Alaska’s Strategic Options for Gas      Pipeline Development         September 14, 2012            Craig Richards        W...
Part I – Strategic Options Available              to Alaska    1. Do Nothing    2. Bullet Line    3. Fiscal Certainty Then...
Part II – The Demand for “Fiscal             Certainty”ExxonMobil, BP and ConocoPhillips require“fiscal certainty” before ...
Steve Coll, Private Empire at 70(2012)“Exxon had opportunities to exploit oil andnatural gas in Alaska, but held back from...
Interest Manager MartyMassey, before the Alaska HouseResources Committee (April12, 2007)“[W]e are willing to take geologic...
Letter re Point Thomson to Governor    Sean Parnell, from Rex Tillerson, Jim    Mulva and Bob Dudley (March    30, 2012) (...
Simple Decision Tree for Lessees                Start           Fiscal Certainty             Lessee         Commercial Dec...
Part III– A Look at “Fiscal Certainty” •Scope of “fiscal certainty” is known    •Murkowski’s 2006 SGDA Contract    •Parnel...
Fiscal Certainty Per 2006 SGDA Contract•   Article 8* – Reduced State Regulatory Oversight: RCA has no Jurisdiction•   Art...
Cost of Fiscal Certainty On Oil Likely     Outweighs Value of Gas Pipeline     Development to State Treasury• 2006 Irwin/R...
Strategic Failings of AGIA       Start                             1) Geared towards highway                              ...
Part IV– State Control as an Alternative       Approach to Gas Pipelines             Development1.   SGDA and AGIA require...
Key Elements of State Control• State takes control of project development and timeline• State partners with gas purchasers...
State Control of Project DevelopmentIncluding Timeline, CommercialArrangements, Permitting, Engineering, Program Managemen...
Lessee Duty to Market at    Wellhead• Lessees do not own Prudhoe Bay in fee; rather theyhave a lease from the State that c...
Letter of David Van Tuyl, BP GasCommercialization Manager, to theHonorable Bettye Davis (July 21, 2008)“If an entity were ...
Are Other Companies Interested inPurchasing at Wellhead and Takingon Project Risk?• Prudhoe Bay resources are about 23 tcf...
Part V – Conclusion1. Do Nothing2. Bullet Line3. Fiscal Certainty then   Commercial Decision4. State Control
Alaska's Strategic Options for Gas Pipeline Development
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Alaska's Strategic Options for Gas Pipeline Development

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Asian Market *Hawaii's LNG*LNG pricing*US export*LNG export*North American prices

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Alaska's Strategic Options for Gas Pipeline Development

