if that is part of the lack
of consensus on the plan of development. He said he knows from
watching the media there is a lack of consensus, apparently, and
maybe that consensus is being solidified through new
appointments. "Maybe that will be a new model … straight down to
the commissioners and directors, but I guess the combination-I'm
trying to figure out this whole lack of consensus discussion
that Mr. Meyer brought up." He added that he can observe there
has been a lack of consensus internally, but he is not trying to
"take the steam out of the engine of what we might hear from DNR
later, but it pops up." He said when there's words used, he
tries to take them to heart, and he is trying to understand the
lack of consensus part. He added that it seems to involve a lot
of things, so, he said, he will just default to the whole plan
of development discussion. He stated that he did not know what
the position was last week, and he assumes that he will know
what it is soon when there is new [unclear]. He continued, "Just
on the whole issue of plan of development and using that legal
lever."
MR. VAN TUYL said BP, as the Prudhoe Bay unit operator on behalf
of all the working interest owners, submitted its plan of
development to DNR "that we think should be approved." The plan
included "the level of information consistent with the plans
that we've provided each year to DNR since the annual plan of
development process started in the year 2000." He noted that BP
has not yet heard a formal response from DNR, and he looks
forward to receiving an approval from DNR. Regarding how BP
views AKLNG, it all starts with cost of supply, and once BP
identifies a competitive cost of supply, "then get out of the
way." He said BP will want to move forward with that project and
get that gas to market, "and until we do, it makes sense for us
to continue to work hard to make sure that the project competes-
it's as simple as that."
MR. McMAHON added that there is total support with BP as
operator and the way it has handled the plan-of-development
process. He said ExxonMobil is focused on cost of supply, and
that will be used to go through the time-tested process of a
stage-gate. "Before signing up for our share of the over a
billion dollars of FEED expenditures, one of the things we'll
want to do is assess where do we think the project is
commercially before making … that decision."
4:29:27 PM
MR. McMAHON said that he seems to be in line with Mr. Van Tuyl,
so he does not see a lack of unity there.
MR. MEZNARICH said ConocoPhillips supports the operator's plan
of development for Prudhoe Bay. Regarding the cost of supply,
ConocoPhillips is interested in new ideas.
SENATOR STOLTZE said it sounds like there is a consensus on that
part. He said AGDC represented a lack of consensus, so he
guesses he will hear what DNR says, "and we'll find out where
that little glitch on the consensus is."
REPRESENTATIVE TARR noted that the witnesses said that 2017
would not be a time when their companies would want to enter
into FEED, but she did not hear information about a schedule
that might look more possible. She acknowledged that there were
many unknowns, but, legislators will be faced with evaluating if
the new concept is a good idea, so she asked, "How long of a
delay would we be looking at versus some other idea that may …
move things along a little more quickly?" She noted that Senator
Giessel said there is hesitation in starting all over, because
it has taken so many years to get to this point. "How much
information can you share with us about how you'll evaluate that
timeline?"
4:31:59 PM
MR. VAN TUYL said he takes some exception to an assumption of
showing opposition to a 2017 FEED. For BP, "the timing is an
outcome, whether it's any particular time, that's something that
you earn as a result of having done the work." Doing the work
means getting to a competitive cost of supply and such things as
the governance terms and commercial agreements, he added. If
that can get done promptly and everyone can make a FEED
decision, "we'll look at the calendar and figure out when it is
and we'll celebrate." Once there is a competitive project that
will be the time for each company to decide to commit to FEED.
MR. McMAHON said ExxonMobil does not want to be schedule driven,
because that is how bad things happen to mega projects. He cited
cost overruns and technical problems, so ExxonMobil does not
want to pin down a date for the FEED decision, "but we want to
work diligently to clear all the factors that we test each time
we approach a stage gate." He said he has only had the proposal
for a week and looks forward to learning more about it, and if
it has ways to reduce the cost of supply, that will be
supported. In order to compete in the LNG market, there has to
be a competitive cost of supply, he reiterated.
4:34:10 PM
MR. MEZNARICH responded that for ConocoPhillips to make a FEED
decision, it must understand the cost, the assurance of the
resource, and the rules of the game. Whoever the investor is
will want to understand that there is gas supply assurance and
what the fiscal and commercial terms are, he said. "Those are
the things that we can work on and then the market is going to
take care of itself."
4:34:54 PM
REPRESENTATIVE HAWKER said Mr. McMahon has been an articulate
spokesperson for the producers, so he is asking for his opinion
on Mr. Meyer being very adamant about the importance of sharing
more information with the legislature and the public, as well as
getting the legislature more involved in the next series of
joint venture agreements and contracts. He then asked Mr.
