Alaska Legislature: Senate Resources, 4/28/26, 9am

I call the Senate Resources Committee meeting to order. Today is Tuesday, April 28th, 2026, and the time is 9:00 a.m. Please turn off your cell phones. Committee members present today Senator Rauscher, Senator Kawasaki, Senator Dunbar, Senator Myers, Vice Chair Senator Wilkowski, and I am Senator Giesel. I believe Senator Clayman will be joining us later.

We have a quorum to conduct business. Thank you to Heather and Chloe for helping us out today. Today we are hearing again Senate Bill 280, oil and gas property tax, and today we are hearing from Gaffney Klein, our consultant on this topic. So joining us is Nick Fulford. He is the Senior Director of Gas and LNG and Energy Transition at Gaffney Klein Energy Advisory.

Mr. Fulford, welcome.

Thank you, Chair Giesel. And for the record, this is Nick Fulford from Gaffney Klein.

Very good. I'll let you— you've given us a PowerPoint presentation. It is up on the screen, and I will let you proceed.

Thank you, Chair Giesel. So before we get into today's material, I did want to offer up some commentary about modeling. I think, as probably the committee will agree, and based on the hearings over the last couple of weeks really, maybe a little longer, we're getting down to a level of detail on the project where Essentially having a standard project model would be beneficial. There's a host of assumptions and financial mechanisms inherent in the project which require very careful analysis and auditing. Just to give you some examples, some of the things that set the project apart from, you know, a number of other similar-scale LNG projects.

First of all, the dynamic between the upstream and the midstream. We've talked about the differences between the current project and the one that was envisaged under SB 138 and the importance of this transfer price between the gas producers and the LNG project developers, which has a host of quite major implications in terms of taxation, for example.

Secondly, and this I think has come up a few times in the context of, for example, gas lease expenditures, the impact of the gas development and gas production on oil production levels and really longer-term oil strategy on the slope, that's another feature which is unique to Alaska, but absolutely material for state revenues. There's other factors like the CO2 removal, the 45Q credits, and so forth. Federal tax credits, loan guarantees, and in fact, you know, the broader capital structure adopted for the project, these are things which are all material. So Mr. Stickel, I think, has mentioned a few times the complexity of the analysis that some of the provisions in the bill would require. Much of the economics that he's presented, they show a consolidated picture of the midstream and the upstream, which obviously is essential to have a perspective on.

So just to be clear, the model that we've used today for talking about the volumetric tax It's purely focused on the midstream, so you will see some differences from that perspective. For example, the state corporate income tax revenues are only in relation to this midstream segment. So as we go forward to— I think to properly support the legislative deliberations and policy, a project model you know, you've heard me mention several times this typical shorthand open book economic model, OBEM. It's something that perhaps needs consideration at this point and obviously as.

The legislative consultant, we'd be happy to help in whatever way might be appropriate in getting that established. But with that background, as I say, today's analysis, it's a relatively early stage in terms of being properly audited and checked, but I believe the numbers that we're going to go through today, they provide directional guidance that's helpful in policy setting and so forth. So with that preamble on the modeling, I suggest we move straight to slide 3 in terms of the main features to be covered today. So I wanted first of all to perhaps take a step back and remind the committee and the folks listening about some of the broader goals which are present today in terms of the imperative to both get the project moving and form an appropriate split between project sponsors and government revenue. But with that, I'll move straight to the project break-even analysis, and particularly the different alternative volumetric tax scenarios that have been discussed and the effect on the levelized cost of gas delivery into Asia.

Um, I'll, I'll move on then to talk about the Phase 1 pipeline, or, or the, the broader, um, pipeline in-state gas supply, the implications of the $12 cap, the $5 cap in the committee substitute, and what that means in terms of, um, a sustainable tariff at different cost estimates and the return on equity implications.

I've also concluded on some of the more general features of the bill which we haven't analyzed in much detail but nevertheless helpful to touch on, I think, in today's testimony.

So moving on to slide 4 then, and perhaps, as I say, a reminder of some of the broader objectives in mind.

First of all, you know, as we've discussed many times, the fiscal framework that the legislature puts in place has really quite a fundamental effect on the project returns and also chance of success.

The constitutional duty of the legislature, we talked about that quite a few times, there is this imperative to end up with a formula around the project which clearly demonstrates that the resource monetization in the state has been done in an appropriate way, which rewards the state and its residents appropriately for the gas being produced, essentially. But, you know, against that, there are some other considerations. One is that LNG is a global business. And capital will always flow to countries or to projects with the highest return and the lowest risk. So clearly there is this kind of trade-off between the way TAC is set and the need to attract capital because at the end of the day the project, as we've heard many people testify, the project itself has a truly fundamental effect on, on the state and its economy.

And so, you know, having a project built here in Alaska is, is the primary goal, I think, for everybody. And setting us an appropriate set of taxes for it is part of that. But having a project in, in the state is perhaps the primary goal. The, the other consideration, I think, is We've touched upon this a little bit in previous testimony, but with the events in the Middle East, with the realization that security of supply for LNG perhaps wasn't as, as robust as perhaps had been assumed. So for that reason, there is a kind of a reexamination going on right now globally in terms of LNG procurement, security of supply.