  1. 1. Alaska’s Strategic Options for Gas Pipeline Development September 14, 2012 Craig Richards Walker & Richards, LLC 731 N Street Anchorage, AK 99501
  2. 2. Part I – Strategic Options Available to Alaska 1. Do Nothing 2. Bullet Line 3. Fiscal Certainty Then Commercial Decision 4. State Control
  3. 3. Part II – The Demand for “Fiscal Certainty”ExxonMobil, BP and ConocoPhillips require“fiscal certainty” before they will make acommercial decision on a gas pipeline
  4. 4. Steve Coll, Private Empire at 70(2012)“Exxon had opportunities to exploit oil andnatural gas in Alaska, but held back fromsome expensive deals because [CEOLee] Raymond had learned after theValdez [oil spill] that the political risksposed by Alaska’s frontier-minded politicalculture and populist governors werecomparable to those of West Africa.”
  5. 5. Interest Manager MartyMassey, before the Alaska HouseResources Committee (April12, 2007)“[W]e are willing to take geologic risks, we are willing to takecost risks, and we are willing to take commodity pricerisks, but we cannot take risk of fiscal terms changing. Letme expand on this important concept… If fiscal terms can bechanged in the future, then we are not able to make a wellfounded investment decision on behalf of our shareholders.…Because fiscal terms could be modified under theproposed AGIA legislation, it does not provide the fiscalstability necessary to ensure a commercially viable project.… Locking in one piece of take while leaving open all theothers pieces of take still does not provide any fiscal stabilitybecause it can just be changed in another form of the take.”
  6. 6. Letter re Point Thomson to Governor Sean Parnell, from Rex Tillerson, Jim Mulva and Bob Dudley (March 30, 2012) (emphasis added)“We are now working together on the gas commercialization projectconcept selection, which would include an associated timeline and anassessment of major project components including in-state pipelineroutes and capacities, global LNG trends, and LNG tidewater sitelocations, among others.Commercializing Alaska natural gas resources will not be easy. There aremany challenged and issues that must be resolved, and we cannot do italone. Unprecedented commitments of capital for gas development willrequire competitive and stable fiscal terms with the State of Alaska firstbe established. Appropriately structured, stable fiscal arrangements haveopened new opportunities around the world, and will play a pivotal role inmaking Alaska competitive in the global market and unlocking the economicpotential of North Slope resources.”
  7. 7. Simple Decision Tree for Lessees Start Fiscal Certainty Lessee Commercial Decision Project Start
  8. 8. Part III– A Look at “Fiscal Certainty” •Scope of “fiscal certainty” is known •Murkowski’s 2006 SGDA Contract •Parnell’s 2012 Point Thomson Settlement •Structure of “fiscal certainty” is: 1. Tax and royalty concessions on oil and gas 2. State relationship redefined as contractual • Terms locked in for life of project • Surrender of sovereignty
  9. 9. Fiscal Certainty Per 2006 SGDA Contract• Article 8* – Reduced State Regulatory Oversight: RCA has no Jurisdiction• Article 11 – Fiscal Stability: Contract Controls Royalty and Tax Obligations• Article 12 – Royalty: State Takes Gas Royalty in Kind and not Value• Article 13 – Reinjected Gas: No Taxes & State Takes Reinjected Royalty in Kind• Article 14 – Production Taxes on Oil and Gas: Reduced & Capped• Article 15 – Upstream Property Taxes on Oil: Reduced & Capped on per Barrel Basis• Article 16 – Upstream Property Taxes on Gas: Reduced & Capped on per Barrel Basis• Article 17 – TAPS Property Taxes: Reduced & Capped on per Barrel Basis• Article 18 – Impact Payments During Construction: Fixed Payments• Article 19 – State Income Taxes: Reduced & Capped• Article 21 – State Responsible for Taxes to Municipalities• Article 23 – Point Thomson: ExxonMobil, BP and ConocoPhillips retain control• Article 25 – Audits: State Auditing Powers Limited to Scope of Contract• Article 26 – Dispute Resolution: International Arbitration Rather than Alaska Courts• Article 27 – Judicial Challenge: State will Defend Contract Before Courts• Article 29 – Confidentiality: State will Keep Producer Information Confidential• Article 35 – Force Majeure: Producer Performance Excused & Interest Payments Waived *For Articles in red there is a similar provisions in the 2012 Point Thomson Settlement Agreement
  10. 10. Cost of Fiscal Certainty On Oil Likely Outweighs Value of Gas Pipeline Development to State Treasury• 2006 Irwin/Rutherford memorandum suggested SGDA Contract cost State$13.25 billion•FY 2006 State collected $3.7 billion on oil (RSB Spring 2007)•ACES enacted in 2007•ANS West Coast Price: ~$55/barrel January 2007 ~$140/barrel early July 2008 ~ $110/barrel early September 2012• FY 2011 State collected $8 billion on oil (RSB Spring 2012)• CONCLUSION: At current oil production and price levels, State revenuefrom a gas pipeline will likely not offset the cost of fiscal certainty on oil formany years
  11. 11. Strategic Failings of AGIA Start 1) Geared towards highway project AGIA 2) Permit and "they will come" approach  YPC already tried Fiscal Certainty  Fails to address “fiscal certainty” 3) TC Alaska is a reluctant Lessee championCommercial Decision  “Nothing goes forward until Exxon is happy with it.” Hall Kvisle, CEO TransCanada (2008) Project Start  ExxonMobil has co-opted process
  12. 12. Part IV– State Control as an Alternative Approach to Gas Pipelines Development1. SGDA and AGIA require State to negotiate fiscal terms on oil and gas with ExxonMobil, BP and ConocoPhillips before a commercial decision2. Economics and loss of sovereignty makes this approach undesirable to the State3. The alternative is for the State to take direct control of gas pipeline development
  13. 13. Key Elements of State Control• State takes control of project development and timeline• State partners with gas purchasers and demands sale atwellhead•State and partners develop commercial arrangements formajor project components• State and partners undertake permitting and engineeringnecessary for FID•State and partners contract program managers, includingrisk sharing arrangements, and procurement
  14. 14. State Control of Project DevelopmentIncluding Timeline, CommercialArrangements, Permitting, Engineering, Program Management and Procurement• From a project owner perspective ExxonMobil, BPor ConocoPhillips are not unique • Resource and pipeline owners do not build major pipelines • There are a numerous global energy companies that can fill the project development oversight role• ExxonMobil, BP and ConocoPhillips’ “uniqueness”originates exclusively from their extraction rights –i.e., the Prudhoe Bay and Point Thomson leases
  15. 15. Lessee Duty to Market at Wellhead• Lessees do not own Prudhoe Bay in fee; rather theyhave a lease from the State that creates certain rights andobligations• A lessee has the duty to diligently market gas from theleasehold, which includes selling at the wellhead, if thereis a “reasonable expectation of profit”• A landholder’s remedies for a refusal to market aredamages for lost royalty and termination of the lease/unit• Oil and gas law provides that if ExxonMobil, BP orConocoPhillips refuse to sell gas their leases are subjectto forfeiture
  16. 16. Letter of David Van Tuyl, BP GasCommercialization Manager, to theHonorable Bettye Davis (July 21, 2008)“If an entity were to bear the expense andtake the risk of building a pipeline, wewould be delighted to ship gas on theirpipeline provided we had a reasonableexpectation of making a profit. Indeed, ifa credit worth entity were willing to buyour gas on a commercially reasonablebasis we would sell it to them today.”
  17. 17. Are Other Companies Interested inPurchasing at Wellhead and Takingon Project Risk?• Prudhoe Bay resources are about 23 tcf of gas, or 4.0billion BOE• Point Thomson resources are about 7 tcf of gas, or 1.2billion BOE (plus hundreds of millions of barrels of liquids)• These are world class assets• To say global interest is “robust” is an understatement• Asian buyers alone will subscribe the entire pipelineexport/liquefaction volumes
  18. 18. Part V – Conclusion1. Do Nothing2. Bullet Line3. Fiscal Certainty then Commercial Decision4. State Control

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