Thoughts on State participation in the Alaska LNG Project

BRAD KEITHLEYKEITHLEY CONSULTING, LLC

MARCH 4, 2014

Summary

I strongly support state participation/co-investment)

But I have three significant and fundamental concerns with the current proposal Fails to achieve alignment Does not provide Alaska with an active voice

upstream Creates fiscal policy issues and does not maximize

return to Alaskans

Recommendations

2

Why I support state participation

Where the state is the resource owner, co-investment better positions the state … … to help drive continued investment in the state’s

resources, and … to identify where the best opportunities are

Where done well, produces more robust ongoing exploration and development activity Norway

Co-investment also has been used by major private resource owners to focus development on their lands Burlington Northern and Union Pacific Louisiana Land & Exploration

3

Alignment I agree with the Alaska North

Slope Royalty Gas Study … The current proposal,

however, does not even remotely achieve that goal

By substituting TransCanada as the owner of the state’s share a large portion of the project, the proposal creates the very misalignment – and risks – which the royalty study warns against

4

Alignment Alignment is important for a number of reasons

Avoid disagreements between the participants that can effectively derail a project

Avoid other parties shifting costs and revenues between components of the project

Allow each participant to see full project economic challenges and opportunities, and enable each to help drive economic investment and opportunity

Inserting TransCanada … … undermines those objectives,

… oddly, creates a secure, guaranteed revenue stream for TransCanada at the expense of the state, while enabling other owners to take that return for themselves

5

Upstream Although not hi-lited as such in the

Royalty Study, resource owners who participate in the midstream and downstream typically also co-invest in the upstream

The reasons are some of the same as those supporting alignment Enable each

participant to help drive economic investment and opportunity, etc.

Upstream activity is especially important to Alaska, where state is dependent on production levels

6

Upstream As with alignment, the current proposal does not

achieve global best practice Under the current proposal, the state accepts a passive

role in the upstream … takes whatever volumes of gas are derived from its

royalty and tax share

… does not sit on the operating or technical committees

… does not receive additional information

As a result, the state is not well positioned to help drive and identify upstream investment opportunities, despite having significant investment exposed downstream (which is dependent on continued upstream activity)

7

Upstream Even where the government does not invest, close

participation is important to help drive investment Last year, for example, Governor Parnell cited the UK’s

efforts to spur investment as a good analogy to Alaska Last week, the UK found it appropriate to adopt additional

steps to spur activity

Right to attend consortia meetings… to effectively manage the UKCS, the Regulator must understand to the fullest extent possible the challenges faced by industry. As such, licenses should include a provision allowing the Regulator to attend Operating and Technical Management Committee meetings. This is a common practice in Norway and the Netherlands … to ensure [those responsible for development] are fully informed.

UKCS Maximizing Recovery Review: Final Report (Feb. 24, 2014)

8

Fiscal Policy Given the current financial

outlook, the state’s “nest egg” (financial reserves) needs to be invested and managed as an income producing asset in order to build it to levels sufficient to produce long term “sustainable revenues”

From a fiscal policy perspective, any significant investment of those assets should be reviewed – and in my opinion, managed – by the state’s investment experts – the Permanent Fund Corporation

9

Fiscal Policy Substituting TransCanada as the owner of the pipeline

segment is not justified on fiscal reasons (see “Rodell: Risks high in pursuing LNG alone,” Juneau Empire (Feb. 28. 2014) The state has the money to make the investment if it is presents

a good opportunity (which, at a 12% return -- higher than average Permanent Fund return – it is)

The Permanent Fund should evaluate if the opportunity fits into its portfolio – the PFC is moving into the oil & gas sector already (see “Like oil industry, Alaska Permanent Fund looks to North Dakota,” Alaska Dispatch (Feb. 26, 2014))

Substituting TransCanada simply because the state doesn’t have enough money is essentially the equivalent of the state paying 12% interest on debt

Finally, the State is not pursuing LNG “alone” – it is partnering with three of the most sophisticated oil companies in the world (indeed, Exxon is actually building the pipeline)

10

RecommendationsThree recommendations

1. Alignment: In order to achieve alignment, retain the state’s share of the pipeline and treatment plant. Resolve the legacy AGIA issues in another way that does not interfere with the success of this project.

2. Upstream: Provide for active participation in the upstream, either through co-investment (Norway model) or Wood Report approach (UK model). Accept lessons learned from other governments about best global practice.

3. Fiscal Policy: View ownership in the project as a long term investment of the state’s “nest egg”. Evaluate and manage through the state’s professional investment arm – The Permanent Fund Corporation. Maximize return to Alaskans by retaining superior return opportunities.

11