Really weighed up against the sort of economic consequences of LNG importing countries of losing that supply, which I think has suddenly been brought home. So in that sense, it is also a very critical time for the Alaska project and moving the project forward in a positive way, attracting additional equity investors, attracting buyers At the moment, that's a very important point to try and capture. So as we look at some of the other features here, again, I've mentioned it quite a few times before, but as you think about competition, the main competition for Alaska is coming directly from the south. From the LNG projects being put forward in Canada.

LNG Canada obviously is already operating. They're considering a phase 2. There are a number of other LNG projects which are at a broadly similar stage to the one in Alaska. So ensuring that the world sees an appropriate level of attention to the development activity, you know, the project development processes that Glenfarm and AGDC are pursuing and the dialogue in the legislature, et cetera. It's important to project that view to potential customers and to potential investors.

Worth pointing out, of course, that, you know, we've talked a lot about Canada, but ultimately the price-setting mechanism globally for for LNG right now is the US Gulf Coast cost of supply.

The marginal MMBtu, the marginal ton of LNG in today's LNG market typically is set by US Gulf Coast economics. So again, it's good to remember that as well.

But unless there are any questions on those remarks and on that page, I'll move on. Senator Kawasaki. Thank you. Thanks for being online this morning. Question I had just on your last statement about it being Gulf Coast priced.

Is there any discount for the fact that we're that much closer to the Pacific Rim, the Ring of Fire?

Thank you, Senator Kawasaki. Through the chair, I think a good way to look at it is that Alaska has two huge competitive advantages. One is a significantly lower cost of gas than the Henry Hub supplies into the Gulf Coast. The other is the— not only the much lower cost of shipping across to key Asian importers, but just the simplicity of it, frankly. So there's no canal tariffs, there's no canal holdups to worry about, and just the shipping logistics involved is just so much simpler.

The competitive disadvantages, if you like, are the processing plant on the slope, the CO2 removal, which is very costly, the 800-mile pipeline, which obviously we'll be talking about more today, and to some extent the liquefaction plant itself. But, you know, you could, you could view that liquefaction plant as being a given, you know, wherever you put it. It could be slightly more expensive in Alaska. So really, it's, it's the pipeline and the processing weighed off, you know, balanced with the shipping and the cost of gas, and that's what gives you the equation. And again, returning to what's happened in the Middle East, what that has clearly shown is that simplicity around shipping logistics, absence of marine risks, people are going to put a value on that these days.

And conceivably, a few cents, probably not more than that, could be added to the value of Alaskan gas because of that and because of the lower risk. And then follow-up. Follow-up, Senator Kawasaki. Thanks. And then, so, and we also have a history.

So Alaska has a history of export, even in the recent early 2010 time frame, in which we've exported to Japan. ConocoPhillips has. I think that that history is something important. I did have the other question is, so globally we have, you know, sort of President Trump and the Secretary of Energy and a lot of.

Lots of folks saying this is a project, it's their number one project, LNG from Alaska to wherever. How is that seen?

Is it embedded in the risk? Is it something that lowers the risk? Is it, you know, because the president obviously makes comments all the time.

Is there any sort of— is there any idea of what that means? Because it's been tweeted a couple of times.

Thank you, Senator Kawasaki. And through the chair, I'll quickly answer the first question because, you know, LNG is a business of trust and long-term relationships. Fundamentally, it still is that. Even though it's become a much more commoditized business, but particularly from an Asian buyer perspective, having that sort of trust and familiarity with your counterparty still counts for a lot. And there are still many people at very senior levels in particularly the Japanese LNG companies and the electric utilities who do remember that Alaska was the very first Pacific LNG development and that exports, reliable exports, took place to Tokyo Electric and others over a period of many, many decades.

So Alaska will benefit from that history and from that, from those memories. So it's, it's helpful to raise that today in the current sort of geopolitical context. Moving on to the sort of broader federal government—. Mr. Fulford, were you completing this slide? I have someone else with a question.

I have two other people with questions. Oh, sorry, I was moving on to the second part of Senator Kawasaki's question, which is more about today's—. All right, right now then. Just to highlight for you, we have approximately 1 hour left. We will be adjourning before 10:30 today to go to the floor.

Just setting timeframe. Please proceed. Okay, thank you, Chair Giesel. I'll keep my comments brief. And I think on the second part of Senator Kawasaki's question there, there's no doubt that The federal government, through various measures, have a host of policy levers that they could use to propel the Alaska LNG project forward.

One of the ones we've talked about many times is the federal loan guarantees, which in itself would lower the cost of debt materially. And at the end of the day, this is all about capital, this project. So cost of debt is a very key feature. I think it remains to be seen what specific actions emerge in the next months and years which could help the project, but there's no doubt that there are many things that could happen.

All right, Senator Rauscher, you had a question. Thank you, Madam Chair. So I'll try to be quick. So my understanding is Prices change daily. One country may get X amount of a price in a contract and another one may get a different one.

