Legislature(2017 - 2018)Anch LIO Conf Rm
10/16/2017 01:00 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Alaska Lng Project Update | |
| Presentation on Aklng | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
October 16, 2017
1:05 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha von Imhof
HOUSE RESOURCES
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Dean Westlake, Vice Chair
Representative Harriet Drummond
Representative Justin Parish
Representative DeLena Johnson
Representative David Talerico
MEMBERS ABSENT
SENATE RESOURCES
Senator Bert Stedman
Senator Shelley Hughes
Senator Kevin Meyer
Senator Bill Wielechowski
HOUSE RESOURCES
Representative Chris Birch
Representative Mike Chenault
Representative Chris Tuck
Representative George Rauscher
OTHER LEGISLATORS PRESENT
Senator Berta Gardner
Senator Donald Olson
Senator Anna Mackinnon
Senator Gary Stevens
Senator David Wilson
Representative Paul Seaton
Representative Dan Saddler
Representative Zach Fansler
Representative Jason Grenn
Representative Charisse Millett
Representative Lance Pruitt
COMMITTEE CALENDAR
ALASKA LNG PROJECT UPDATE
HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAVE CRUZ, Chair
Alaska Gasline Development Corporation (AGDC) Board
Anchorage, Alaska
POSITION STATEMENT: Provided an outline of AGDC.
FRANK RICHARDS, Senior Vice Chair
Alaska Gasline Development Corporation
Anchorage, Alaska
POSITION STATEMENT: Provided an update on the regulatory aspects
of the Alaska Liquefied Natural Gas project (AKLNG)
LIEZA WILCOX, Vice President
Commercial and Economics
Alaska Gasline Development Corporation
Anchorage, Alaska
POSITION STATEMENT: Provided an update on the financial aspects
of the AKLNG project.
ACTION NARRATIVE
1:05:32 PM
CHAIR CATHY GIESSEL called the joint meeting of the Senate and
House Resources Standing Committees to order at 1:05 p.m.
Present at the call to order were Senators Coghill, Micciche,
von Imhof, and Chair Giessel, and Representatives Parish,
Talerico, Westlake, and Co-Chair Tarr.
CO-CHAIR GERAN TARR introduced the House members.
^ALASKA LNG PROJECT UPDATE
ALASKA LNG PROJECT UPDATE
1:08:30 PM
CHAIR GIESSEL announced the meeting as the required update on
the Alaska Liquified Natural Gas (AKLNG) Project. The AKLNG
project was constituted three years ago with two objectives:
monetize natural gas resources on the North Slope and bring
natural gas to Alaska citizens. Many members present today were
part of a lengthy process of passing Senate Bill 138 by a vote
of 52 to 8. It had tremendous support. Since the State of Alaska
was investing significant public funds into the AKLNG project
and was one of several partners in a $45 to $65 billion venture,
the legislature felt the public should know how its money was
being managed. A provision requires a quarterly legislative
public update. Since the passage of SB 138, there have been five
joint interim updates.
1:09:49 PM
CHAIR GIESSEL listed the dates and locations of those updates,
including an infamous meeting in Palmer that lasted six hours.
The resource committees have also held updates during the
legislative sessions. At each hearing, she said, she would be
reminded of changes that occurred in personnel, direction, and
scope and framework of the project. She said there have been
substantial changes from the original vision of the legislature.
The AKLNG project has frequently changed to something quite
different. The many reasons include the global drop in prices,
philosophical differences, and personality differences. Alaskans
have talked about a gasline project for generations, she added,
and public money is continuing to be spent toward that goal. She
believes that about $700 million has been spent so far, and she
has heard people say that the gas pipeline is too big to fail,
so Alaska must complete the project.
1:11:47 PM
CHAIR GIESSEL said the purpose of this hearing is to learn how
close the project is to the stated goal of monetizing the gas to
the benefit of the treasury and getting affordable gas to
citizens. She asked if Representative Tarr had opening comments.
1:12:31 PM
CO-CHAIR TARR recognized members who are on line. The House
Resources Committee received a brief update on AKLNG at the end
of the last session, and she is looking forward to information
on two announcements from last summer: the IRS private letter
ruling and a solicitation of interest.
[Audio missing: 1:13:25 to 1:14:30]
1:14:37 PM
CHAIR GIESSEL explained that the members on line will not be
able to speak due to technical difficulties, and she told them
they could text questions. She noted that all documents are
available online through the legislative website. She said the
speakers include Dave Cruz, Frank Richards, and Lieza Wilcox.
^Presentation ON AKLNG
PRESENTATION ON AKLNG
1:17:44 PM
DAVE CRUZ, Board Chair, Alaska Gasline Development Corporation
(AGDC), Anchorage, said the board is composed of five Alaskan
CEOs and two commissioners of Governor Walker's administration.
Four of the CEOs are actively engaged in major business portions
of Alaska. One is retired, and two are affiliated with the
pipeline industry, one with finance, one with heavy
construction, and one is affiliated with labor. "This is the
best board since I've been on," he stated. The board is managed
responsibly and actively engaged. Members participate in the
board meetings as well as in varying committees. The committees
cover technical, governance, communication, and commercial
issues, he added. It is a very, very active board.
1:19:28 PM
MR. CRUZ said AGDC stepped up and took leadership of the AKLNG
project in January of this year and began marketing the project
in Asian markets. "We have come a long way in a short time." The
president, Keith Meyer, is now in Asia marketing our gas, and he
has been leading the charge and doing as the board has directed
to work tirelessly to get a customer and financing. The board
thought it was crucial for him to remain in Asia to work on that
mission. He said he appreciates the legislative support to the
AGDC this year. He has committed that the board will advance the
AKLNG project, and it has. "I would like to highlight the issues
of negative comments and headlines that are impacting our
marketing efforts." He said the world is watching, and every
local news story places a great challenge when the team has to
first defend the project against the negative comments. "I
respectfully ask for your consideration when talking to the
media," he requested. Today, the committee will hear the
successes of regulatory, financial, and commercial efforts. The
board is very engaged with President Meyer and the team at AGDC,
and he expects the committee to find the progress satisfactory.
1:22:15 PM
CHAIR GIESSEL said she and Senator von Imhof have a question
about the financials. Looking over the presentation, she doesn't
see a lot of numbers, yet the update in February 2016 had a very
detailed report. In that same meeting, AKLNG created breakout
codes with the Legislative Finance Division as it made transfers
of money from appropriated money. "We're no longer getting those
kinds of reports," she said. Senator Von Imhof asked for the
numbers.
SENATOR NATASHA VON IMHOF said she met with certain AGDC staff
on Friday regarding AGDC's financial position for its mission
over the next 12 to 24 months. "There was a little bit of
dancing around that," she stated. Over the weekend, she saw the
GeFONSI account activity with about $16.8 million in one account
and $53.7 million in the second account. This is public
information. The other report she looked at was the component
detail report, and, being on the finance committee, she looks at
it on a regular basis for many departments. The report for AGDC
in December 2016 shows a breakdown of travel, compensation, and
other expenses, and for every department there is similar
detail. "I think our concern … does AGDC have the money to carry
out its mission in the next 18 to 24 months, and what is the
burn rate, and where's the money actually going?" She said AGDC
received tax-exempt status as a public entity, and that is
wonderful, but it means that AGDC must publicly report its
expenses.
1:26:00 PM
MR. CRUZ said, "That is provided monthly to the board, and we
openly have that at our board meetings." There are normally 11
board meetings a year, and that is "where we measure that and
keep track of it." He did not mean to belittle the legislature
in not providing that. It is readily available at the board
meetings. He said Frank [Richards] will go into detail.
SENATOR VON IMHOF said, outside of the visual presentation, she
is assuming there will be an addendum.
MR. CRUZ said Frank will go into it now.
1:27:52 PM
CO-CHAIR TARR ask about Mr. Cruz saying the board is the best,
and since he has been involved from the start, she asked why
this group of people are best positioned to move things forward.
MR. CRUZ said he whole-heartedly agrees with what Chair Giessel
said earlier. He has been involved since its inception and has
never been involved in a project with as many "twists, turns,
ups, downs, spin cycle, meetings, and what have you. We stood a
corporation up for the state from nothing." The AGDC was
organized under one pipeline project, the Alaska Stand Alone
Pipeline Project (ASAP), and was handed the responsibility of
AKLNG, and it continued to move both projects forward. Not
favoring one over the other, it has tried to monetize Alaska's
gas resources, he said. It has been a challenge. The positives
include the leadership today. "From looking at this project and
how many iterations of a pipeline for the state of Alaska, I
would say, if we ever had a possibility, the sun and the moon
and the stars have aligned to try and get closure on this, and
so we are actively, actively working on it."
MR. CRUZ said that sometimes he talks to his wife using certain
acronyms about the project, and with others, he has different
acronyms. But when the president of China came to Alaska, he
didn't come to look at beluga whales, he came to meet with
Alaska, direct from meeting the President of the United States
in Florida where he discussed trade imbalances. This project has
the potential to help balance that. "This is big time," he said.
It is starting to change. The gasline summit in Girdwood
included meeting with the end-users, and that's the first. Never
has anyone brought up an actual customer to take the gas, he
noted. President Xi left his secretary of state to meet with
AGDC, which is very important for Alaska. There would not be an
oil pipeline today if it wasn't for Vice President Spiro Agnew's
one vote in the U.S. Senate. "We're in direct marketing," he
said. "We're no longer relying on trying to take a company in
Alaska or an international company and tell them, 'Well, we'll
help you with your permits. We're really behind you. We hope you
can put something together.'" This is the first time Alaskans
are engaging directly with the end user, he explained. He said
it is phenomenal, and he has had the personal opportunity to
meet potential customers. He went to the North Slope with them,
and they went up on a phase-2, which means "you can only see 30
feet instead of a little bit further than that." What it showed
the customers, he said, is a machine that runs every day, and
that is important for reliability. For him, he said, those are
very much successes, and AGDC has done all this since January
2017. He said he totally agrees with Senator Giessel, "and if
it's 750, it's 750." The only way to get that back, he said, is
to follow through and build something. The board of directors
first met at the Dena'ina Center in 2013, and each member was
asked their vision, and they all said they were there to build a
project, not study it. "We are here to build a project … and
that is our mantra."
1:33:30 PM
SENATOR DONALD OLSON said people like him who are in the private
sector get very concerned about the comment that the project has
come too far to pull the plug. He would like to hear that that
mentality does not prevail, which could get the state in a worse
situation that it is now.
