EQUITY PARTICIPATION AND RISK SHARING ALASKA GAS PROJECT

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EQUITY PARTICIPATION AND RISK SHARING ALASKA GAS
PROJECT
October 13, 2004 Pedro van Meurs Presentation
to the Legislative Budget and Audit
Committee Senate Resources Committee
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EQUITY PARTICIPATION AND RISK SHARING BY THE
STATE OF ALASKA

• This presentation will deal with the following
  issues related to State equity participation
• The risk-reward balance
• The international experience
• The issue of risk on pipeline project
• The unique position of Alaska

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RISK REWARD BALANCE

• The more risk investors have to accept the more
  profits they want.
• The more risk a government is prepared to accept
  the higher the government revenues.

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RISK REWARD BALANCE

• Stranded Gas is being developed around the world
  by lowering project risk.

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INTERNATIONAL EXPERIENCE

• Many jurisdictions alter the risk-reward balance
  in order to achieve policy objectives. This can
  be done through
• Equity participation, and/or
• Production/Risk sharing agreements

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INTERNATIONAL EXPERIENCE

• These methods are used by governments in gas
  projects
• To create additional revenues for the State
• To make marginal or stranded gas projects more
  competitive, in particular with respect to LNG
• Two concepts are employed
• Joint Ventures
• Production/Risk Sharing Agreements

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INTERNATIONAL EXPERIENCE

• Joint Ventures are typically of three different
  types
• Joint Stock Companies
• Joint Operating Agreements
• LLCs or LPs

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INTERNATIONAL EXPERIENCE

• JOINT STOCK COMPANIES
• Parties are shareholders
• Assets owned by the company
• Decisions are made by the Board appointed by the
  shareholders
• Capital to be contributed is share capital
• Individual shareholders cannot "opt out" of any
  of the project of the company
• Operations are managed by the Managers of the new
  joint corporation
• Income is distributed as dividends
• the new joint venture is a separate taxable entity

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INTERNATIONAL EXPERIENCE

JOINT OPERATING AGREEMENTS

• Parties remain independent
• Assets owned pro-rata by the working interest
  owners
• Parties can vote in accordance with their working
  interest in the venture
• Decision are made by the Operating Committee
• Capital is contributed project by project on the
  basis of cash calls
• Parties can "opt out" of certain projects they do
  not consider attractive,
• Operations are managed by one of the Parties
  (Operator)
• All gross income (less operating costs) is
  distributed in accordance with working interest
  percentages
• each party remains a separate taxable entity.

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INTERNATIONAL EXPERIENCE

LIMITED LIABILITY COMPANIES/LIMITED PARTNERSHIPS

• Parties remain independent members
• Assets owned by the LLC/LP
• Parties can vote in accordance with their
  membership interest in the venture
• Decision are made by the Management Committee,
  often levels of voting
• Capital is contributed project by project on the
  basis of cash calls
• Parties can "opt out" of certain projects they do
  not consider attractive,
• Operations are managed by a Manager
• All gross income (less operating costs) is
  distributed in accordance with working interest
  percentages
• each party remains a separate taxable entity.

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INTERNATIONAL EXPERIENCEExamples Joint Ventures

• Joint ventures involve the contribution of
  equity capital in upstream and/or midstream
• The Netherlands
• Venezuela
• Russia
• Brunei
• Oman
• Qatar

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INTERNATIONAL EXPERIENCEExamples Joint Ventures

• Joint ventures involve the contribution of
  equity capital in upstream and/or midstream
• Norway
• Malaysia
• China
• Colombia

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INTERNATIONAL EXPERIENCEExamples Production
Sharing

• Production sharing involves the taking of a
  share of the gas in kind, rather than levying
  royalties and tax
• Trinidad Tobago
• Indonesia
• Malaysia
• China
• Bangladesh
• Egypt
• Yemen

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THE ISSUE OF RISK

• With respect to a pipeline project there are two
  important parties
• The Shipper of the Gas
• The Pipeline Owner

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THE ISSUE OF RISKShipper vs Pipeline Owner

• The most rudimentary project, would be a 14
  billion pipeline from Prudhoe Bay/Point Thomson
  to the BC/Alberta border.
• The tariff could be estimated as 1.20 per MMBtu
  (2004 ) (incl. feeder line, GTP and Alberta Hub
  entry).
• To build the line a pipeline owner would need a
  shipping commitment for at least 15 years of
  throughput. At 4.1 Bcf/day of sales gas this
  would be for 22 Tcf of gas.
• In other words a 28 billion contract is
  required.