And if I'm wrong, I'd like to know. So I'm wondering, can Fairbanks get a different price than the others also? Can it be sold for a different price in Fairbanks as opposed to a different country at a different time?

Uh, thank you, Senator Rauscher, through the chair.

I think the best way to answer that question is, is while, while a project framework appears to have been negotiated between AGTC, Glenfarm, and, and potentially involving now some upstream providers, I think it's worth remembering that, um, any commercial framework like that can be changed by mutual consent. So I think it's good to remember generally that in the next months, years, as the project comes to fruition, whatever agreements are in place today can be changed. So I think the quick answer to your question is that, you know, between the legislature, AGDC Glenfarn, and the producers, You can set whatever price you like. And if there are implications around subsidies and, you know, differential pricing which is less than commercially driven, then, you know, those mechanisms, if approved by the legislature, can be implemented. Thank you.

I appreciate the answer. Senator Myers. Yeah, thank you. So, Mr. Fulford, you mentioned on the one slide on one side of the slide, our constitutional duty, but then on the other side you mention the potentially transformative nature of the project to the, to the state. And so I guess my question is, if we actively harm or even prevent the project from happening, either through taxation or some other policy requirement, is that fulfilling our constitutional duty for maximum benefit?

Thank you, Senator Myers, and through the Chair. Clearly the committee, today's committee, is very familiar with these trade-offs between, you know, taxation and seeing economic development take place. And this is the same, just on a much, much bigger scale. And so arguably, you know, a project with a slightly less than ideal taxation framework is better than a project that cannot be pursued for whatever reason. And, you know, as we form part of these dialogues globally, you know, between governments and LNG projects.

With the best will in the world, everything is based on forecasts, unknowns, risks, so forth. So it's never— with all the analysis in the world, it's never quite possible to put your finger on exactly the right tax mechanisms, you know, the the exact frameworks. So it is all a compromise and at some point that compromise between setting appropriate taxes and pursuing your constitutional duties and allowing a commercially viable framework to exist, that compromise is a very fine line and which is why we're here looking at this material today. It typically takes months or even years to arrive at that compromise that allows the project to go forward. Thank you.

I see no further questions.

Thank you, Jake Eazel. I'll move to slide 6. So as I mentioned, we're at a relatively early stage in in modeling this type of thing.

And again, just to emphasize, all the numbers that you see today are purely around the midstream. It doesn't include any upstream implications. But I felt this was a useful graphic to show, you know, where we're at in the kind of evolution. So we start with the current property tax equation, and this reflects some of the figures you've seen both from Gaffney Klein and from DOR. For illustrative purposes, I've included what that levelized cost of delivered LNG would look like with no property tax at all, and then I've put the, the 15 cents alternative volumetric tax on there.

So as you think back to the breakeven matrix that you've seen from DOR and which we've marked up and commented on, Really, it's Scenario 1 and Scenario 3 that are the two that are included. So you'll see, you'll be able to cross-reference those numbers, kind of around about $8.80 delivered cost of LNG to Asia under the current property tax arrangements and around $8.60 with the 15 cents. So, so adding in the 15 cents for the processing plant, the 15 cents pipeline, and 25 cents for the liquefaction plant, what you end up with is a, is a taxation environment that's, that's marginally higher than the current property tax. But of course, importantly, what it does is that it changes the the profile of those taxes. So some of the benefits, for example, for the state and for the boroughs is that it replaces what is ultimately a reducing funding.

Resource over a couple of decades with something that's both sustainable and slightly increases over time. The other benefits are that it tracks the project volume. So for example, if there's an expansion to an additional train or so on and so forth, then those volumetric taxes go up. Probably higher proportionally than what would be reflected in the additional capital cost expended on the plant. The potential downsides, you know, first of all it is a relatively high rate of taxation and crucially I think for the project, how the project would look at this, there's no front-end mitigation.

So in other words, that crucial 5, 7, 10 years following the start of commercial operations when, you know, a typical investor discounting mechanism would really place much more emphasis on that 5, 7, 10 years period. During that period, there's no mitigation, there's no provisions in there to assist the project economics in that way.

I think, you know, at the moment with a number of external stakeholders, potential other equity investors, buyers looking at the project, I think they might look at this and be a little concerned about directionally how things are moving. But again, as you look at how host governments typically analyze and address these things, the process that we're going through currently with different rates of AVT being looked at, I think, is not at all unusual, and I think many people would look at it that way as well. So, I think that concludes my comments on the slides. If there are any questions? I see no questions.

Thank you, Chergiz. I'll move on to slide 7. So taking the analysis from the previous page, the 3 separate levels of AVT, what you notice is that the AVT collections are relatively constant, as you would imagine, with a constant flow of gas over the project lifetime. What you notice as well on there is the increasing levels of corporate income tax, which assuming that corporate income tax is fully payable by the midstream companies, other than the initial stabilization, which is the feature of the accounting, the corporate income tax moves from about $157 million in year 2 of operation up to almost $900 million by 2050. So as you can see, the AVT proportionally is a very material feature of government take in the first few years of the project, and by about 12 or 15 years of operation, the corporate income tax takes over as a more material source of government funding.