McMahon if he and his corporation would object to the state
giving the legislature and the public the new concept documents
that were offered last week.
MR. McMAHON said that proposal belongs to AGDC, and ExxonMobil
would have no objections if AGDC chose to release it.
MR. VAN TUYL and MR. MEZNARICH agreed.
4:37:42 PM
SENATOR MACKINNON asked the producers if there has been any
disadvantage by not having AOGCC at full complement. There has
been a vacant position for almost two years, she stated.
MR. VAN TUYL said no; BP has had great interactions with AOGCC,
and it celebrates the ruling that it obtained last October on
both the offtake rate at Prudhoe Bay and for CO2 reinjection.
Both are essential elements in allowing AKLNG to move forward.
MR. McMAHON echoed that for Pt. Thomson. ExxonMobil was able to
secure the necessary offtake rules, he said.
MR. MEZNARICH said ConocoPhillips appreciates what AOGCC has
done; "I think they've done what they could and done well."
SENATOR MACKINNON said the governor's press release suggests
that the offtake is an indication that Alaska is ready to move
forward and sell gas in market. She asked if that is the
decision or is further work needed for the commission to start
taking off or selling some of the CO2.
4:39:59 PM
MR. VAN TUYL said AOGCC gave approval with some homework
assignments that are due in five years. There is still work to
do on CO2 optimization, he clarified, but BP is confident it can
do the technical work required within the timeframe required.
SENATOR MACKINNON said she is concerned that "we could reappoint
an AG in 48 hours, a DNR commissioner, and maybe the
administration has had more lead time than that, but that we
continue to hold vacant a very technical position that is part
of the livelihood of understanding and creating monetary value
for the people of Alaska." She stated that Commissioner [Dan]
Seamount's position expires in 2017, and there will be two
vacancies. She said she is not part of the press, so she does
not get her answers publicly sometimes, and she is doing a shout
out to the governor's team that she is waiting for an
appointment and has been for at least 18 months. She said she
appreciates Mr. Meyer taking over the lead at AGDC and
advocating for Alaskans an economically and commercially viable
project. She noted that she feels like "some folks aren't
playing well together." Legislators are not able to be inside
some of the conversations, so they would just be finger-
pointing. She asked the witnesses why there is not a gas sales
agreement between the three producers so that some of the supply
costs can be advanced. She said the legislature has been told
that "you're not playing well together" in reaching a gas
balancing agreement on the North Slope. She asked for an update.
4:42:58 PM
MR. MEZNARICH answered that he could not comment on confidential
negotiations, but ConocoPhillips continues to make reasonable
offers and resolve the differential ownership between the two
fields. "It' a challenging issue right now."
MR. VAN TUYL said there has been tremendous progress on a very
commercially complex issue, but he does not know what it takes
to reach agreement, because it depends on the counter party. "We
are very much motivated to try to remove any of the barriers
that we have." He said BP will devote the resources necessary to
solve those problem, no matter how complex or time consuming.
MR. McMAHON answered that ExxonMobil has been making reasonable
offers as well. If Alaska elects to take royalty in kind, it is
a party to the agreement, "and they have been involved in the
negotiations when they were under one."
SENATOR MACKINNON expressed hope to find a way for a legislative
representative to start listening to some of these
conversations, because "with the answers that we were just
given, it's hard to determine how to help progress this
integrated project." There is finger-pointing that at least
three of the parties are not coming up with the balancing
agreement for a variety of reasons that we're not privy to." She
said it is frustrating to not have the inside details, "and then
we hear the blame game going around that the state hasn't set
our fiscal terms when we've been waiting for some agreement from
the management team or the producers." She said she is not
meaning to be disparaging; it is a complex project. She hopes
the administration allows participation so someone can represent
the legislature to give confidence that the blame game is fair.
4:46:29 PM
REPRESENTATIVE SEATON asked if there are other agreements that
are in conflict besides the gas balancing agreement, and, if so,
what is the nature of any other upstream agreements that have
not reached alignment?
MR. VAN TUYL told Representative Seaton to look at the
governor's January 18 letter for a list of agreements that the
administration was looking for at that time. "Those were the
things that we were engaged on at the time," he stated.
REPRESENTATIVE SEATON asked about other "complex issues" that
are not in alignment and that he is not aware of.
MR. VAN TUYL said one of the key issues that was not listed in
the letter was the fiscal terms, which remains to be completed.