MR. CRUZ said he didn't make that comment. "I just want to make
sure I'm not in trouble."
1:34:19 PM
SENATOR PETER MICCICHE said Mr. Cruz spoke about negative
comments from the legislature. He said the legislature has a
constitutional job description to be the appropriators, so it
has the responsibility to make sure that the state is headed in
the right direction. He knows that Mr. Cruz did not say "too big
to fail," but the legislature's job is to make sure that's not
the case. For those willing to invest in this project, the check
and balance is a selling point. He said that's important to
remember. He asked if AGDC is going to request additional
appropriations for fiscal year 2019.
1:35:41 PM
MR. CRUZ said that determination hasn't been made yet. He thinks
"it's going to result in are we able to deliver a gas customer
for AGDC." He said he did not single the legislature out in his
earlier comment. He hears negative comments on the public media.
About three years ago, the head of Exxon made a statement, "and
I want everybody to think about what I'm saying." When the head
of Exxon was asked about the gasline project, he said Alaskans
are their own worst enemy. Mr. Cruz said he bristled at that.
How can anyone from Texas say that? However, being the chair, he
shares a lot of that sentiment. Alaska can't stand success, he
said, but look at what has been done in the last ten months. He
thanked the committee for its support, "but this is not the time
when we talk about declining revenue and income taxes when we're
sitting on the largest known reserves in North America of
natural gas, and all it needs is a pipeline to get it down
here." He stated that he asks a lot of people what Alaska does
better than anyone else. He said his whole career has dealt with
energy exploration and production in Alaska, and the one thing
the state does better than anyone else is energy export. This is
just the next phase of energy export. It will have a road up one
side of it. It will never be built like TAPS [Trans Alaskan
Pipeline Services] was, he said, it has a lot of positives, and
that's what keeps him positive.
CO-CHAIR TARR noted that Representative Justin Parrish asked if
the discussions of a state fiscal plan, or that lack of a fiscal
plan, has any impact on the project.
1:39:28 PM
MR. CRUZ said the project will either succeed or fail based on
its merits. There is a global gas price that it must meet.
Certain returns are expected from this project.
1:39:59 PM
SENATOR ANNA MACKINNON said Cruz Industries has put a lot
Alaskans to work. She thanked Mr. Cruz for his efforts. The
appreciation may not seem as much as she wants it to be. "I just
hope you will accept the entire legislative body's well wishes
and thanks for your service." She explained that she had to ask
hard questions because of phone calls from constituents. They
are asking to support the project and to ask hard questions. She
hears from people who are concerned about "the burn rate of the
cash that Alaska's going through." She asked what price will
Alaskans receive for the resource? She acknowledged that the
cost of the project must be known first? The only value that is
being negotiated is the bottom line. If Alaska is successful
with the IRS ruling, which she has questions on, there is going
to be an amount that Alaska is willing to accept for the
resource, and "I've never heard what that is." She keeps hearing
that after 20 years, the state will have millions of dollars or
more, but what is our bottom line? She asked for the actual
numbers from Mr. Cruz, which can be addressed inside an
executive session.
MR. CRUZ replied it's a labor of passion. Another thing, he
said, this is the crossroads. There is a declining gas resource
in Cook Inlet. Depending on what customers sign up under the
Letters of Intent (LOIs) and the volume, Alaska could see a 90-
year supply of known reserves to the State of Alaska. What other
state has a 90-year known reserve? He said Alaska has been on
diesel for about 100 years. That is another benefit to the
state. "We'll get into the numbers. Mrs. Wilcox has a very good
presentation."
CO-CHAIR TARR said Representative Dean Westlake asked what the
costs of not doing anything now. She said he may be referring to
the costs of not moving forward.
MR. CRUZ said, speaking explicitly of the market window, there
has to be an LNG customer to make it work for Alaskans by 2025.
If it cannot be done now, "we probably better put this on the
waiting list, and the legislature of 2037 can look at this
again." It is cyclic, and it has long-term contracts. He said
every Alaskan is part of this corporation. "We do not waste
people's time. We use our money in the most expeditious manner
that we possibly can." The board has given president Meyer one
task: get us a gas customer. There are two good projects that
are not technically challenged. He said it is a competitive
project, but to do nothing, the project should be considered in
2037.
CO-CHAIR TARR said she understood that there was not going to be
a request from the FY19 budget, and Mr. Cruz was not clear.
MR. CRUZ said that is correct.
1:46:58 PM
At ease
1:47:39 to 1:48:44
FRANK RICHARDS, Senior Vice Chair, Alaska Gasline Development
Corporation, Anchorage, said he spoke with Senator von Imhof and
she requested some financial information, but the presentation
was done, and he could not insert it. He said he brought the
information with him, and it is presented monthly to the board.
He can share the financials with everyone.
SENATOR VON IMHOF said she would like a monthly or quarterly
report of expenses, a simple pro forma, including the FERC
[Federal Energy Regulatory Commission] costs, which is a pretty
significant hurdle.
CHAIR GIESSEL asked about the personnel and travel expenses.
MR. RICHARDS said the most recent report has information both on
an operating budget level by personnel, travel, capital, as well
as contractual, similar to what the legislature receives from
the state in the 100 through 400 accounts. It also provides
information on the spend rate on the capital side, which is the
money spent for FERC regulatory issues and commercial expenses.
In the August meeting, the report showed they had spent around
$22 million for both the operating and capital expenditures for
AGDC, he added.
CHAIR GIESSEL asked the time of that expenditure.
MR. RICHARDS told the committee that the expenditures are
identified by calendar year, because the board authorized "for
our 18-month future look out, and that was where they provided
us with authorization for expenditure to cover not only our
operating expenses but also the major capital expenses." So,
that was the 18 months "we were reporting to." The $22 million
was for calendar year 2017, so that would have been January
through August, with a projection of August expenditures.
Senator von Imhof asked about a burn rate. For the past few
months, it has averaged about $3 million per month, and
sometimes more. The board gave authorization to spend $6 to $6.5
million per month, but AGDC has taken the board's direction to
work smartly, judiciously, and tirelessly and has "not gone out,
as we had identified," to bring in a large engineering,
procurement, and construction contractor (EPC) to help assist us
in advancing the technical and regulatory. "We've kept that in-
house," he said.
1:54:12 PM
SENATOR VON IMHOF asked about November 1 and forward. Regarding
FERC, will there be more pressure on the finances? How is the
FERC process? She said she believes that AGDC is looking to hire
a finance person and asked how that will impact management of
"the run rate going forward."
MR. RICHARDS said he hopes FERC is ready to start its
environmental impact statement; AGDC has spent the last five
months answering hundreds of questions for the environmental
review, and he hopes that is now done. The burn rate now will be
from continued interactions with FERC on the regulatory issues,
but maybe not as much on the engineering. He hopes those
expenses will decline. He said Ms. Wilcox will discuss the
investment banker and the projections for that.
SENATOR VON IMHOF asked if the January component detail report
will be updated, because the last one she has was released
December 2016.
MR. RICHARDS said the report from the Office of Management and
Budget will have that, but AGDC also provides it on a monthly
basis to its board.
1:56:41 PM
SENATOR GIESSEL asked Mr. Richards to repeat the expenses.
MR. RICHARDS said the $6.5 million per month is the burn rate
the board had authorized ADGC to spend, and it is actually
spending about $3 million per month.
CHAIR GIESSEL said that when Alaska was one of four partners,
she heard that in pre-FEED [front end engineering design], usual
expenditures were $10 million per year. In the FEED stage, it is
$10 million per month, and when the project is being built, it
will be $10 million per day. What phase is this project in?
MR. RICHARDS said AGDC is in regulatory permitting advancement.
The pre-FEED work concluded at the end of 2016.
CHAIR GIESSEL said that sounds like a new stage-gated approach.
She said she is looking at how the project was configured when
the state had corporate partners. It was using a very prescribed
stage-gated approach and was executed very carefully. As she
looks at what she was given in February 2016, she is concerned
that $98 million was spent in 2015 during pre-FEED. She applauds
AGDC for being frugal, yet, "I hope we're doing a really careful
job and we've considered all the contingencies and we have the
right people in place and we're not budgeting for a project that
could really sink the state financially."
1:59:26 PM
MR. RICHARDS explained that when the chairman took over, AGDC
was following the stage-gate process for the ASAP, and AGDC
adhered to that, "and we followed that through with the AKLNG
project as well." In 2017, AGDC needed to somewhat de-risk the
project, so it advanced the environmental permitting stage. He
said ADGC has been focusing on that for the last nine months, so
it could apply to FERC for the Section 3 license and address the
issues raised by FERC. They knew that advancing to FEED was
going to be an extremely expensive endeavor. The cost is
estimated at $1 to $1.5 billion, based on the work by its
partners. "We did not have the money to do that," so the best
way to advance it was to de-risk it by addressing the regulatory
issues in Alaska. "As we all know, everyone loves Alaska and we
want to make sure its protected." At the same time, AGDC is
pushing through with the commercial and financial discussions
with potential partners and investors. By attracting customers
and investors, the project can go to the next stage gate.
CHAIR GIESSEL said that the legislature took a course on mega-
projects in 2012, and the course outlined appropriate steps for
such projects. It is raising concerns if AGDC is not following
best practices. She asked to see a timeline like what Steve
Butt, the previous project manager on the AKLNG project used to
provide for the previous project. For the next meeting, she
wants to see where the project is, what is being worked on, as
well as the expected burn rate.
2:02:30 PM
CO-CHAIR TARR asked on behalf of Representative Talerico's
office whether the detailed financial information is publicly
available on the AGDC website.
MR. RICHARDS said the information is at www.agdc.us.
CHAIR GIESSEL said she will also link it to this meeting.
SENATOR MACKINNON noted that Mr. [Larry] Persily sends updates
about what is happening around the world on LNG and other
hydrocarbon projects. She said that Japan just went into a
unique agreement for purchasing that allows them to go to the
spot market, and they don't actually have to land all their
shipments. It has already been said today that Alaska is looking
for a buyer, and it needs long-term contracts. She added that
legislators have been through a mega-project course multiple
times to tell them what they should be looking for. Their
financial consultants have told them the risks and rewards of
owning the project, but "we are shifting right now in the global
market with such supply on the water that the contracts are
changing." She said she is not sure if there are 25 and 30-year
contracts, and she asked Mr. Richards if he is following the
changes in the contracts.