So with that, I can move on to slide 8, which is essentially the same thing expressed in a cumulative fashion. Mr. Fulford, Senator Wielechowski has a question.

What amount of profits are you assuming for the corporate income tax, and what rate of return are you assuming for the corporate income tax?

Thank you, Senator Wolkowski, through the chair. Yes, that's a, that's a good clarification. So this, this entire model is driven off a 70/30 debt-equity framework, and consistent with the DOR model, we've used a 5% cost of debt, which I think we probably view as low, but in the context of federal loan guarantees, I think that's probably where you'd end up. But for equity returns, we've assumed a 10% return on equity for the equity investors, and that's essentially what we've, we've solved for a 10% return. So that's essentially how we've derived the profits.

Follow-up, Senator Wilkowski. So if you've got $890 million in corporate income taxes in 2050, is that— and it looks like it's around that same amount, around $800, $900 million in corporate income taxes— is that assuming profits of How much per year?

I have to back-calculate it, but we've taken the 9.4% corporate income tax rate, federal income tax not shown on here, but will be proportionally higher. I can very quickly look that up in the model and give you a written response. Follow-up, Senator Wilkowski. I can just do some rough math in my head. It's about $8 billion in profits if it's, if it's $800 million and that's 9.4%, just extrapolating that out, is that about $8 billion in profits?

Um, that sounds But I agree with you, Mark. And as I say, I think what I'd prefer to do is look back at the model and just check because these are important conclusions that we're looking at here. Follow-up? So just sort of looking at the— you know, we like to talk about us, the sharing a third, a third, a third in revenue from our resources between the state, the feds, and the producer, whoever. Looks like the developer here would, in peak— well, by around 2040, getting around— we're getting around $1 billion, and they're getting $8 billion.

Does that sound about right?

I think I would agree with your maths, Senator Wolkowski, through the chair. The one other feature I would highlight here is that for this particular output, we're assuming just a $1 upstream transfer price. So that inherently will push more profit into the midstream. Which, which may not be the reality.

Senator Dunbar, question. Thank you, Madam Chair. I just want to sort of put this in context. I'm looking at the Department of Revenue's first presentation about the governor's proposed tax bill, and on slide 39, total state benefits through 2042, $7.4 billion. So the math we just described is that the total state benefit under the governor's bill by 2042 would be about equal to 1 year of profits for the midstream owner, uh, if the— with, with these projections.

So it's not we get $1 billion and they get $8 billion under the governor's plan. It's they get $8 billion in a year and Alaska gets $8 billion over 15 years. So just a little bit of a— just a little illustration of when you start to match up the graphs between the Department of Revenue from the governor's presentation and, uh, and this one. Thank you, Madam Chair. Thank you, Senator Dunbar, for Further questions?

And if I— if Madam Chair, I can make a follow-up comment.

The commentary I gave at the start of the presentation, I think the necessity around reconciling models, reconciling approach, looking at the holistic effect of you know, upstream and so forth. I think this is an illustration of why that dialogue forming a project model that we're all comfortable with, I think, would be an essential step. Thank you. Well, along those lines, Mr. Fulford, I believe you actually proposed that, and I believe I connected you and our Department of Revenue.

Oh, AOGA, thank you. With you and AOGA to work on establishing that open book model, have you reached out to AOGA yet? Alaska Oil and Gas Association. Yes, thank you for that connection, Senator Kizil. We haven't yet met.

Met, but we have connected. Equally, I've had some dialogue with Mr. Stickell to examine some of the, you know, previous dialogue that we've had to make sure that we're reconciled. But I would fully support that initiative because with the degree of detail that we're getting into now and the importance of an agreed set of numbers, I think it's a highly desirable outcome. I would agree. I would also just make sure that you're aware we have about 3 weeks left in this legislative session, and it is our desire to come to a final product.

So just FYI. I don't see any more questions on slide 7.

Thank you, Senator Giesel. So moving to slide 8, this would be a cumulative AVT and corporate income tax analysis for reflecting really the numbers that you saw on the previous slide. So this brings you to a $20 billion revenue, which, you know, given the discussion we just had around reconciling models and assumptions and so forth, This is something which is also subject to audit and further review, as it says on the slide. But nevertheless, it serves to underline the key importance of the project to the state. Senator Wilkowski has a question.

Just wanted to clarify on that. What AVT are you assuming? Is this the 6-cent or is this the Senate Version G amount? Yeah, this is the committee substitute, so it is the 15, 15, 25 cents.

And as I say, it is a $1, not that that makes any difference to this one, but other than the corporate income tax.

All right, I see no more questions.

Okay, thank you. And so I think— For the next part of the dialogue, it's useful to move to the pipeline analysis, which is, you know, a relatively straightforward analysis. So what I've done over this next slide is to really look at both the necessary tariff that would be required for for a 10% return, project return this is. So none of these figures that you're seeing now involve any, you know, capital structures or off-balance sheet debt. So we're looking at purely project returns.

