Vision: Natural Gas Business And Trading Hub Energy Self-sufficiency For Alaskans

1. Vision: Natural Gas Business And Trading Hub Energy Self-sufficiency For Alaskans

2. Gas Business Vision: Introduction • Producers completing studies to create their gas “vision” • State should proactively complete its separate studies to create a “vision” that’s best for Alaskans long-term • State could make big mistakes by waiting for the producers to finish their “vision”, then State reacts • Producers’ and State’s perspectives will differ - Producers focus on discounted present value, rates-of-return - State focus on 50 years of socio-economic benefit to the state • What proactive “vision” for the State should be examined? • Strive for win-win with majors

3. Northern vs. Southern Route • Implications To Anchorage • Majors claim higher PW from northern route, but reality is • route will not receive permitting or will be delayed • Natural gas deliverability shortages in Anchorage predicted by 2008 in AEDC study, substantial deliverability shortages 2017 • Doubtful, risky if exploration in Cook Inlet, other fill the gap - Natural gas could be 2-3 times higher price - Increased pollution in Anchorage from fuel switching • Southern route would provide lower cost natural gas to Anchorage and Kenai Peninsula for homes, businesses • Southern route provides additional value-added processing - Natural gas refinery…NGLs, DME, olefins, feedstocks - LNG from Valdez or Kenai - Other industry expansions with secure fuel

4. Northern vs. Southern Route • Alaska Must Be Prepared • Historic negotiations will soon take place • Majors are highly sophisticated, Alaska must be highly • sophisticated in our negotiations, our lease and legal rights • Governor and Legislature must be unified in our stance • or we will be divided by majors, resultant weak negotiation • Alaskans must realize implications to them personally… • “vote” and speak out for gas revenues, increased • infrastructure and long-term clean energy self-sufficiency • Companies, business leaders in Chamber and Alliance • and politicians may have to make hard choice: • - Support majors’ higher claimed profits…or • - Energy self-sufficiency, new business for Alaskans

5. Alaska’s Next Steps - • Gas Business Vision: Recommendations • Gas pipeline traversing Alaska • “Natural gas hub” near Fairbanks or Delta Junction: physical facilities and contractual system • State retain 12.5% royalty share of gas “in kind” • State (or Alaskan companies) invest 12.5% share or more in the gas pipeline from Slope to hub and hub facilities • State formulate policies/regulations for clear and transparent valuation/pricing of gas at the hub • State examine alternative solution if majors do not support Alaskan infrastructure and energy self-sufficiency

6. Alaska Natural Gas Business And Energy Self-sufficiency Justification Points

7. Gas Pipeline Traversing Alaska • Lower 48 market appears best currently, but cyclical • Northern route holds Alaska gas “hostage” to one cyclical market long term • Southern route along TAPS route and Alaska highway provides access to future multiple markets off hub - Alaska internal markets - LNG and/or gas products - Asia - LNG and/or gas products - West Coast U.S. • Southern route fosters new business development - New natural gas exploration along pipeline route interior basins - New mining development along route with possible new terms - Existing businesses expansion with affordable, long-term energy • Southern route fosters new long-term jobs - New infrastructure - Pipeline, gas value added processing - Existing businesses’ expansion

8. Natural Gas Trading Hub/Contracts Physical system and contractual system Physical system Valves, manifolds that allow future pipelines to “plug in” Secure in-state markets, construct hub near Fairbanks or Delta Junction to facilitate market access Contractual system(must happen even if physical hub does not) Trading hubs fundamental to physical gas distribution but also for clear, transparent trading and price valuation Numerous trading hubs in the Lower 48, Canada, UK, Europe, progressing in Asia

9. Natural Gas Trading Hub (continued) • Assess regulations, guidelines, policies at such hubs for trading and netback pricing; institute at Alaska hub • U.S., EU’s Gas Directive, UK’s Natural Gas Trading Arrangements are examples of regulations • Formulate rules up front for access to in-state markets • Access negotiations tougher later, when gas is flowing • Precedence of NS facility access issues are negative “Plug Into The Hub”

