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

2. Alaska’s Strategic Options for Gas
Pipeline Development
September 14, 2012
Craig Richards
Walker & Richards, LLC
731 N Street
Anchorage, AK 99501

3. Part I – Strategic Options Available
to Alaska
1. Do Nothing
2. Bullet Line
3. Fiscal Certainty Then
Commercial Decision
4. State Control

4. Part II – The Demand for “Fiscal
Certainty”
ExxonMobil, BP and ConocoPhillips require
“fiscal certainty” before they will make a
commercial decision on a gas pipeline

5. Steve Coll, Private Empire at 70
(2012)
“Exxon had opportunities to exploit oil and
natural gas in Alaska, but held back from
some expensive deals because [CEO
Lee] Raymond had learned after the
Valdez [oil spill] that the political risks
posed by Alaska’s frontier-minded political
culture and populist governors were
comparable to those of West Africa.”

6. Interest Manager Marty
Massey, before the Alaska House
Resources Committee (April
12, 2007)
“[W]e are willing to take geologic risks, we are willing to take
cost risks, and we are willing to take commodity price
risks, but we cannot take risk of fiscal terms changing. Let
me expand on this important concept… If fiscal terms can be
changed in the future, then we are not able to make a well
founded investment decision on behalf of our shareholders.
…Because fiscal terms could be modified under the
proposed AGIA legislation, it does not provide the fiscal
stability necessary to ensure a commercially viable project.
… Locking in one piece of take while leaving open all the
others pieces of take still does not provide any fiscal stability
because it can just be changed in another form of the take.”

7. 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 project
concept selection, which would include an associated timeline and an
assessment of major project components including in-state pipeline
routes and capacities, global LNG trends, and LNG tidewater site
locations, among others.
Commercializing Alaska natural gas resources will not be easy. There are
many challenged and issues that must be resolved, and we cannot do it
alone. Unprecedented commitments of capital for gas development will
require competitive and stable fiscal terms with the State of Alaska first
be established. Appropriately structured, stable fiscal arrangements have
opened new opportunities around the world, and will play a pivotal role in
making Alaska competitive in the global market and unlocking the economic
potential of North Slope resources.”

8. Simple Decision Tree for Lessees
Start
Fiscal Certainty
Lessee
Commercial Decision
Project Start

9. 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

10. 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

11. 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 revenue
from a gas pipeline will likely not offset the cost of fiscal certainty on oil for
many years

12. 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 champion
Commercial Decision
 “Nothing goes forward until
Exxon is happy with it.” Hall
Kvisle, CEO TransCanada
(2008)
Project Start  ExxonMobil has co-opted
process

13. Part IV– State Control as an Alternative
Approach to Gas Pipelines
Development
1. SGDA and AGIA require State to negotiate fiscal
terms on oil and gas with ExxonMobil, BP and
ConocoPhillips before a commercial decision
2. Economics and loss of sovereignty makes this
approach undesirable to the State
3. The alternative is for the State to take direct
control of gas pipeline development

14. Key Elements of State Control
• State takes control of project development and timeline
• State partners with gas purchasers and demands sale at
wellhead
•State and partners develop commercial arrangements for
major project components
• State and partners undertake permitting and engineering
necessary for FID
•State and partners contract program managers, including
risk sharing arrangements, and procurement

15. State Control of Project Development
Including Timeline, Commercial
Arrangements, Permitting, Engineering, P
rogram Management and Procurement
• From a project owner perspective ExxonMobil, BP
or 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

16. Lessee Duty to Market at
Wellhead
• Lessees do not own Prudhoe Bay in fee; rather they
have a lease from the State that creates certain rights and
obligations
• A lessee has the duty to diligently market gas from the
leasehold, which includes selling at the wellhead, if there
is a “reasonable expectation of profit”
• A landholder’s remedies for a refusal to market are
damages for lost royalty and termination of the lease/unit
• Oil and gas law provides that if ExxonMobil, BP or
ConocoPhillips refuse to sell gas their leases are subject
to forfeiture

17. Letter of David Van Tuyl, BP Gas
Commercialization Manager, to the
Honorable Bettye Davis (July 21, 2008)
“If an entity were to bear the expense and
take the risk of building a pipeline, we
would be delighted to ship gas on their
pipeline provided we had a reasonable
expectation of making a profit. Indeed, if
a credit worth entity were willing to buy
our gas on a commercially reasonable
basis we would sell it to them today.”

18. Are Other Companies Interested in
Purchasing at Wellhead and Taking
on Project Risk?
• Prudhoe Bay resources are about 23 tcf of gas, or 4.0
billion BOE
• Point Thomson resources are about 7 tcf of gas, or 1.2
billion 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 pipeline
export/liquefaction volumes

19. Part V – Conclusion
1. Do Nothing
2. Bullet Line
3. Fiscal Certainty then
Commercial Decision
4. State Control