And on this first slide, what you see is the project return or the— really the price that the downstream sales price— so in other words, the price at which gas would be being sold by the project to NSTAR, for example, under different scenarios. So this looks at— along the bottom axis you've got different upstream gas prices. So on the left-hand side you've— the assumption is that it would be a $1 sales price between gas producer in the project. And on the right-hand side, it goes up to $2.50. On the left-hand side, you have the tariff in, in dollars per million BTU that would be charged to the utility in the South Central Zone.

And also shown on there is the $12 per million BTU cap.

So as it, as it's pointed out on the right-hand side here, the 42-inch pipeline is significantly larger than what would be required to deliver in-state gas. I think everyone understands that. But of course, the, the economic implication of that is that those low flow rates significantly impact the, the tariff required.

So the lines on the graph there, they're divided into two separate scenarios. First, the higher tariffs required reflect the 300 million standard cubic feet per day flow rate, which is, you know, actually it's a little more than the demand in the South Central area today. And the bottom line reflects 500 million standard cubic feet per day flow rate, which would include potential industrial suppliers, power generators. It, it would include some level of new demand as, as has been discussed. So what you immediately get from that graph is that if the flow rate through the pipeline is only 300 million cubic feet per day, the tariff that would be required or the downstream sales price that would be required to sustain that would be very substantially more than $12.

So it'd be, well, in round terms, $20 to $30 an MBTU.

The other variation shown on this graph is the capital cost of the pipeline. So as we look at that top grouping of 3 lines under the 300 million standard cubic feet per day scenario. The bottom line, the dark gray, represents a $10 billion capital cost of the pipeline. The middle one is $12 billion. The top one is $14 and so forth.

So the immediate conclusion from that is that if you can, if you can flow $500 million through the pipeline and the capital cost of the pipeline is $10 billion, you can more or less sustain a $12 per million BTU price cap and still generate a 10% return. But in all the other scenarios, the return would be less or the tariff would have to be higher to generate that 10%. So on the next slide, I've reversed the analysis and said, well, what would be the rate of return on the pipeline under those same scenarios? So if you wish, I can move on to talk about that unless there are questions. There is a question from Senator Myers.

Yeah, thank you. Thank you, Mr. Proffitt. So on slides 10 and 11, just to start off with, which variation of the property tax/AVT are you assuming in this one?

Thank you. This analysis actually assumes no property tax and no AVT.

I know there have been different provisions discussed around, you know, under what circumstances the AVT would apply, whether it would be in full operation, i.e., more than a BCF a day. So thank you, Senator Myers, through the chair. That's an excellent question. I should have clarified that. So I was going to say, in any of the AVT scenarios, these— all these three lines would be marginally higher.

Okay. It wouldn't make a huge difference. Follow-up, Senator Myers. Yeah. So, Mr. Fulford, I was recently made aware that this past winter that Enstar was running short on gas and went to one of the producers and offered to buy more at $16, and they came to an agreement with the producer at that, at that price level, but not for the volume that Enstar wanted.

They wanted more but weren't able to get it. Um, so combine that with the way that we've got some of the taxes for the upstream producers laid out, saying that, you know, effectively we're going to tax you higher, you know, tax you based on what we believe is the market rate rather than, you know, what you're actually selling it for potentially. So, you know, it's kind of a penalty if you sell too low. So with those together, why would we put a $12 cap Thank you, Senator Myers, through the chair.

The— this dialogue, it touches on a number of regulatory, commercial, social issues.

You know, generally speaking, as you get into these sorts of discussions around the appropriate price setting for fuel for end consumers, it tends to give rise to a series of policy questions around the appropriate level of charging for residents to pay for what, what is ultimately an essential commodity. So, um, so the question I think around the $12 cap is.

What is it intended to represent? And if a subsidy is required to bridge the gap between $12 and a commercially appropriate rate, how does that subsidy get funded? So, you know, from a South Central resident's point of view, you know, $12 might be a— it's a lot higher than what they're paying currently.

But obviously they would welcome that, that price cap. From a project developer's point of view, they may require more than that $12 as shown on the slide in order to invest the capital in the pipeline. How you make up that difference is, is, is in the realm of policy and subsidy and, and so forth. But, um, but yeah, there's a whole range of questions there, I think, that warrant further dialogue. And one more on this subject before your next question, Senator Myers.

I think it's important to explain the $12 cap. That is— that source is a statement by our governor who announced that at the just the pipeline use, that he was expecting the price of gas to be at $12.

This drives expectation by the citizens of Alaska, certainly the citizens of Southcentral. So that's why that cap was put in the bill. And this slide is very helpful in explaining the unrealistic expectation of that price. Your question, Senator Myers? Yeah, thank you, Madam Chair.

On that point, actually, um, so Mr. Fulford, as the chair just pointed out, that the dollar figure on that cap was chosen as a result of some public statements that were made. Um, and we've had some discussions in the committee, uh, on this bill and a couple of previous versions that regarding information sharing between, uh, the developer and, and the state, or developer and the legislature in particular. My question is, does putting these price caps in the bill based on public statements create an environment where companies will be less likely to be willing to share information because they will be concerned that the information will be weaponized against them?

Thank you, Senator Myers.

Through the Chair, the dynamic that exists currently is— contains a commercial dynamic between the project developers who are ultimately profit-driven and want to make sure that their shareholders get an appropriate return. There are facets which are very material in terms of social policy, particularly around the price of fuel for residents.