MR. RICHARDS said he also receives the emails from Mr. Persily,
but what she is likely referring to is that these contracts
allow [the buyers] to sell the resource to another buyer. Those
are new activities that buyers are entering into, and Ms. Wilcox
will talk about contracting strategies.
SENATOR MACKINNON said she greatly appreciates Mr. Richards'
service. Both he and Mr. Persily are former federal coordinators
of gas transportation projects. "We do have an excellent
resource available."
2:05:55 PM
SENATOR MICCICHE said he respects Mr. Richards expertise, but he
would like to talk about the deadline to pull the plug, which
has passed. He asked him to explain why the legislature should
remain behind the schedule. He said a lot of folks expect things
to happen in a certain timeline for pre-Feed plus, FEED light,
or whatever current stage-gate. He said to explain why Alaskans
should remain behind the project despite the date change.
MR. RICHARDS answered that the deadline Senator Micciche is
referring to might be from what the governor said about a year
ago for needing an activity by September 2017. At the AGDC
level, the project has advanced to marketing in Asia in the nine
months that is has taken on the project. He said, "Our
activities and the responses we are getting have been positive."
Positive is relative, he noted, but from within his organization
and from the board's direction, they have been told to proceed.
The board finds enough significant activity and positive
response, and they support AGDC going forward with the project.
2:08:45 PM
MR. RICHARDS noted that Rosetta Alcantra, another AGDC vice
president who focuses on external affairs, is here. Referring to
slide 3 of his presentation, he said he will speak to the
activity and achievements of the last nine months, which is when
the state took sole responsibility for the project. There have
been several significant federal actions and a positive response
from the administration in Washington DC. In review, the Section
3 application is required by FERC to construct an LNG project.
FAST-41 stands for Fixing America's Surface Act of 2015, Title
41, which is a mechanism for major projects to be recognized at
the federal level, he explained, and special permits are
required through PHMSA, the Pipeline Hazardous Materials Safety
Administration. He said he will give an overview of some of the
guidelines coming out through the Council on Environment Quality
and the new organization called the Federal Permitting
Improvement Steering Committee. He said he will also cover a
designation in the Yukon River Basin by the Environmental
Protection Agency called ARNI, Aquatic Resource of National
Importance, and how that would impact the project.
2:12:02 PM
MR. RICHARDS turned to slide 4, which shows three six-and-a-
half-foot stacks of binders with 60,000 pages of information
provided to FERC. It was submitted in April and was accepted as
a complete application. He said FERC's two roles are to advance
the environmental review process and to assure the safety and
security of the project. With the application, AGDC had to ask
for an initiation of the environmental process and to start the
safety and security part. Section 3 is normally for just an LNG
plant and not necessarily a plant, an 800-mile pipeline, a gas
treatment plant, and a pipeline to Pt. Thomson. The pipeline has
been thoroughly studied on numerous occasions, and he hopes that
FERC will push it forward. The issue was getting the application
complete and accepted by FERC. The partners had pre-filed
various editions of the resource report, and AGDC had to
assemble it for the application. At the same time, FERC and
other agencies were asking for continued information, so in
January it had to work rapidly. Detailed questions are still
coming from FERC, and ADGC is still addressing the issues. Many
of the questions have been answered before.
CHAIR GIESSEL asked if the project will fall to the end of the
line if deadlines are missed.
MR. RICHARDS said he will discuss that along with actions that
the federal administration has put in place.
MR. RICHARDS referred to slide 5, which shows a map of the
pipeline route from Pt. Thomson to Prudhoe Bay with a gas
treatment plant, and then the 800-mile pipeline to Nikiski with
a liquefaction plant. The pipeline parallels the oil pipeline
for the first 400 miles. There were previous projects, including
the Alaska Natural Gas Transportation System in 1976, with an
EIS [environmental impact statement] conducted by the US
Department of Interior. It would have gone through Canada to the
Lower 48. After that, there was the Trans Alaskan Gas System
[TAGS] that proposed to terminate in Valdez. That EIS was
completed by the Army Corps of Engineers and the Bureau of Land
Management in 1988. "Another thoroughly studied environmental
process by the federal agencies."
2:17:54 PM
MR. RICHARDS said, most recently, at the behest of the
legislature, "we at AGDC have nearly completed the ASAP project,
which runs from Prudhoe Bay down to Pt. McKenzie across the Cook
Inlet, which again parallels the same route as the Alaska LNG
project." He said AGDC will have a complete environmental impact
statement by December of this year. Again, it's the same route
as the Alaska LNG project. The route has been studied, the same
environmental review has been undertaken by numerous federal
agencies that are also working with AKLNG and FERC, so the EIS
may be accelerated.
CHAIR GIESSEL noted that it is crossing a lot of waterways.
There is a ballot initiative related to salmon, and she asked if
it would have an impact on the project.
MR. RICHARDS said the project crosses about 430 waterways, so
AGDC will go through the process that it is required to with the
State of Alaska and in Title 17, and it will make sure to comply
with state laws. He said he assumes that the existing process
would suffice for this project. He turned to slide 6 and said
there are many federal authorizations needed. He enumerated the
major federal permits and authorizations, including safety
standards, Section 404 of the Clean Water Act permits to protect
wetlands, right-of-way leases for crossing federal lands that
are mostly north of the Yukon River, and incidental harassment
authorizations for protected species from National Marine
Fisheries. The activity is all going on concurrently with what
must be provided to FERC, he explained. The normal timeline for
FERC is 18 months, so the goal is to accelerate that schedule
due to the work done on previous projects.
MR. RICHARDS said slide 7 depicts most federal, state, and local
authorities to deal with during construction.
2:22:57 PM
MR. RICHARDS said slide 8 refers to Fixing America's Surface
Transportation (FAST) Act of 2015, which is the reauthorization
of the federal highway bill. It authorizes state transportation
departments to receive federal dollars. There was a provision
called Title 41 allowing for major projects-over $200 million-to
be elevated to an expedited arena of review. Originally, AGDC
did not apply but decided to in August and was accepted within
two weeks. He said that the AKLNG project is now ensured good
communication and coordination, which will provide more
accountability with the federal agencies. It also means that the
agencies must commit to a schedule, and any slippage of that
schedule must be reported to Congress. He said he is hoping that
AGDC will have all the federal authorization schedules by next
week. "That's a great thing," he stated. He said he met with the
[FAST-41 Federal Permitting Improvement Steering] Council
executive director and identified the previous efforts that have
been done for Alaska projects. He asked to help leverage the
work of FERC to reduce duplication and improve efficiency and
timeliness. He was assured of that. He said, to be accepted
under the FAST Act, the council and FERC had to determine
whether AGDC was technically capable of completing the project,
and they determined that in very short order, and he took that
as positive.
2:26:28 PM
CO-CHAIR TARR noted that Representative Millet asked which
terminal is being marketed, Valdez or Nikiski.
MR. RICHARDS said it is proceeding with Nikiski.
CO-CHAIR TARR said that Representative Parish asked for the
number of fish-bearing waterways that will be crossed.
MR. RICHARDS said about 433 waterways will be crossed, but he
will later provide a list of fish-bearing waters. He turned to
slide 9, an overview of PHMSA special permits. The AGDC is
asking for consideration of the large expanses that are
uninhabited in Alaska by obtaining waivers for certain pipeline
regulations. Regulations are set to keep people safe from
pipeline breaks and explosions, and they involve block valves
and crack arrestors. Waivers are requested to reduce costs, so
the pipeline can have fewer block valves. Engineering analyses
show that the spacing can be increased without reducing safety.
The regulations are all based on the number of inhabitants and
habitable dwellings. He said he is also asking PHMSA to consider
strain-based design, the ability to design pipe that will
withstand ground movements for frost heaves and ground
settlement, particularly in areas of discontinuous permafrost.
This is new for a land-based pipeline, but PHMSA allows for
strain-based design on offshore pipes all the time. It would
allow the pipe to withstand movement greater than 5 percent
strain. [He later corrected himself and said it was 0.5 percent
strain.] Another issue is sufficient containment in case of a
leak on the pipe leading to the loading berths on the trestle.
New technology called pipe-in-pipe has been used, "and we feel
we can use it as a major cost savings."
2:30:27 PM
CHAIR GIESSEL asked the diameter of the pipe.
MR. RICHARDS said it will be a 42-inch pipe.
CHAIR GIESSEL asked if AGDC is testing only one diameter
regardless of how many trains are constructed.
MR. RICHARDS said the design is 42 inches, but a 48-inch pipe
was tested. The ASAP project considered a 36-inch pipe. "We have
a very good repository of pipeline data," he stated.
SENATOR MICCICHE said he won't torture him on the technical
aspects, but what are the cost savings on the block valves,
coating, and pipe-in-pipe? They will reduce costs significantly,
he stated. He asked about the probability of success. He is
unaware of a US pipe-in-pipe approval, and, unfortunately, being
in remote and different geography like Alaska isn't accounted
for by federal regulators..
MR. RICHARDS said, "We feel very good after our discussions with
PHMSA" on the probability of waivers on mainline block valve and
crack arrester spacing after explaining the project's safety
procedures. The external coatings, fusion-based epoxy coating
versus three layers of polyethylene, will be a heavier lift,
because PHMSA has not had that experience in the US, but
pipelines around the world use polyethylene, including pipelines
constructed elsewhere by Alaska producers. It's all about trying
to prevent cathodic corrosion, and he doesn't know the
probability. The pipe-on-pipe is a technology that he feels is
warranted and has been used, but not in the US. He said AGDC
will contend that it will meet the safety requirements; it's all
about spill containment, he explained.
SENATOR MICCICHE asked for the estimated cost savings.
MR. RICHARDS said it is in the tens of millions if not a hundred
million dollars or more.
2:35:46 PM
MR. RICHARDS said slide 10 reviews "establishing discipline and
accountability in the environmental review and permitting
process for infrastructure." The goals are to identify where
there is repetition and inefficiencies in the permitting
process. It is an attempt to condense environmental reviews and
authorizations to two years, have accountability, and "eliminate
redundancy and prevent duplication." He said ADGC has identified
duplications, and he would like AKLNG to be the poster child to
meet the guidelines. He said he has had good conversations with
the Council on Environment Quality and hopes the council will
enact the guidelines quickly.