MR. McMAHON said he has a copy of the letter, and one issue is
the byproduct handling agreement, which deals with taking the
byproducts from the GTP and use them at Prudhoe Bay. The third
issue listed is the field cost allowance under the lease
agreements, he added.
REPRESENTATIVE SEATON asked if those agreements need to be
worked out before a FEED decision.
4:49:12 PM
MR. MEZNARICH added that the other issue that came up in
testimony in Palmer, Alaska, last fall was the marketing
structure, "and there's JV versus equity marketing," and that is
another open issue. He explained that JV means "full four-party
JV marketing." From the perspective of ConocoPhillips and
regarding a constitutional amendment, before a package is
brought to the legislature and the public, all these things need
to be sorted out. The rules of the game and the technical work
all have to be done, he said, and then the project can be ready
when the market is ready. "They should be resolved in advance."
REPRESENTATIVE SEATON asked if that would be before a FEED
decision is made.
MR. MEZNARICH said that is before a package is brought to the
legislature for ratification, which will precede a
constitutional amendment, "and then you'd be ready to go to
FEED."
CO-CHAIR GIESSEL said the goal of FEED was to make that decision
in 2017. If that were delayed, she asked, would the end time for
the project coming on line also be delayed by a commensurate
amount of time or can that time be made up?
4:51:05 PM
MR. McMAHON answered that when a project schedule is put
together, it is important to understand what is on the critical
path. The regulatory process, securing permission from FERC to
construct, is one, so the question is hard to answer day for
day. There are scenarios where the schedule can be maintained.
MR. MEZNARICH noted that there is technical and regulatory work,
but if the commercial work is not ready, that may not matter.
Some work in Alaska have had permits and have not gone forward,
he added. "We really see this as a package," so he is not sure
that the regulatory work would be a critical path in all cases.
4:52:28 PM
SENATOR MACKINNON asked if the current application can change
leads without having to restart the FERC process. If the AGDC
proposal includes the state taking the lead, would FERC have to
be restarted?
MR. MEZNARICH said he is not a FERC expert, but there are
requirements to decide in advance. But people can work together,
he added.
MR. VAN TUYL said there are certain changes that would require a
restart, but he does not know about the project lead.
4:54:25 PM
MR. McMAHON said that is one thing to do due diligence on. It
may be something that is quite simple to work out, he said.
SENATOR MACKINNON asked about the land ownership interest in
Soldotna and Nikiski held by an LLC.
4:55:48 PM
MR. McMAHON answered that the land is for the LNG plant, and
FERC requires the applicant to have control of that land. He
said the land might be purchased or leased, but it is too early
to say how "that may come out."
REPRESENTATIVE SEATON deduced that a constitutional amendment
would be in late 2018, which is a requirement for FEED, "so
we're really looking at 2023 before we would even get to project
sanctioning?"
MR. McMAHON said ExxonMobil needs to have predictable and
durable fiscal terms to be able to enter FEED. Those terms must
be valid under Alaska's constitution, he stated. In mapping out
additional milestones down the road, "we approach each one of
those stage gates, including the final investment decision, with
that same rigor of looking at the commercial agreements, looking
at the potential commercial viability of the project, the
economics of the projects, looking at our own individual LNG
marketing progress, so … it's hard to put dates on that." He
said ExxonMobil does not want to be schedule driven.
4:58:52 PM
REPRESENTATIVE SEATON noted that a constitutional amendment
could happen no sooner than late 2018, so the FEED decision
would not come until after that. Then there would be the FEED
process, which optimistically would take two years.
MR. VAN TUYL said BP does not need a constitutional amendment
for the fiscal certainty it envisions. "We recognize that the
former attorney general had a different opinion and what not,"
but BP has gone down a path before in seeking fiscal terms
without such an amendment. He said BP does not see that delay.
He said BP would want "sufficient confidence that the parties
would all endorse those terms to be able to make that commitment
from BP's perspective for FEED. What that sufficient confidence
might entail will be very fact dependent." He reiterated that BP
has not requested a constitutional amendment, but it might end
up being a requirement if that is what the host government says
is necessary.
CO-CHAIR GIESSEL said there are competing attorney general
opinions about that.
MR. McMAHON said, "The premise given to us was it would be a
constitutional amendment."