And then there are broader dynamics around international buyers and so forth. So inevitably different stakeholders will interpret and use numbers in different ways to suit their goals. But ultimately, you know, this, like many other projects, will go through a series of iterations, and I think we all hope that it ends up in a formula and an equation which meets everybody's requirements. Okay. Thank you.

Senator Dunbar. Thank you, Madam Chair. Thank you, Mr. Fulford. So this slide points out that a 42-inch pipe is wildly oversized for in-state demand, and if there's no price gaps, you say here that to maintain, uh, you know, a good environment for the, for the company and to get them their 10% rate of return, the people of Alaska, people of Southcentral in particular, are asked to pay $20, maybe $25, maybe $30 for gas. At the same time, importing LNG would be— we don't know exactly, maybe $14 to $16.

It's not something we want to do, but at what point should the people of Alaska say, we can't possibly subsidize something this oversized when, for basically political reasons, when there's a cheaper alternative where we can import? So would you—. Would your suggestion be to just let it, as I think my colleague from Fairbanks is suggesting, just let it be uncapped and the people of Alaska could absorb $20, $25, $30, you know, in South Central from BTU?

Should we do that instead of importing?

Thank you, Senator Dumbo, through the chair.

There's one feature of this that I think warrant discussion at the committee, which is that, um, it's been said by AGDC and by Glenfarm that the FID on the Phase 1 gas pipeline will de-risk the entire LNG project, and ultimately the benefit for everybody, including probably most particularly the residents of Fairbanks, South Central, etc., is having that second part of the project go ahead. So you could look at this Phase 1 gas pipeline as being a little bit like an option. It's, it's an option that de-risks the broader LNG project, and above all, it's an option which gives the North Slope gas producers line of sight towards a gas sales agreement which has an NPV of billions of dollars. So, so really, 3 stakeholders are kind of helping that option. It's South Central consumers by underwriting a supply through it.

It's the— it's Glenfarm and AGDC who benefit from the option by you're risking this broader, you know, $45, $50 billion project. And then it's the upstream producers who benefit through a higher probability of a very substantial gas sales agreement. So you have to consider, well, of those 3 parties, if each of them is making a contribution towards this grand option, this Phase 1 pipeline, how much should each of them be contributing?

And, you know, for a South Central customer, you could be saying, well, I'll, you know, I'll be willing to take a gas price of X dollars more than I need to because longer term I could benefit very substantially from substantially reduced prices. Glenfarm could take the view that, you know, a lower than typical return on the pipeline might be worth it. In order to increase the chance of that project. And obviously the upstream producers aren't yet in the mix because there's no contractual framework for them to, to work. But their contribution potentially could be a lower price.

That could be their sort of price they're paying for that option to, to achieve that long-term contract. So for me, there are sort of three separate considerations here: one by end users, by customers, one by the project developers, and one by the gas producers.

Further questions? Seeing none, the next slide.

Thank you, Jake Eazell. So on slide 11. So this really kind of reverses the analysis that we did before and says, well, if you do cap the price at $12, uh, what then is the return on the pipeline? So again, you can see there that if we start with the 500 million standard cubic feet per day, uh, number, you, you can see that you can pretty well clear a 10% return with a $10 billion capital cost and, uh, and, and, uh, uh, a $1 gas price. But as the gas price is raised and as the capital cost goes up, obviously the returns go down.

So with that 500 million standard cubic feet per day pair of lines, um, I would say for, for a gas pipeline with a highly creditworthy end user, it, it would not be unusual to see a 7, 8, 9% return being acceptable to a host of investors. So I, I would say broadly speaking, a 500 million standard cubic feet per day flow through that pipeline could be supportable even, even with a $12, uh, cap. As we discussed, you move it down to 300 a day flow rate, you're in much lower rates of return, and it's unlikely that you would get a commercially attractive project going at that rate.

So, you know, I think that broadly the same conclusions as we had on the other slide, just, uh,.

Reversed a little. The next slide, if it's appropriate to move on, contains a list of some of the FERC-regulated pipelines and the return on equity that typically those stakeholders would see.

Madam Chair? Senator Dunbar? I'm sorry, Mr. Fulford, the top of this graph— graphic kind of got cut off. What does it say? What's that label?

Is that return on equity? What does it say there? In the blue box?

Is that just— does that say regulated pipeline average returns? I mean, is that what this is? This is their—. Oh, sorry. We're on slide 12.

Yes. Yeah. Ah, yes. Yeah, I apologize for the graphic there. But yes, it's return on equity from— over, you know, different periods of time.

So what I wanted to indicate on this slide is that towards the bottom end of this schedule, you can see that returns of 7, 8, 10% do occur.

And the other thing to bear in mind you know, with these FERC numbers is that once tariffs have been set under FERC, they're not usually reopened unless there's some kind of change. So typically what has been seen to happen is that over time these rates of returns go up. But when you're establishing a— you know, a rate of return towards FID, 7, 8, 9% for a gas pipeline with the right type of credit arrangement could be workable. That's the main point from this slide. Senator Wielechowski.