10. Trading Hub and Natural Gas Business Vision With Future Multiple Markets Access (50-Year Perspective) North Slope Gas (Ownership in line from Slope to the hub and the hub includes producers, State and/or Alaskan companies; State could hold long-term or divest to Alaskan companies, Native corporations with in-state commercial gas projects) Fairbanks/Delta Junction Gas Trading Hub Gas To Fairbanks, Anchorage Kenai For Power Generation, Home Use, Expansion Of LNG, Petrochemicals, GTL, NGL, DME, etc. (Gas supply entrepreneurs, gas distribution companies, etc.) Pipeline Gas To Lower 48 (L48 project participants, e.g.,major producers) Gas To Valdez For LNG (Yukon Pacific, others) Gas Converted To GTL Down TAPS (major producers, entrepreneurs)

11. State Retain 12.5% Share “In Kind” • Lease agreements allow royalty payment or taking gas “in kind” • Allows state to market its own gas to validate best market pricing being obtained • State could choose to contract to third party gas marketing firm (e.g., Williams, Duke, Enron) • State’s 12.5% share of gas is substantial at 250-500 MMCFD if total production is 2-4 BCFD • State’s volumes could facilitate in-state use and new business creation for economic impact • Texas highly successful with “in kind” program - 50% sold at higher netback than producers’ - Power generation for schools, state buildings

12. State Invest 12.5% Share In Line/Hub State investment/transport in line from Slope to hub State contract with pipeline or Alaskan company for operational management of its investment share Best mechanism to accurately know and have input on transportation costs and operations Clear, transparent operating costs for valuation at hub State hold investment long term or divest to Alaska companies, Native corporations with in-state uses Alternative: if state does not invest, select Alaskan companies to invest 12.5% to transport State’s gas Keeps more profits in state!

13. State Set Valuation/Pricing Policies Precedents in Lower 48, UK NG Trading Agreements, EU Gas Directive For taxation, netback pricing must be clear, transparent Avoid controversies, hearing, lawsuits of past oil pricing disagreements Direct involvement by State in its own share of gas allows clear, transparent market pricing at hub Valuation/pricing mechanisms, methodologies known up front rather than after gas flowing Win-win when known up front

14. State Examine Alternative Solution State, large pipeline companies own all of line from Slope to hub, potentially to Alberta Positive wellhead value to majors with bids by natural gas trading firms Foreign investment with exports to West Coast or Asia as well as Lower 48 State should exert its rights, its freedoms and be bold, visionary

15. Gas Business Vision: Conclusions • Gas pipeline traversing Alaska • “Natural gas hub” facilities Fairbanks or Delta Junction: physical facilities and contractual system • State retain 12.5% royalty share of gas “in kind” • State (or Alaskan companies) invest at least 12.5% share in the gas pipeline from Slope to hub and hub facilities • State formulate policies/regulations for clear and transparent valuation/pricing of gas at the hub • State examine alternative solution if majors do not support Alaskan infrastructure and energy self-sufficiency

16. Gas Business Vision: Next Steps • 2001-02: Resolution supporting principles of natural gas business in Alaska in conjunction with L48 gas line • 2002-03: 1) Regulations for clear, transparent netback pricing 2) Rules for clear, transparent access for in-state use 3) Rules for clear, transparent access for overseas markets 4) State finalize decision of investment in line, gas “in kind” • 2004-2006+: State attract investors for hub and/or spur lines, in-state distribution, city infrastructure, value added processing • 2007: Gas sales for Alaska, Alaskan companies, Alaskans!!! • 50-100 Years: Energy self-sufficiency

17. BACKUP SLIDE

18. Example Resolution Principles for Alaska - • European Union Gas Directive • Gas transmission, distribution interconnected, no barriers • State(s) regulates gas business: nondiscriminatory, clear • Fair and open access to the natural gas system • Access to pipelines allowed under set of transparent rules • Participants in the market will not abuse their dominant position nor engage in predatory behavior • Participants have open, nondiscriminatory storage access • Gas suppliers will compete freely for “eligible customers”