MR. RICHARDS stated that the Departments of Interior and
Agriculture can designate energy corridors across federal lands,
which may expedite the project. In August, Region 10 of the EPA
sent a letter to the Army Corps of Engineers designating the
waters of the Yukon River Basin as an area of national
significance. This is similar to a designation of the Tanana
River around a significant bridge crossing, the Niqliq chnannel,
and the CD-5 development on the North Slope. It elevates any
activities that would impact waters, including wetlands. The EPA
protects wetlands, but wetlands will be filled for the work pad
along the pipeline. The Army Corps of Engineers is authorizing
this fill, which concerns the EPA. He said AGDC asked the
governor to chime in, and he sent a letter to the EPA
administrator. Mr. Richards is hoping that Region 10 will be
directed on how it would like to see the process moving forward.
He said an Alaskan may be running Region 10 soon and may
"alleviate this issue."
CHAIR GIESSEL referenced slide 10 and asked if the pipeline
crosses Native corporation land where there might be objections.
MR. RICHARDS said the corridor crosses state, federal, Native,
and other private land. The Department of Natural Resources
(DNR) granted AGDC a right-of-way on state lands. Currently,
AGDC is applying for the federal corridor, and it will begin
negotiating with private landowners.
2:42:41 PM
MR. RICHARDS turned to slide 12 and said AGDC staff have been in
Washington DC discussing federal issues and keeping Alaska's
Congressional delegation informed. There is a provision in the
Senate energy bill asking for relief from Title 11 of ANILCA
(Alaska National Interest Lands Conservation Act) for running
the pipeline through Denali National Park. The specific section
of the act has an onerous burden of requiring a presidential
override to agency objections, which is a very high bar, he
said. He is looking at the 2004 Alaska Natural Gas Pipeline Act
(ANGPA), because it contained loan guarantees of $18 billion,
and AGDC is working on AKLNG to qualify for that assistance. He
said the administration is supporting this project, including
from the Departments of Commerce and the Interior.
MR. RICHARDS turned to slide 13 and said he is proud of the team
he leads. There is an active board and tried-and-true Alaskans
who manage the project and its team of consultants. The
timelines are being met, he said, and AGDC is using the people
who helped develop the AKLNG project for the ExxonMobil-led
team. He noted other entities ADGC is working with. He turned to
slide 14, listing the next steps. He noted the FAST-41 schedule,
nonduplication of federal efforts, working with commercial folks
to align the project components, and developing a contracting
strategy that offers the best rate to customers to keep it
economically achievable. That is the conclusion of the technical
and regulatory update, he said.
2:48:59 PM
CO-CHAIR TARR said Representative Saddler asked the turnover
rate of AGDC personnel over the last three years.
MR. RICHARDS said the former president, the late Dan Fauske,
left at the end of 2015. Three vice presidents left in 2016.
Some administrative staff moved on. On the contracting side,
where most work is done, people move on when contracts are
complete.
CO-CHAIR TARR said Representative Parish asked what would cause
the board to recommend the termination of the project.
MR. CRUZ said the deciding factor would be lack of a customer.
Referring to the previous question, he said the core technical
team is the same as day-one. He said he has enjoyed working with
them, and it is a very small circle.
SENATOR MACKINNON said the legislature was told that October was
the deadline for getting a customer, and after that, "we would
cease and desist."
MR. CRUZ said the board has always used December 31. The
administration had a different date. A firm take-or-pay contract
will not happen in 2017. The board is seeking a solid LOI
(letter of intent) by that time. The gas marketing folks have
said that if an Asian entity firms up a deal with a Memorandum
of Understanding (MOU) and with a letter of intent-those
entities do not break letters of intent-and that is what the
board is looking for. It will take time beyond that to get the
contract.
SENATOR MACKINNON said there have been multiple letters of
intent without follow through. Maybe there are different kinds
that are more contractual. She noted that when the pipeline
headed towards the Lower 48, it had expressions of interest, and
she asked if an LOI is more of a contract.
MR. CRUZ said yes. From the end user, the utilities, it is a
solid process and they very much are serious when they issue
those type of letters, he stated. One of the Asian utilities
AGDC is talking to is in China and is state-owned. They have a
million employees and 300 million customers. "Our project is a
drop in the bucket for them to contract with us for a long-term
gas supply." He said that is unbelievable volume for a market.
2:56:43 PM
SENATOR VON IMHOF asked if the LOI would have a price number,
like eight or nine dollars.
MR. CRUZ said yes, "We are expecting capacity." That will
dictate how much they are willing to take and the price they
will take. Alaska must be competitive; it is an international
commodity. "Our gas is no better than someone else's, other than
we're a lot closer, and that's one of the big, big plusses." The
other thing is the IRS exemption.
2:58:28 PM
SENATOR VON IMHOF said, "What we saw in the end of 2017, let's
hope that it holds true in 2025." She referred to flexibility
and if the buyer can back out. Is there flexibility with the
eight dollars in terms of contractual rigidness? Slide 18 shows
a projected demand, she noted. How can Alaska respond to the
market changes? "Will there be, in this LOI, or are you actively
looking to negotiate some type of out by the buyer in 2025?"
2:59:31 PM
MR. CRUZ said not that he is aware of. "We are not wanting
somebody who wants to go to the dance and then when it's time to
go to the dance, she doesn't want to go with us."
2:59:59 PM
SENATOR MICCICHE said he thinks he will wait for Ms. Wilcox's
discussion, because there sounds like there might be a midpoint
between a firm gas sales agreement and a LOI. He is unaware of
binding LOIs.
3:00:18 PM
CHAIR GIESSEL said slide 15 begins the commercial update.
3:00:31 PM
LIEZA WILCOX, Vice President, Commercial and Economics, Alaska
Gasline Development Corporation, Anchorage, addressed slide 16
that provided an overview of her presentation.
3:02:35 PM
MS. WILCOX said slide 17 speaks to balancing three competing
objectives. One is clearing the LNG market in the Asia-Pacific.
Clearing the market on one day does not mean that is where it
will stay, she clarified, so what she really means is clearing
the long-term market starting in the mid-2020s. "That's where
every LNG project, at the moment, that is in development, is
trying to compete." Another objective is acceptable pricing for
debt and equity markets, which means getting the debt at a level
where the project can compete and getting the equity at the
projected levels. In other words, she said, "Can we get equity
investors interested with the level of commitment this project
has to receive the rate of return that we've projected?" The
third objective is for an acceptable netback. Some of the
revenue to the state will be the upstream netback, royalties in-
value or royalties in-kind. It also means acceptable netback to
the North Slope producers.
3:04:40 PM
SENATOR MACKINNON asked for more information on what constitutes
an acceptable netback. Multiple times, the governor has said
having money 30 years after paying back debt is unacceptable. If
that is the only return, it is unacceptable to her. It is a huge
investment, she said, but she will hold off if it will be
covered later.
3:05:49 PM
MS. WILCOX said she will address the netback, but it is not
AGDC's decision to determine if it is acceptable. It will
provide the information for the state to make that decision.
3:06:06 PM
SENATOR MACKINNON said this has been an evading answer by the
administration. The legislature has been trying to determine
what the governor believes is acceptable, and she and the people
of Alaska are worried if the governor can make a commitment
without asking the legislature. She said, "We did that, so we
would have a project that was viable and could produce long-term
revenue for our state as well as affordable energy." She added
that the concern is increasing, because a penny is not
acceptable, and she is not included in that discussion. "That is
why you hear Chairman Cruz sort of probing and poking all the
time, because you're in the boardroom and we are outside of the
boardroom for the most part when you go into executive session
to talk about some of this." It is a huge issue.
3:07:27 PM
MS. WILCOX noted that the netback will be addressed shortly.
Addressing slide 18, she said it has been shown to various
legislative committees, so it is a review, but she has an update
for 2017. The slide shows long-term contracts for LNG from
several months ago, and AGDC has not spent much effort updating
it, because not many new contracts have been made. But in the
short term, Asia has a bit of an over-sold market, and that is
why flexibility clauses are important to Asian buyers. It is
from a record upswing in the LNG markets when the prices were
high. Every analyst she has heard from expects the market to
rebalance in the mid-2020s. There are not many projects that
have taken the plunge to commit to that rebalance, she said,
meaning not many projects have achieve FID [final investment
decision] since 2015. At the same time, 2017 saw record growth
in the trade of LNG. Bloomberg expects the global trade to
exceed 280 million tons per annum. It was about 245 tpa in 2016,
and that is the highest increase since 2011. She said about 5.7
million tons per year of long-term LNG commitments were made in
the first half of the year, which is the lowest since 2010. "So,
you see the market increase in use of LNG with new projects
coming in and with prices being low, but not a lot of new
projects being sanctioned. Part of the urgency is due to the
long-term development for this project, and Alaska should be on
the front end of that next wave to get the contracts. That is
why, she stated, they are working so hard on the letters of
intent.
3:10:43 PM
SENATOR JOHN COGHILL said this is predicated on the market "that
we're looking for." He has read that the market using long-term
contracts are going more into short-term contracts in 2025. He
asked if Alaska has to be more nimble.
3:11:19 PM
MS. WILCOX said the flexibility of new projects will be limited
by financing. It is a question of how flexible the banks will
be, and so far, they have not shown a great degree of that
flexibility, which means that any project that is constructed
will need a portion of it to be debt, and debt needs to come
with long-term commitments. The spot market is between 15 and 20
percent of the total LNG trade, and it is expected to rise to 25
or 30 percent. Some estimate it to be higher in the early to
mid-2020s. There is no question that spot sales and short-term
sales will be a larger part of the market, she said, but it
won't be the entire market.
3:12:23 PM
SENATOR COGHILL stated the "two biggies" are Australia and the
Gulf Coast. The Gulf Coast has a lower debt, and by the time
this window shows up, Australia will probably be paid off. Does
that impact the financing and the market? "Since we're taking a
shot at a window, I want to know what our chances are."
3:12:59 PM
MS. WILCOX said the Gulf Coast started producing LNG a couple of
years ago, and many are still in development, so they will
likely still have debt by 2025. About half of the Gulf Coast
pricing is dependent on Henry Hub, and she believes a smaller
percent of the pricing for Alaska LNG can be dependent on a
commodity, and that is one of Alaska's competitive advantages.
3:13:56 PM
SENATOR MACKINNON said some projects have utilities as part of
ownership, and she asked if there is a limit on end-user percent
of ownership as far as debt.
