Legislature(2005 - 2006)
2006-05-31 Senate Journal
Full Journal pdf2006-05-31 Senate Journal Page 3533 SB 2004 SENATE BILL NO. 2004 BY THE SENATE RULES COMMITTEE BY REQUEST OF THE GOVERNOR, entitled: "An Act relating to the Alaska Stranded Gas Development Act, including clarifications or provision of additional authority for the development of stranded gas fiscal contract terms; making a conforming amendment to the Revised Uniform Arbitration Act; relating to municipal impact money received under the terms of a stranded gas fiscal contract; and providing for an effective date." was read the first time and held on the Secretary's desk. The following fiscal information was published today: Fiscal Note No. 1, indeterminate, Department of Natural Resources Fiscal Note No. 2, zero, Department of Revenue Governor's transmittal letter dated May 31: Dear President Stevens: 2006-05-31 Senate Journal Page 3534 Under the authority of art. III, sec. 18, of the Alaska Constitution, I am transmitting a billamending the Alaska Stranded Gas Development Act (AS 43.82) (SGDA) to clarify or provide additional authority for the development of stranded gas fiscal contract terms. When the SGDA was originally passed in 1998, the Legislature had in mind a very different kind of state involvement than is presently written into the proposed fiscal contract now under preliminary review by the Legislature. The original intent was to authorize the development of a contract that could reduce the tax burdens on a project. Under the proposed fiscal contract, the state would become a part owner of a large-diameter gas pipeline with a design capacity to transport approximately 4 billion cubic feet per day of stranded gas from the Alaska North Slope to markets in Canada and the Lower 48 states. The proposed fiscal contract would create obligations to make payments in lieu of taxes that are roughly equivalent to the taxes in effect for the 2005 tax period. After analysis of the economics of the project, it was determined by the state that the best method for inducing the sponsor group to proceed with development was for the state to agree to take an ownership interest and to agree to assume financial responsibility for shipping its gas through the pipeline. It was also considered important that each owner's interest in the project should correspond to the amount of the owner's gas that would be shipped through the pipeline. By taking payment of certain tax obligations in gas rather than money, the state could establish an ownership interest of approximately 20 percent. These key terms would increase the potential profitability of the project in a way that would not require the state to materially reduce public revenue in the future. The legislative history of the SGDA was clear that the original intent was to provide fiscal certainty only on gas taxes. The sponsor group made a compelling argument that fiscal certainty must extend to taxes on oil as well as on gas. The production of oil goes hand in hand with the production of gas. Because of this connection, any fiscal constraints placed on the exploration or development for oil also have a direct effect on the exploration and development of gas. For this and other reasons, it was agreed that fiscal certainty should be extended to taxes applicable to oil production. 2006-05-31 Senate Journal Page 3535 The amendments proposed in this bill are intended to provide express authority in the SGDA for the terms in the proposed fiscal contract. To accomplish this intent, the bill would broaden the scope of the purposes of the SGDA to include fiscal terms relating to oil as well as to gas. The fiscal terms would also extend to a related party, which may include the mainline entity formed to own and operate the gas pipeline and related facilities. The bill would broaden the scope of subjects that may be negotiated under the SGDA. These new subjects include equity ownership, payment of obligations in gas rather than money, and changes in existing leases and other agreements with the state regarding oil and gas properties. The bill would expand the types of terms that may be included in a contract. This is accomplished by a provision that would give the commissioner of the Department of Revenue broad discretion to adopt terms that are reasonable and promote the purposes of the SGDA. Terms are also appropriate if they are consistent with the long-term fiscal interests of the state. The authority granted would cover terms in the fiscal contract now under review by the Legislature and the public. These terms include "netting-out" provisions, payment of interest on obligations, ability to provide fiscal terms to others, confidentiality of payment-in-lieu records, state acquisition of pipeline capacity, indemnity given by the state, exemption from a reserves or resource tax, Regulatory Commission of Alaska jurisdiction, audits, and limits on damages. The bill would expand the scope of authority to adopt contract terms that modify existing law set out in AS 38 concerning oil and gas property. Under existing law, authority extends only to timing and notice requirements applicable to royalties. The bill includes provisions to allow broader powers to adopt terms resolving conflicts between the terms of the contract and provisions in existing oil and gas leases and unit agreements. Under the bill, the terms of the contract prevail over contrary provisions in state leases or unit agreements. The bill would place a limit of 45 years on the expected term of the contract from the effective date. It is expected that it will take approximately 10 years from the effective date to achieve 2006-05-31 Senate Journal Page 3536 commencement of commercial operations. Existing law provides that the term is 35 years from the commencement of commercial operations. The bill also authorizes the contract to provide for a suspension of the running of the term during periods of force majeure. The bill would provide interim authority for the commissioner of the Department of Revenue to negotiate collateral agreements to form limited liability companies, limited liability partnerships, or any other recognized form of business association that would own or operate any part of the project. The bill would create an account in the general fund to receive municipal impact payments from the sponsor group and also a fund into which the money will be subsequently appropriated by the Legislature. Once in the fund, the money will be available for grants to economically affected municipalities and certain nonprofit organizations serving the unorganized borough; the grants would be administered by the Department of Commerce, Community, and Economic Development. I urge your prompt and favorable consideration of this bill. Sincerely yours, /s/ Frank H. Murkowski Governor