CO-CHAIR NAGEAK thanked all of the witnesses and said that never
in his wildest dreams would he "live to be 66 years and have
been involved with the oil industry for at least 45 years." He
started back in 1969 as a jug hustler, he explained, when he was
19 years old. He remembers those days of putting jugs in the
ground and hooking them together, doing one line and another for
16-hour days. He said he has known some people from the state
since when he was a young man, and "Marty" has been a friend for
many years. He thanked "everybody involved in this." In the past
45 years, "I've been very productive for us in the North Slope."
Without oil we would not have our own municipality, "and those
leaders who did all that work for us, and most of them are all
gone," but for those who are still alive, he said he wants to
thank them publicly for giving their lives to "better our ways."
There are various people who were in charge of the North Slope
Borough, including mayors and assembly members, and he said he
wants to thank everybody for what they have done, and without
working with the industry, they would not be where they are
today. He said there would not be a permanent fund for the state
nor for the North Slope Borough, and without industry, there
would not be the fire department and all the clinics, roads, and
schools. "We may not see eye-to-eye on a lot of things, but we
have to live together, and we're hoping for another windfall
here someday." He hopes the next generation, his son and his
grandkids, will be able to enjoy all that he has enjoyed. "But
thank you very much for your presentation, and we'll see each
other again, I'm sure," he stated.
5:05:35 PM
CHAIR GIESSEL said she has a list of deliverables, and she asked
the producers to provide their statements in written form and to
keep her apprised about what would happen with FERC "if a lead
changes." She said she has been asked to inquire with the DOL as
to AGDC's role under SB 138. She also requested a copy of the
concept document from AGDC.
5:06:39 PM
CHAIR GIESSEL adjourn the Joint Senate and House Resources
Committee meeting at 5:06 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 16-002_FiscalCertainty.pdf |
SRES 6/29/2016 10:00:00 AM |
AG Opinion on Fiscal Certainty-AKLNG |
| SB138 Section 77 Report.PDF |
SRES 6/29/2016 10:00:00 AM |
SB 138 |
| AKLNG – Legislative Update 29Jun16 v8 - Final.pdf |
SRES 6/29/2016 10:00:00 AM |
AKLNG Update 6-29-16 presentation |
| 2016 06 29 AGDC Joint Resources Presentation.pdf |
SRES 6/29/2016 10:00:00 AM |
AGDC Presentation AKLNG Update 6-29-16 |
| AGDC Contracting Service List.pdf |
SRES 6/29/2016 10:00:00 AM |
Response tp Questions |
| AGDC Employee & Embedded Contractor Salary & Benefits.pdf |
SRES 6/29/2016 10:00:00 AM |
Response to Questions |
| AGDC Board Member Travel Per Diem and Stipend.pdf |
SRES 6/29/2016 10:00:00 AM |
Response to Questions |
| AGDC Employee & Board Member Signed CAs.pdf |
SRES 6/29/2016 10:00:00 AM |
Response to Questions |
| AGDC Employee Confidentiality Agreement.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| AGDC Organizational Chart.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| AGDC Responses to Senator Giessel set 1.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| AGDC Responses to Senator Giessel set 2.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| Letter_EM to Sen Giessel_RE AKLNG QandA_28Jun2016.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| Persily overview of AK LNG Project 6-28-16.pdf |
SRES 6/29/2016 10:00:00 AM |
Persily overview AK LNG project as of June 28, 2016 |
| Sen. Giessel Questions - COP response - June 29 2016.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| 2016_June_28 - BP Response to Senator Giessel.pdf |
SRES 6/29/2016 10:00:00 AM |
Responses to Questions |
| BP Legislative Testimony_06-2016_R8.pdf |
SRES 6/29/2016 10:00:00 AM |
AKLNG Update BP testimony |
| enalytica, AK LNG Project Update, July 2016.pdf |
SRES 6/29/2016 10:00:00 AM |
AK LNG Update JT Resources Cmmttee 6-29-16 |
| COP response - Joint Committee question Jun 29 2016.pdf |
SRES 6/29/2016 10:00:00 AM |
AK LNG Update Jt Resources Cmmttee 6-29-16 |
| AGDC - AK LNG Project Concept Document.pdf |
SRES 6/29/2016 10:00:00 AM |
AGDC AKLNG Project concept document |
| 1. 07132016 Responses Joint Resources Qs.pdf |
SRES 6/29/2016 10:00:00 AM |
AGDC Responses - AK LNG Update of June 29, 2016 |
| 2. Letter from Keith Meyer to Senators Meyer and Giessel 13 July 2016.pdf |
SRES 6/29/2016 10:00:00 AM |
Letter AGDC President to Sen. Meyer and Sen. Giessel |