You mentioned a few slides ago when we were looking at corporate income taxes and AVT that I believe I heard you say it was— your assumptions were that it was a 70/30 debt-to-equity ratio. And just doing rough numbers in my head, $50 billion project, 30% equity is $15 billion of equity. And if you're doing a return on equity and you were calculating a rough profit to producers of $8 billion, And, and so, uh, by my calculations, and correct me if I'm completely wrong on this, but if you're making $8 billion on $15 billion of equity in this project, we're looking at about a 50% rate of return on equity by full gas.

Uh, thank you, Senator Wolkowski, and, um, I would prefer to review those questions and revert from the benefit of some dialogue with DOR to consolidate models. You know, that's something that we had provisionally set up, and I think as Senator Giesel has mentioned, it's probably something that we need to do in the short term. Follow-up, Senator Wolkowski. But it— I mean, is my math or my logic completely off? Is it— I mean, in my calc, is it 15, 30% equity would be on a 50— I assume $50 billion project.

I know we're assuming $46.2 billion, but that would, by my math, $50 billion or $45 billion, $15 billion or so in equity. And the return on equity is just how much your you're getting based on how much you put in. And so you put in $15 billion, you're getting $8 billion. Is my math roughly, or my logic roughly correct?

Thank you, Senator Wolkowski. I think I would broadly follow your logic. The way the model is supposed to work is that the levelized cost of delivery is driven by a 10% return on equity.

And if there are inconsistencies in numbers, then I think we need to look into those.

But, you know, again, just to be clear, as we look at the breakeven matrix, as we look at those levelized cost of delivery numbers, they're driven off an assumed 10% return on equity for the project investor.

Senator Myers. Yeah, thank you, Mr. Fulford. So I'm looking at the 5-year average column here. On the low end, we got 7%. On the upper end, you got almost 36%.

And we're— I think everybody, you, DOR, AGDC, has all said we're aiming for a 10% rate of return. But what I'm getting off of this slide is that— excuse me— a 10% rate of return is on the is on the low end and might still be a little bit difficult to attract capital. And so anything else that we do that could potentially lower that is just going to make it, you know, take a marginal product and make it that much— marginal economics and make it that much worse. Is that accurate?

Thank you, Senator Myers. The— [Speaker:ANDREW_HOPWOOD] It's perhaps worth emphasizing that the dialogue here is around a gas pipeline, typically seen as a kind of a long-term, low-risk return, particularly if you have a creditworthy entity paying the tariff. So I would argue for gas pipeline that 10% rate of return is adequate and that would probably attract a number of particularly institutional investors at that rate. Okay. That's not to say that that would apply to the liquefaction plant or the gas treatment plant.

Mm-hmm. Okay. Which involves slightly higher technical risk. Senator Wilkowski. But just to clarify, based on your calculations of what you assume the— corporate income tax to be of roughly $800 million a year, extrapolating that out and extrapolating on a 70/30 debt-to-equity ratio, this project has a rate of return of about 50%.

Is that about right? Just using the numbers you've provided us.

Looking through the logic, I'm concerned that You know, with the speed at which this has been put together and the degree to which we have been able to check and look at it, I am concerned that there are some errors in the model which I would prefer to clarify in writing. Senator Wielekowski. But just based on the numbers you have provided us, is my math right that it is about a 50% rate of return? To be honest, Senator Wielekowski, through the Chair, I, I have concerns like you about the logic and the numbers coming together, and I prefer to review these. Certainly in putting these numbers together, I was aware that there were differences between our projections for corporate income tax and those in the D.O.N.

Numbers, and I had already been in touch with Mr. Stickell to arrange to meet to discuss that.

Thank you, Mr. Fulford. You know, I want to acknowledge what you've said here in the last few sentences, that this was hastily constructed and more thought needs to be put to it. We, on the other hand, are being pressured to move quickly on this, to rapidly put into place policy that will last for generations. And, uh, so you have articulated exactly our concern as well, that the numbers are being put together very hastily and statements are being made about the cost of gas at the end of this project that may not be actually credible. So I appreciate what you just called out about haste and error.

Are there further questions? Senator Kawasaki. Yeah, just a comment-question on some of these regulated pipelines. Some of these pipelines are fairly new, and then some of these pipelines are 50 or 60 years old. Maybe if you're going to go over these slides at some point, if that could be put in there.

On this sort of calculated rate of return. I don't know that a newer pipe would show the same year-end average return as an older pipe.

So that's just a comment. Yes, thank you, Senator Kowalski. And this was— there's a trade association that puts together these numbers Every year, which, which was the source for these, for this data. I think it's helpful to look internationally as well at long-distance pipelines and the rates of return which, which they generate.

And, um, and so we can, we can find that for you and present it. Senator Dunbar. Thank you, Madam Chair. I know we're about to run out of time, and so I'm wondering if I could ask a question on the next slide. Uh, before you do that, I believe Senator Wolkowski had— no, okay, go ahead, Senator Dunbar.

Mr. Fulford, if we can go to the next slide. We are now on slide 13. Pipeline rate of return, pipeline rate of return at $5 cap. But I don't see a percentage on either the x or the y-axis. I'm trying to interpret this.