3:14:20 PM
MS. WILCOX asked if Senator MacKinnon meant equity.
SENATOR MACKINNON said she means equity, "but then I'm looking
at our debt per se after that to actually finance the project."
There could be an upstream ownership, a pipeline ownership, an
LNG ownership, or a transportation ownership in the same project
but with different rates of return and risks. Are we looking at
capping a percentage of ownership? Is it wide open where an
outside organization could have significant ownership interest
in the project?
3:15:21 PM
MS. WILCOX said there is a balance between minimal ownership
with no control of the project and maximum ownership with a lot
of financial risk or perceived risk. The goal is to present the
options and tradeoffs. Ultimately, the state makes that risk
choice. By owning the project, the state could receive long-term
stable returns. From the cashflow projections, that can be a
foundation of the income to the state, she explained. The income
from the upstream may be more volatile, but smaller, because the
state only has the royalty plus tax compared to the entire
project. The state will have to make that choice.
3:17:03 PM
SENATOR MACKINNON said a legislative analyst showed projects
with a 5 percent utility kind of ownership, or maybe a few
percentages beyond that. She expressed concern about selling
larger shares to utility owners. Utilities want in the
discussion, because they want to know the finances associated
with these projects. So, they buy small shares to "come inside
the tent and hear the information." If they buy larger shares,
they are more likely to start dictating terms to benefit
themselves and not the state.
3:18:07 PM
SENATOR VON IMHOF said slide 18 is the crux of the whole deal,
and it should be her first slide. It is the periodic gut-check.
It is wildly talked about that Alaska gas is very expensive and
not competitive. She said she was looking at the International
Gas Union, and there are 15 projects just in Canada that will be
coming out in 2020. Two, Grassy Point LNG and Discovery LNG,
will come out between 2021 and 2014. Both look exactly like
AKLNG in terms of capacity and target market, she said. She
asked how Alaska gas compares and what their costs are and their
debt. "If you're going to build something you want to know
exactly who your competitors are and how you fare," she stated.
Is Alaska still competitive?
3:20:22 PM
MS. WILCOX said that is a good transition to the next slide. She
will talk about Alaska LNG competitiveness with at least one set
of projects that are the most active at conferences and in the
markets, "and that is the projects in the US Gulf." She said
those projects have had the same uplifting atmosphere as AKLNG
with the US trade policy wanting to export more LNG. They are
trying to take advantage of that, but they are structured
differently, and their competitive drivers are different. The
Gulf Coast cost structure for selling LNG to Asia breaks into
thirds: a third is infrastructure cost, a third is shipping, and
a third is the price of Henry Hub, because those projects
generally don't produce their own gas-they buy gas in the Lower
48. The shale gas revolution has allowed them to enjoy low
pricing. Cheniere is the company that started exporting LNG
first, and there are many projects that are in development, and
they all rely on the relatively low cost of Henry Hub natural
gas and the relatively low cost of putting a project together in
the Gulf states.
MS. WILCOX said the chart shows the Henry Hub costs in yellow,
expressed in 2018 dollars, based on the Energy Information
Administration (EIA) forecast for 2025. The low and medium
forecasts are generally what AGDC looks at. The range is $8 to
$10, which is the range of what a Henry Hub-based LNG project
might present to the market for a long-term contract, because
they don't know what they will buy the gas for in 2025. Gas
purchases don't go out that far, because it is a liquid market,
she explained, so they have to depend on the market to stay
where it's at now to really be competitive in Asia. Spot price
for LNG hovered at $5 or $6, and now it is $8.50 because of the
increase in the use of LNG.
3:24:03 PM
MS. WILCOX said Alaska's structure is different. The cost of
infrastructure is higher. The range on the chart represents
different financing terms. Alaska's advantages include shipping
and gas supply. The Henry Hub price is at liquefaction, she
explained. "You have to pay for the cost of the pipeline,
tariffs to get there-to get to the liquefaction point from
wherever it is produced-and you have to pay for the upstream
cost of the gas, which requires … drilling and fracking,
nowadays, in order to actually make the supply happen." So, the
cost of Henry Hub does not represent the true upstream netback.
Alaska's netback is at the entrance to the pipeline and the
treatment system that takes it to the market. She added that 75
percent of Alaska's gas is already developed. It is being
produced in Prudhoe Bay and re-injected, so it does not require
an extensive drilling program. That one to two dollars "is a
reasonable amount to compensate the upstream." She said it would
be good to get more, of course, but part of the balance is the
other terms and the time it takes to make the contract happen.
The graphic is attempting to show that Alaska can compete.
3:26:41 PM
MS. WILCOX said she has looked at the Canadian projects, and
Alaska's project is also on the list that Senator von Imhof
referred to. The list indicates the stage of the projects, and
many of the Canadian projects that were really going strong a
few years ago have run into permitting, economic, or sponsoring
issues. Many are on the board but are not moving forward at the
moment, partly due to the downturn in the market.
3:27:32 PM
CO-CHAIR ANDY JOSEPHSON said the issue of competitiveness is
what it's all about. Looking at the 2037 market would generate
the same discussion. Competitiveness is an important question,
but there is no getting away from that, is there?
MS. WILCOX agreed. The cost structure of the upstream may change
by 2037. The AOGCC [Alaska Oil and Gas Conservation Commission]
ruling said the mid-2020s was a good time to start production of
gas in Prudhoe Bay, but it would maximize the recovery of oil.
In 2037, the state will still be 800 miles long, and it will
still be difficult to export LNG from the North Slope.
3:29:02 PM
CO-CHAIR TARR clarified that the cost estimates on the graph
show the lower and upper estimates.
MS. WILCOX said that is correct.
3:29:26 PM
SENATOR MICCICHE said he would like more details on her
assumptions for the cost of supply. Ms. Wilcox seems to be
saying that gas to the liquefaction plant will be $3 to $6. "I
struggle with that."
3:30:19 PM
MS. WILCOX said the assumptions will be covered next.
3:30:28 PM
SENATOR MICCICHE asked for an update of the demand data on slide
18. If the source is Global NatGas Advisors, "I would like to
see an EIA. That is a very rosy outlook for projected demand."
He said he has talked about this several times. The public needs
to know that when looking eight years out, there will be a
dropout, but he agrees that there is a contract rollover
opportunity. He suggested that her diagram paints a different
picture than what really exists.
3:31:33 PM
MS. WILCOX said she would update the demand data and provide
examples of several curves that exist, but "I don't believe this
is the most aggressive projection." There is a large swing
factor out there and some very large economies with many
consumers who still have gas as a very small percentage of their
energy portfolio. Even a small variation in the growth rate-
those economies are projected to grow-can affect the forecast.
She will happily provide some examples. She said she has seen
more aggressive projections, and they are usually from companies
who want to sell gas so should be taken with a grain of salt.
3:32:37 PM
CHAIR GIESSEL addressed slide 19 regarding shipping costs,
noting that China and India will be demanding the gas. She asked
what shipping to them will cost. She said she is assuming that
the shipping estimate is to Japan.
3:33:07 PM
MS. WILCOX answered that the shipping estimate ranges from 60 to
75 cents and covers China. It may be a bit low for India, but
that is not the core market Alaska is aiming for.
3:33:36 PM
SENATOR VON IMHOF asked about gas supply on slide 19. She asked
if Alaska has a contract with the big three suppliers and the
smaller producers.
MS. WILCOX replied that the producers are interested in selling
their gas, but agreements have not been concluded. "What we plan
to offer is a price that we view will balance those three
objectives of the market."
SENATOR VON IMHOF expressed her hope that the letter of intent
and the supply complement one another in the next three months.
3:35:03 PM
CHAIR GIESSEL said, for slide 19, the Gulf Coast would include
Oklahoma, Texas, and Louisiana, and she asked why the cost of
their gas would be higher than the cost of Alaska's gas.
MS. WILCOX explained that the Gulf Cost gas price is market
based-a balance of the cost of production versus demand. It is
an index connected by pipelines. Henry Hub has been very
volatile, ranging from $11 to $1.60 just in the last ten years.
It has been $2.50 to $3 for a few years. If the projects in the
Gulf Coast are successful, "it might be driven by the pull of
those projects versus the ability of the producers to satisfy
those contracts at a certain price." The producers are located
through the US, they have to drill and frack, they have to ship
the gas to the facilities that buy it, "and they have that
purchase as a component in their contract." The ultimate buyer
of the gas has to pay whatever price Henry Hub delivers. It is
not the responsibility of the project itself-it's indexed,
generally at 115 percent or so, for the gas portion. Why is it
higher? Because the cost of the continual investment in gas
production and the cost of the pipeline network is part of that
number. The gas is not all associated with oil, and people
actually drill for the gas and build the facilities to export
it. The netback to the upstream producers, which is part of this
pipeline-connected market, is likely lower than Henry Hub.
3:37:57 PM
MS. WILCOX said slide 20, Financial Model Basic Assumptions,
shows what is used to estimate the higher-end cost of the
infrastructure, which is close to $6. It is 75 percent debt and
25 percent equity, the general construction period is six years,
and production starts in 2025. The toll is for the full build-
out of the three trains, and AGDC also analyzed a phased build-
out of two trains. She thinks there may be levers to make the
project work even with the two trains. The financial inputs are
5 percent interest on the debt and 5 percent financing fees
charged upfront, so that does have a big impact on the project.
Anything with such a long construction schedule that is charged
upfront is a concern. It may be misplaced in the assumptions,
but the IRR is 8 percent for the equity investor based on the
20-year contract term. The assumption for PILT [payment in lieu
of tax] is $450 million during the operational life, slightly
escalated as discussed in the previous reincarnation of the
project, "and just under a billion dollars O&M that has
inflation assumption in it." The PILT is the substitute for
property tax for the project, and "O&M" is operation and
maintenance expense, she explained.
3:41:25 PM
MS. WILCOX said the tolls were structured to have a slight
escalation of 1.15 percent, and that means the owner of the
project starts out charging a lower toll that goes up slightly
over its life, but it is still under inflation. That allows the
owner or shipper to have a lower cost upfront when starting
production. It basically provides for the O&M portion of the
project to rise with inflation, because the O&M will rise too,
but, for the fixed portion of the project that has already been
expended, it keeps relatively flat. The 25 percent equity
investment is about $10.8 billion in today's dollars and is
structured to give Alaska the opportunity to invest. A portion
of it could be with municipal bonds as the project enters the
next stage.