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THE ISSUE OF RISKShipper vs Pipeline Owner
Example

• The main risk is committing to a 28 billion
  contract. This is the shippers risk.
• On the basis of the guaranteed income of a 28
  billion contract, the pipeline owner can invest
  the required 14 billion to build the line.

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THE ISSUE OF RISKProducer decision

• The producers can take the decision to either
• Commit 14 billion to the construction of the
  pipeline, or
• Commit to a 28 billion contract, so pipeline
  company can built the line

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UNIQUE ALASKA ISSUES

• The main risks in the case of the Alaska Gas
  Project are
• The huge size of the project
• Gas Price Risk
• Cost Overrun Risk
• Regulatory Risk

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UNIQUE ALASKA ISSUES Project size

• The gigantic size of the Alaska project compared
  to projects in the rest of the world increases
  the difficulties in absorbing risk.

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UNIQUE ALASKA ISSUES Project size

• The huge up front capital requirements of the
  Alaska Project create a project that has a low
  rate of return compared to competing projects

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UNIQUE ALASKA ISSUES Project Size

• The huge size of the project also creates the
  opportunity for huge rewards.

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UNIQUE ALASKA ISSUES Price Risk and Cost Overrun
Risk

• However, ..significant price uncertainty and
  cost overrun risk create a huge down side risk.

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UNIQUE ALASKA ISSUES

• In summary the Alaska Project has unique
  challenges
• An extra-ordinary large project, with
• A low rate of return, and
• Huge downside risks, in
• The most complex regulatory environment in the
  world
• But potentially also a huge reward for Alaska
  and Producers under upside conditions.
• To get this project going requires unique
  solutions.

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RISK REWARD BALANCE

• The low profitability of the project makes it
  imperative to lower risk otherwise the project
  will not go forward.

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NEW IDEAS Risk Reduction

• On April 7, 2004, I already presented to the
  Joint Caucus the overall strategy as follows
• A Stranded Gas Agreement with improved
  competitiveness and fiscal stability
• A Risk Sharing Package between the State and the
  Producers, and
• The need for a Federal Energy Bill.

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NEW IDEAS Risk Reduction

• The Federal Energy Bill is a classic example of
  a superb risk reduction package, which contains
• Enabling provisions to significantly reduce
  regulatory risk
• Federal Loan Guarantees to reduce financing risk
  and
• Attractive tax provisions to reduce down side risk

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NEW IDEAS Risk Reduction

• The passing of the Federal Energy Bill is a
  gigantic step forward for the Alaska Gas Project.
  
• The onus is now on Alaska to implement quickly
  the next steps.

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NEW IDEAS Risk Reduction

• We are negotiating with various parties, to
  bring one or more Stranded Gas Contracts to the
  Legislature with competitive fiscal regimes and
  appropriate fiscal stability provisions.

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NEW IDEAS Risk Reduction

• The last piece of the puzzle is the Risk Sharing
  Package.
• We can use ideas that have been employed
  elsewhere to make Stranded Gas projects economic,
  such as
• Equity participation and participation in
  shippers risk
• Taking Gas in Kind in a manner similar to
  production sharing provisions in other countries.
  

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NEW IDEAS Risk Reduction

• A well structured Alaska risk sharing package
  will eliminate the need for Federal tax credits
  in order to deal with downside risk. It will be
  a structure that much better protects the Alaska
  interests.