What's the assumed rate of return with this slide? So the— these slides— this slide is entirely based on a 10% rate of return for the project. And again, the title of the slide is somewhat misleading. It should really be in relation to tariffs. So the left-hand axis is the downstream tariff that the South Central utility would be paying.

The bottom axis is the upstream tariff, the price at which gas is being sold to the— to the project. So these are all at 10% rate of return and Again, fairly clear for conclusion from that is that essentially a $5 cap should address most of the scenarios in terms of capital cost and pricing. And delivery of gas to South Central at significantly less than $5 is potentially feasible.

I would also note, as Senator Myers mentioned previously, this assumes no property tax or alternative volumetric tax. That's correct. Senator Clayman. Thank you, Mr. Harf. Well, if the title pipeline rate return at $5 cap is not the best title, what would be a better title?

Than what it's titled?

It would be gas supply tariff at 10% rate of return in relation to $5 cap.

Senator Dunbar. Thank you, Madam Chair. You know, it's really interesting looking at this. $5 Gas in South Central would be transformative. There's no question it would transform our economy if we, if we managed to get there.

And there's quite a lot of distance between $5 and, and $12 or $16 or whatever we're looking to. And I just— strikes me that I, I would be comfortable setting the— this cap higher in the long term because it is— it'll be transformative at $7, be transformative at $9, looking at the long term, right? But what we've done, and what you said, is by de-risking the pipeline on the front end, we've shifted a tremendous amount of risk, if there's no controls, uh, onto the consumers in South Central and frankly on the state of Alaska, because the DOR slides also show that our oil and gas revenue goes negative until 2031, um, associated with the project. And so my question for you, Mr. Fulford, is How do we bridge that? Is there some way, or what would be your suggested way, to shift some of the risk so that maybe, um, we get a slightly less amazing deal at the end of the project, but we are able to protect the consumers and the finances of the state between now and 2031?

Thank you, Senator Dunbar. Through the Chair, I think that's a highly productive dialogue which could give rise to a number of very workable solutions.

The feature which would unleash, you know, those Many of those mechanisms would be early supply through the pipeline in the knowledge that the LNG project will follow at some point. Because, because once, once you're in that scenario, you can, you know, collateralize some of the future revenue. You can, you know, you can create financial instruments to you know, to create that kind of blended solution that you've suggested there. So I think it's a highly worthwhile avenue to pursue, which ultimately alleviates what potentially could be a very significant burden for South Central consumers and indeed those in Fairbanks, but would still provide a very cost-effective, long-term supply of gas. Which at the end of the day is probably about half what they're paying today.

So, you know, those, those trade-offs are very, very valuable. Follow-up. Follow-up. Just very, very briefly, what, what you just said, Mr. Fulford, I think is, you know, ensuring that early supply is guaranteed to be tied to LNG export means that the best thing to do is treat this all as one project. If this is all one project financed simultaneously, then there is that guarantee, correct?

Uh, that's correct, uh, Senator Dunbar. And, um, so much, so much hinges on the, the timing.

Okay, thank you, Madam Chair. You know, Mr. Fulford, you, you've suggested that there are various ways to craft this. And that's actually why we hired you. We're looking for those concrete suggestions from you. So we would welcome that at future presentations.

I see your slide 15 is basically just a review of other features of the committee substitute.

Most of which we are discussing internally already ourselves. So if at a future time you have concrete suggestions about how these items might be amended, we would be open to concrete suggestions. Senator Kline-Man, did I see your hand up? No. Okay, any other questions?

Senator Myers. Yeah, thank you, Madam Chair. So looking at the other provisions, one, one provision, Mr. Wohlford, that I did not see listed in this presentation, uh, is the community impact payment that we included in the bill. Um, you did mention, uh, early on in the presentation the importance of keeping costs lower at the very beginning of the project, uh, and, you know, potentially able to pay a little bit more later on down the line. But, you know, we've got this $800 million payment in there, roughly, you know, that would have to be paid before— well, really before any revenue comes along down the line.

Have you looked at the potential economic implications of that?

Thank you, Senator Meyerson. Through the Chair, that was— that's included in sort of next steps, if you like, in terms of the model and how we include additional features. But as you point out, it would add to that levelized cost of delivery that we spoke about earlier. Okay, thank you. Thank you.

And of course—. And Madam Chair, if I could just briefly add a brief comment on the numbers and the disconnects, which I think we've identified. I suspect that the state CIT graph might be showing the entirety of CIT, including federal. I think that might be one of the problems, but I will get back to you and Senator Wielechowski just to conclude that. But that being said, I think the— those two slides that show the CIT, I think we should regard those as needing additional clarification.

Thank you. I appreciate that, Mr. Fulford. Um, thank you for your presentation today. Thank you for the work that you're doing for us. So with that, it concludes our agenda for today.

Our next meeting will be tomorrow at 3:30, and at that time, same subject, SB 280, and we will be hearing part 2 of the Department of Revenue's presentation. At this time, the meeting will stand adjourned. Let the record reflect the time is 10:13 AM.