3:42:00 PM
CO-CHAIR TARR asked about bond limits. Referring to the last
general obligation transportation bond, it seems like those
don't get much more above a few million dollars. Are there
limitations on what can be accomplished with bonding?
MS. WILCOX deferred to an bonding expert.
3:42:53 PM
CHAIR GIESSEL asked about the $450 million PILT estimate,
because she recalls that it was much more last year.
MS. WILCOX said the estimate was $550 million, the midpoint
between the $45 and $65 billion estimate. The pre-FEED was not
then completed, and at the bottom of it all, it was tied to a
$55 billion project. Since pre-FEED, the estimate has decreased,
and it is reasonable to put out a smaller number.
3:44:08 PM
MS. WILCOX addressed slide 21, "Debt Data Points," which is an
example from an industry publication. There have been many
questions on if the project debt assumptions are reasonable.
"Five percent has been there for some time," and knowledgeable
and experienced people say, "You will know the debt once you
have the contracts and those contracts provide the underlying
security for the project, and then you will know for sure what
the mortgage rate is." The graph provides some good data points
that really put Alaska's project toward the top of other LNG
projects that have been financed, and she recognizes that it is
a large project. It may have a bit of a premium, but this gives
AGDC confidence that "we're in the range on our assumptions."
3:45:25 PM
CHAIR GIESSEL asked if investors ever bring up the Alaska risk
factor.
MS. WILCOX said that is the first factor that comes up in any
conversation, and that is what AGDC is constantly trying to work
with. Alaska's risk factor is a bit of a lore that is not always
justified. She said she has seen that Alaska is viewed as a
mystery. The projects that are financed in the state tend to do
very well, but it always takes a bit of convincing, including
clarifying that Alaska is part of the US. "It is cold, but we
can still construct things." However, it is a risk, and part of
what our teams are doing is de-risking the Alaska factor. The
permitting determines a lot of the costs, and it drives, for
instance, how the block valves are spaced and how much gravel
needs to be put down. "That is what we're doing to, if not
eliminate, at least substantially reduce the Alaska factor."
3:47:22 PM
CHAIR GIESSEL stated that she sees the "Alaska risk factor" as
the political environment, including changing tax policy and
having tax certificates "that we don't seem able to pay."
MS. WILCOX said those factors have not been part of the
discussion so far.
3:48:02 PM
SENATOR MICCICHE asked the project view on royalty versus "ROI"
of the state. If the state invests, "what is your vision on that
proportion?"
3:48:31 PM
MS. WILCOX noted that she will address what the cash flow could
look like if the state was the owner, and that would provide 100
percent of equity investment. She said she is not making a
judgment on what equity the state will take, but those numbers
can be scaled fairly easily.
SENATOR MICCICHE said he is wondering about the baseline and the
right proportion.
3:49:38 PM
MS. WILCOX said if the project is successful in its current
state, just by virtue of having invested in it, the state will
be a part owner because of the money that has been spent, if it
is any good at getting some value for that in the equity model.
As far as how much the state should invest, that is the state's
decision.
3:50:21 PM
MR. CRUZ stated that the first customer will dictate "so much to
us." The state will have to look at the rate of return and if it
is worth the investment, or if it uses outside funds. Either
way, Alaska will have an equity position. "We're not giving it
away, I can tell you that."
MS. WILCOX added that the state's capacity to invest has a large
impact. Slide 22 is a review of capacity solicitation from the
summer. The solicitation causes a lot of questions, but the
reason that the capacity solicitation occurred over the summer
is that AGDC and the state wanted clarity of how much LNG they
are representing in the market and how much LNG would likely be
sold by the upstream owners. It was a broad solicitation, not
just for the upstream producers. The marketing effort had
started earlier in the year, and normally buyers wait to see
what the project owners, sponsors, and resource owners will do.
The responses received were from one North Slope producer and
one that was not conforming to the solicitation. The LOI that
went out is part of the committee materials. Then AGDC responded
to its own solicitation as the owner to make sure that it got
foundation capacity right on the project, "so the we'd be ready
to buy the LNG, ship the LNG to the system, and sell the LNG."
Based on the result, AGDC received some clarity that the
majority of LNG would have to be sold by AGDC representing the
state, and it would have to be through a purchase of gas and a
sale of the end product. She said that is not an unusual
scenario for an LNG project. Many are financed that way. In
fact, ultimately the offtake contracts for many LNG contracts
are financed on the basis of the offtake commitments. That is
another reason why many buyers have a keen interest in having a
position in the project itself, because they know it's their
credit and the value of their contracts that are taken to the
bank.
3:54:20 PM
CO-CHAIR TARR asked about the diagram on slide 21 and if the
size of the circle is relative to the value of the debt taken
on, and the Y axis is the interest rate for borrowing. All of
the dark blue circles represent US projects, but which
represents AKLNG?
MS. WILCOX said the AKLNG project has not been financed, so
those represent Gulf Coast projects and one East Coast project.
3:55:11 PM
CO-CHAIR TARR asked on behalf of Representative Parrish if AGDC
is considering a debt more than three times higher than any on
the diagram.
MS. WILCOX said it is a large infrastructure project, but it has
not been a secret, so that is correct. Most of the projects are
financed and built in phases. It is the smallest size that can
compete in the market, so they start with two or three trains,
and that is the size of financing, and then they build up from
there. Because of the pipeline that is necessary, Alaska cannot
start as small; however, some of the circles may be different
phases of the same project. Sabine Pass has already had one
expansion, and if they put out two different finance packages,
there may be two separate circles, but in totality that project
is close to 45 billion [dollars].
3:56:31 PM
SENATOR MACKINNON asked if AGDC has to be the marketer. When the
project was approved, there was a conversation about joint
marketing with some of the producers. As she recalls, BP and
ConocoPhillips had offered to joint sell. Is that off the table?
MS. WILCOX said AGDC had an MOU with ConocoPhillips on
marketing. The concept would be purchasing the gas upstream and
marketing. At this time, AGDC has not reached an agreement to
execute the marketing. In the meantime, AGDC has been going out
to the market representing, potentially, the state's gas, but
that would be DNR's decision and potentially gas that Alaska
could buy, but, ultimately, under the constructs of the MOU, the
gas would still be purchased upstream.
3:57:56 PM
SENATOR MACKINNON asked if the price of something goes up or
down if there are more people selling it.
MS. WILCOX explained that the price would go down.
SENATOR MACKINNON said that is her concern, and she has
expressed that to the administration. If a producer is selling
in a market that Alaska hasn't been in before, and the producer
already has contracts and buyers, for Alaska to create another
option and not go in jointly would be negotiating against the
state for a lower sale price. She asked why that is a good thing
to do.
3:58:40 PM
MS. WILCOX explained that the state has stated a preference for
a joint marketing agreement, but it would be joint with all
producers, and no agreement has ever been reached. There are
marketing organizations. She said she is not aware of them
actively marketing Alaska gas. There would be economies of scale
and leverage just having one marketer of Alaska LNG, "but,
obviously, we can't prevent other projects competing with us,
whether they be owned by Alaska producers or others."
3:59:34 PM
SENATOR MACKINNON said, "I can only express the concern that
I've heard in the legislature about us entering into a market
that is very different from a Henry Hub that's in the US and
going in-I believe it's called a Japanese cocktail, if I'm
recalling correctly." That means that an entity has to go to
each individual buyer that might be regional and not
centralized. Constituents are telling legislators that Alaska
does not have that expertise, and the producers already have
those potential buyers out there.
4:00:27 PM
REPRESENTATIVE JOHNSON referred to the supply chart and shipping
"and so on." She has heard that the negotiations with Japan had
stalled due to plants being built in Oregon, making the shipping
costs go down. "Are those still in the works or are those being
stalled as well?"
4:01:14 PM
MS. WILCOX said the Jordan Cove project in Oregon has just
resubmitted its FERC Section 7 application for a pipeline. The
previous pipeline route was rejected by FERC on the basis of
eminent domain, and FERC needs to be satisfied that enough
demand exists for the project. The situation is different. She
said she read the revised application advocacy from the head of
the project, and she said there have been maybe 56 reroutes
trying to get the pipeline around some of the problem areas. The
project is still dealing with over 400 private land owners, and
about 30 or 40 percent have signed some letters to agree. That
is a different public process situation. She said she believes
that Jordan Cove had an LOI with JERA, a major Japanese buyer,
and one project does not necessarily change the situation for
them in 2015. A number of companies are working with AGDC in
Japan, so the Oregon LNG project won't expressly affect things.
4:04:03 PM
MR. CRUZ said ConocoPhillips has clearly stated it wanted to be
a wellhead seller. One of the measures that senior management
has wanted to see is a tax-exempt status. When AGDC received the
status, Mr. Cruz got an email of congratulations from senior
management in the main headquarters of ConocoPhillips. He said
he took that as a very good thing for the state. The expertise
that AGDC is using for gas marketing is the same that sold the
Gorgon project in Australia to Tokyo Gas and Electric. Are we
getting in over our head? No, we are using players that are real
in this game.
4:05:23 PM
MS. WILCOX addressed slide 24, "Gas Supply," and said that the
results of the capacity solicitation do not preclude the
existence of tollers other than AGDC; all it does is grants
those foundation customer rights at the start of the process,
but we know that most of the LNG sold would be represented by
the State of Alaska. The AGDC buys the gas, and the state could
potentially sell its own gas. The diagram shows how AGDC
envisions calculating the netback to present to DNR and the
upstream sellers. The calculation takes the price received in
the market through the sale and purchase agreements for LNG; the
price would be free on board in Nikiski and account for the
shipping advantage that AKLNG has, "but we would start
calculating from Nikiski, and we would subtract the toll and
transfer the netback to the upstream owner, DNR or a producer."
That is how AGDC is starting to talk about the LNG sales. Part
of what makes the project competitive is the infrastructure cost
that can be financed-"and if we take advantage of that and
include that in the price, we can potentially have a very stable
price, but a risk modification factor for an owner of the
project, the state or someone else, is that you need a price
that potentially has a floor that can cover the toll." It is a
slightly different structure, but it is a hybrid for what has
been done in the LNG industry, where the LNG was sold oil-
indexed and it would just vary with oil. It would sometimes have
some callers on it, so it would have some limitations on the top
and the bottom. In the Gulf, they have used a tolling structure
where the toll is essentially guaranteed to the project owner,
and then the upstream varies with the index. "We're trying to
bring the structure into Alaska; we realize that our toll has to
be higher, but we do have the advantage on the shipping and, we
think, on the upstream, to still meet a competitive price."
Other projects are trying to be as creative as possible, so
there have been some announcements about making fixed-price
deals for a short period of time, because those projects can't
guarantee the Henry Hub to stay where it is.
4:08:57 PM
SENATOR MACKINNON asked if she is correct that the reason that
Mr. Cruz has stated that it depends on the buyer is because the
first buyer will pay the debt service for the long term.
MS. WILCOX explained that the first serious buyer gives the
confidence for the project to really start raising capital. She
said that is how she understands it. Once a project starts to
have some momentum and there is a reputable party that is
interested, that should provide confidence that selling the
entire project is achievable.
SENATOR MACKINNON asked for clarification that the first buyer
provides a foundation for debt service or other items.
4:10:20 PM
MS. WILCOX answered absolutely. Once that package is put
together, the bank will want to make sure that all the capacity
is subscribed, or nearly all. As far as charging each individual
buyer, it is done on a nondiscriminatory basis.
4:10:42 PM
SENATOR VON IMHOF asked how the second bullet on slide 24-
netback price where a portion of the LNG price is indexed to
commodity and passed on to upstream-affects the yellow portion,
or gas supply, of the diagram on slide 19.
MS. WILCOX explained that the long-term fixed price with
escalation can be equated to starting at one dollar and
escalating to two dollars over the time of the project. On the
netback price, there could be more upside at times and more
downside, but that is generally the range that it would expect
to vary in order to compete.
SENATOR VON IMHOF said they had talked earlier about the
flexibility in the range. When taking the individual slides and
bringing out various concepts, it is important to finally draw
them all together in one diagram and show the flexibility points
and ranges of where we have to fall to be competitive. "You are
showing this gas supply. We are putting pressure on our
competitiveness at the supply wellhead, which is fine, but how
does that affect the overall project?"
4:12:17 PM
MS. WILCOX said AGDC will work on a one-slide presentation. The
range for the US Gulf Coast, at the moment, appears to be around
$8 for competing long term. Some projects are higher, and some
are lower, but that is viewed as the long-term price, which
could change in the future. What AGDC is saying is Alaska has
enough advantages to be able to compete with that.
4:13:12 PM
SENATOR VON IMHOF asked about Gulf Coast pricing.
MS. WILCOX said some contracts are not as transparent as they
could be, but their structure is a toll, which in the earlier
contracts are in the range of $3 to $3.50. It is 115 percent of
Henry Hub, so that adds up to around $6.50 plus about $2 in
shipping. Some are different, and she has seen some that arrived
in Asia that were as high as $12.50 several months ago, but she
is not sure how they were structured.
4:14:28 PM
SENATOR VON IMHOF said, "If you think that this panel right here
is a tough customer," municipalities and Native corporations
will be very formidable forces, and they will want much clearer
answers than what Ms. Wilcox is providing. They will want an
annual pro forma to know exactly where the money is coming from
and where it is going. The committee is not asking that now,
because it is a long presentation. She told her that the
transparency that Ms. Wilcox is not providing today will be
demanded by Alaskans from around the state, as they will be
contributing 25 percent.
4:15:54 PM
MS. WILCOX said one question was the significance of non-binding
agreements, such as memoranda of understanding (MOU) and letters
of intent (LOI). There are "outs," but they are taken very
seriously by the LNG industry. A final agreement will likely not
be signed until the pre-final investment decision. Both sides
will want to know that regulatory approvals are well in sight
and that more engineering has been done in order to solidify the
estimate. However, those significant LOIs are from the parties
that AGDC has been talking to in Asia and they want the supply
in the timeframe of the project and they could go for this
location. They think they can indicate a term, a volume, and
potentially a price. If the price is not in the letter of intent
itself, it has frequently been part of the discussions. "So,
that price has been broken down for the buyer, and the buyer has
reviewed the data enough to have some level of belief in it." It
is also important to the large utility buyers that the project
rises to the level that allows them to devote resources to it.
The relationship with the marketing organization has been
established and tested on a trial agreement, such as an LOI or
confidentiality agreement. Evidence suggests that it takes one
to two years to get to an LOI.
4:18:54 PM
CO-CHAIR TARR said that Representative Saddler asked if an LOI
is a commitment that AGDC can take to the bank. He is getting
frustrated that AKLNG success keeps getting redefined downward.
Expressions of interest, LOIs, and MOUs are agreements in
principle, but none justify continued investment or activity. He
asked for evidence that he is wrong.
4:19:39 PM
MS. WILCOX replied that the best evidence is that under the
project structure that AGDC is proposing with a relatively low
return on equity for the investment of a utility rate of 8
percent, this project can be competitive. She said AGDC has been
spending the last several months trying to get the confirmation
from the market itself, and some progress has been made. There
is no final confirmation.
4:20:26 PM
CO-CHAIR TARR noted that the state had signed a MOU or LOI with
Korea Gas (Kogas), and that seemed like an important
announcement, but [Kogas] had signed a few others on the same
day. Will Korea have a demand requiring several contracts, or
does it mean that they are just wanting to talk to several
projects, but not select them? She asked how Alaska ranks if it
is not the only project that Korea is talking to.
4:21:43 PM
MS. WILCOX said Kogas is a state-owned company. At the time of
the MOU with AKLNG as well as three other projects on the Gulf
Coast, South Korean President Moon was on the way to Washington
DC and had a very large delegation with him. Part of the drive
to sign all the MOUs was a first step toward a change in the
trade direction. Korea wants to switch more to natural gas for
environmental reasons, and it wanted to show interest in getting
it from the US. The fact that AKLNG was the only West Coast
project is a very good point for the state. The Alaska project
has differences with the Gulf Coast, so it is not necessarily
competing. Kogas is looking at whether AKLNG has value or
doesn't. The Kogas portfolio has a large drop off in contracts
in that timeframe. They have a stable demand and not a lot of
growth, but, clearly, they are shopping around. It would be a
step in the right direction to be able to prove the value of
AKLNG to them.
4:24:03 PM
CO-CHAIR TARR said she shares some concerns with Representative
Saddler. It sounds like it is a case-by-case situation.
4:24:56 PM
MS. WILCOX said it is specific to the buyers. Texas and
Louisiana have several projects each, so the states, themselves,
promote the industry in general, and each project gets very
excited and makes all the announcements they can, because it
adds to the momentum. The State of Alaska with one LNG project
can do that, and that is part of the challenge. It is good to be
fair and reasonable, but AGDC is trying to grab that momentum.
4:26:15 PM
MS. WILCOX said slide 26 shows the count of marketing
activities. Intensive marketing has started recently. Pre-FEED
has been completed, and the FERC application has been made, so
the project has something to market with. Marketing has been
intense over the last few months.
4:27:01 PM
MS. WILCOX said slide 27 lists the marketing focus areas, which
are large buyers where Alaska has a shipping advantage. Slide 28
shows the number of confidentiality agreements and the buyers
interested in investing who want to access the data-room, which
is a large commitment of time. It shows the number of LOIs that
AGDC is negotiating, with actual drafts going back and forth.
There are three executed documents, she explained.
4:28:09 PM
MS. WILCOX said slide 29 addresses the IRS private letter
ruling, which the IRS published today. The letter asked for
confirmation that AGDC is a government entity whose revenue is
not taxable. The request described the potential structure of
the project, with private parties reserving capacity and selling
the gas to it. The project was described hypothetically, but the
specific question was if AGDC is tax exempt. The IRS was not
asked if the entire project would be tax exempt, because we
don't know who the owners of the project are yet, but if the
project is set up as a tax pass-through entity to the extent
that the state or AGDC owns a part of the project, then part of
the income from the project could be passed through to the state
without federal tax.
4:29:42 PM
CHAIR GIESSEL added that the application for the private ruling
is included in the meeting documents.
4:29:53 PM
CO-CHAIR TARR said Representative Saddler would like a response
to his concern that he has "heard nothing today that justifies
continuing with this project."
MS. WILCOX replied that the signed LOIs are confidential, based
on the counterparty's request. There is a way to share
confidential documents with legislators, in fact, that is
specified in the LOIs. As far as showing proof that further
investments are justified, it could be in those documents.
4:31:07 PM
CO-CHAIR JOSEPHSON surmised that the confidentiality agreements
cannot be shared publicly, but AGDC sees signs of progress.
MS. WILCOX said there are conversations and meeting notes that
give AGDC confidence, and the tempo of the signing of the LOIs
and the tempo of engagement on this project has been faster than
almost anything that the AGDC marketers have seen in previous
experience, and they have decades of experience. There is the
issue of Alaska's credibility as an LNG exporter-location really
does matter. Some buyers have experienced Panama Canal issues
with Gulf Coast LNG. "I'm not saying it's going to shut down the
LNG industry by any stretch," but the general attitude of the
meetings is hard to convey, and ultimately it all results in a
contract.
4:32:58 PM
CO-CHAIR JOSEPHSON noted that it is the duty of legislators to
be circumspect and raise tough questions. He recalled the August
16 meeting about a positive revenue ruling, and it was met with
great skepticism. He said he set through that meeting, and there
were a number of legal briefs presented in detail. Some were
more sanguine than others, but as a body, the legislature was
broadly unconvinced, and yet AGDC achieved that. He commended
Ms. Wilcox and looks forward to hearing more about it.
4:33:54 PM
SENATOR MICCICHE said there is not enough time in this meeting.
He noted that Mr. Cruz walked into this meeting with "a lot of
people hanging in there with you." He said he is from the
district where the proposed liquefaction facility ends up, and
he has had peripheral experience in the industry for a long
time. He is excited about the project with the cost of supply
that is competitive with the Gulf Coast and the Middle East. He
added that LOIs and MOUs do not fund projects. "How do we hang
in there with you?" He said he understands where AGDC is, and
everyone has done an incredible job. "When is a fair timeframe
for us to encourage this project to the point of where we say,
'Now is not the right time?'"
4:35:31 PM
MR. CRUZ said he likes those questions. He wants Alaskans to
understand this because they are the stockholders. He said he
has been involved since Day 1, and when AKLNG was an Exxon
project, "not once did they ever talk about a customer, bring a
customer to Alaska, even though we knew who know who customers
were; it was all about those three partners getting along and
prosecuting the work." He added that AGDC has brought the
customers and searched them out, which has never been done in
the history of this project. There have been LOIs agreed to.
TransCanada said it was going to build a pipeline and sell it
down south. He said he has renewed faith based on all the things
that are coming together. He understands that an LOI doesn't get
Alaska a pipeline, "but an LOI gets us a heck of a lot more than
we have right now for a confidence level." The fact that there
are five LOIs gives him "huge confidence."
MR. CRUZ said, regarding how long AGDC should hang in there, the
board has to have something by the end of this year. It has to
have something that he can take to Alaskans and say, "We've got
an LOI; we've never had that before. These companies have come
forward and said we're interested in purchasing X amount per
day. We have checked the dots that we actually have people that
want to sell their gas, because they do." At that point, he
said, the board has to determine what is best for the state.
Legislators are all welcome to sign a confidentiality agreement
and look at "what we have here," and that's when the board has
to make that decision. It is a tough time, he said, and he hopes
he is answering the question. If AGDC does not have substantial
LOIs at the end of this year or by January 15, then "we have to
look at this and say that this is not going to be a feasible
project." He said he doesn't want to sit another two years
thinking that somebody is going to knock on the door. What
really drives this project is construction, he added, and we
have seven years to build this thing.
4:38:35 PM
SENATOR MICCICHE thanked Mr. Cruz for his answer. There are a
lot of people asking that question and he thinks it is a fair
answer, and it's the most direct he has heard. He said he
understands Mr. Cruz's position. There are things moving this
way. That's a fair answer.
4:38:57 PM
SENATOR COGHILL said he has been as skeptical as anyone, but he
is glad to see what is being focused on. He asked at what point
does the project become a taxable entity because of the make-up.
4:39:32 PM
MS. WILCOX explained that AGDC's income, to the extent that it
is an owner of the project, will always be tax exempt. That is
the IRS ruling. The extent that that benefit is passed on to the
entire project in the form of tolls, that is flexible. Some of
it could be passed on and some of it couldn't, but AGDC would
get a higher return than other owners, but that generally does
not land extremely well in the market. The degree of state
ownership will determine the benefit of the tax-exempt status;
however, the total potential impact is not that material.
Consultants, "Wood-Mac," presented about a $0.45 difference for
a ringed-fenced stand-alone project. For owners of other
projects in the US that could take advantage of write-offs while
the project is having losses, the difference is as little as
$0.20 for the entire tax exemption. That is because of the low
return on equity that was projected.
4:41:18 PM
SENATOR COGHILL said that at one point [the exemption] was shown
as a key element.
4:41:31 PM
CHAIR GIESSEL asked Ms. Wilcox to move ahead to the netback for
Alaska. Citizens are asking what is in this for them.
4:41:43 PM
MS. WILCOX addressed slide 35, "State of Alaska Investment
Opportunity," which represents the total potential cash flow. It
is modeled as the state being 100 percent owner. If the state
made no investment in the project, and all it received is the
netback, then one to two dollars would give it $250 to $500
million per year. That is outside of the $40 billion investment
decision-if the project just happened. The model assumes that
production tax is paid as gas and there is a royalty percentage.
Those are the two "thinnest" bars on the chart. The yellow
portion of the diagram is the investment decision, and that is a
different cash flow; it is if the state actually takes equity
going forward on the project and earns an 8 percent return over
20 years. The income is $1.1 billion per year for the 20 years
that the debt is being paid off, and then the income could
potentially go up if the tolls can be kept at the same level.
MS. WILCOX said that is the $11 billion investment decision, if
you will. In addition, the operating payments in lieu of taxes
would be considered part of the state return, even though some
of it goes to the municipalities. It is represented by the light
blue bar on the diagram. If the state were to own the project
and help it happen, it would start at about $2 billion per year
and rise from there. The investment part is scalable, so by
investing less, there is less return. It is not a pro forma;
"we're using the data that we have that is all rolled up that
has quite a bit more detail to it, but it is still an end-of-
preFEED projection of capital expenditure over time and revenues
over time." This is not the time that the $11 billion is being
requested, she clarified, this is the time $3 million per month
is being spent to de-risk the project and to get the customers
in the door. Then, AGDC will shift to making detailed, month-by-
month projections, because it will determine the pace and size
of the project.
4:45:37 PM
CHAIR GIESSEL asked if the diagram assumes no cost overruns,
construction delays, or fish initiatives that would create
lawsuits.
MS. WILCOX answered correct. The cost estimate of the project is
about $43 billion, and that has a 16 percent contingency.
4:46:16 PM
CO-CHAIR TARR asked to clarify that if the state makes no
additional investment, through the royalty and the tax-as-gas,
it would be around $250 million per year.
MS. WILCOX said yes, and that is with the one-dollar estimated
netback for three trains.
CO-CHAIR TARR said if Alaska becomes an equity investor, the
yellow part of the diagram is all negative cash flow until 2025,
when the project comes on line, but then that brings the return
closer to $2 billion per year. She assumed that the goldenrod-
colored portion would be what the state would have to pay back,
so in the early years, Alaska would still be looking at the
royalty and tax-as-gas until phasing out of the 20 to 25 years
of financing.
4:47:30 PM
MS. WILCOX replied that financing is netted out, so the diagram
shows the net income.
SENATOR MACKINNON asked if PILT is included.
MS. WILCOX said PILT is the light blue portion.
SENATOR MACKINNON asked if PILT is included in the $250 million
to $500 million.
MS. WILCOX said PILT is outside of that.
4:48:13 PM
CHAIR GIESSEL said Ms. Wilcox alluded to three trains. She asked
about two trains.
MS. WILCOX said she has not included that model in detail.
Generally, LNG projects try to start as small as they possibly
can, which was the genesis of the ASAP project that she started
working on in 2011. The size depends on the market. For the two-
train model, there can be a case where the cost of the
infrastructure is largely similar to this one with some
modifications. The modifications could be extending the
contracts that financing is based on from 20 to 25 years,
stretching out the depreciation. Since they are smaller
investments, potentially the payment in lieu of tax portion of
the toll could be reduced until the third train is constructed.
The property tax is based on the level of investment. With that,
you could get close to the same tolls. One of the key
considerations in financing is whether you have the gas behind
it, and with two trains, because the capacity is less, you could
have that gas stretch for 25 years.
4:49:44 PM
SENATOR MACKINNON said she is a former assembly member for
Anchorage and remembers when the Trans Alaskan Pipeline was
built. There are huge safety concerns during construction, "and
huge waves of people are coming in." It looks like PILT is only
being offered after the project is complete, and the negative
impacts are during construction. She asked if Ms. Wilcox is
taking that into consideration at all.
MS. WILCOX said there is a construction PILT estimate in these
numbers. In the current model, it is estimated at an additional
$200 million, and that is to directly pay the communities for
the impacts. She said Resource Report 5 indicated a net positive
income for the communities over the period of construction,
because many communities have taxes. This project will not have
as large an impact on the state as the oil pipeline did because
the state is bigger, and the project is smaller, "but we
recognize those issues."
4:51:30 PM
SENATOR MACKINNON asked where to find those numbers.
MS. WILCOX replied that they are in the yellow part of the
diagram, because it is considered part of the capital estimate.
CO-CHAIR TARR said that in the previous iteration, the dollars
before the project came on line were considered "impact aid."
That was different from the PILT, but it sounds like those are
all considered the same pot of money.
4:52:20 PM
MS. WILCOX said they are being considered within the capital
estimate, so the impact aid, the construction payments in lieu
of taxes, are to compensate for impact. It is not there as a
profit-making tool. That is why it is not presented as part of
the return to the state, because it's just trying to offset the
negative rather than be a positive. It is part of the cost.
SENATOR MACKINNON asked if Alaska is going to capitalize that
debt. Will there be an expense and carry out across the state's
debt load to be able to do impact aid or PILT to advance the
project?
4:53:10 PM
MS. WILCOX replied that the owners of the project would pay for
that. To the extent that the state is an owner and there is a
local community impact, she expects the community would ask the
project to compensate.
4:53:46 PM
MS. WLCOX addressed slide 36, "Netback," and said it is another
way of representing what the range of the netback would be.
There is more detail behind the blue-shaded area, which included
the entire pre-FEED cost estimate and shipping costs. The blue
area is the infrastructure and shipping costs, and the grey bars
represent pricing projections. The projections are based on
Henry Hub-based LNG, so the only variability in them is the
forecast for Henry Hub in 2025. The slide shows that in order to
be competitive, the Alaska project needs to at least match a
competitive market. If the netback is indexed to something, then
it would vary throughout the project life, and if it is not,
then it is determined upfront in the contract.
4:55:25 PM
MS. WILCOX turned to slide 37 and said that the "investment
banker" will assist AGDC in defining key financing objectives,
such as what type of investor to look for, what return is
expected, and where those investments could come from. They will
work with AGDC legal advisors to evaluate and execute the
corporate structure, so it is financeable on both the debt and
equity side. That means the corporate and company set-up and all
the contracts. The bankers will evaluate and minimize key risks
that are in the contract that AGDC is working to negotiate and
will interface with financial agencies and lenders and help
raise the capital for the project. They will have the pen, in
the end, for the stack of documents that show up at the final
investment decision. She said AGDC has taken some time
evaluating the investment banker. Part of the issue was brought
up by the Department of Revenue who advised that, as a
municipality, AGDC requires an independent advisor. There is an
issue related to Dodd-Frank [Wall Street Reform and Consumer
Protection Act, 2010], where AGDC cannot bring in a financial
advisor who will be part of the pool of candidates for the
investment banker. To attract a large entity that would want to
participate and be with the project upfront, it will take some
work to create a compliant structure. She said there are two
very reputable entities in the running, and a letter of
engagement is likely imminent. The cost of the advisor will
likely be fairly low, tens of thousands of dollars per month,
but once they actually start the capital raise, it will be a
large sum. In the model, it is 5 percent of the debt.
4:58:37 PM
SENATOR MACKINNON asked about a report on financing.
MS. WILCOX said the DOR is shepherding that report.
4:59:00 PM
CO-CHAIR TARR noted that Mr. Richards was going to provide a
list of fish-bearing streams and the monthly financials were
going to be made available with the meeting documents.
4:59:23 PM
CHAIR GIESSEL listed the documents linked to this meeting. Ed
King supplied a letter related to royalty-in-kind and in-value.
5:00:23 PM
There being no further business to come before the committee,
Chair Giessel adjourned the Joint Resources Committee at 5:00
p.m.