Legislature(2003 - 2004)
04/02/2003 03:35 PM Senate RES
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HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
CHAIR OGAN informed members that a proposed committee substitute
had been prepared. He noted a new Sec. 43.82.100(1)(A), which
reads: "the transportation of North Slope natural gas by natural
gas pipeline to one or more markets, together with any
associated processor treatment;" on page 2.
He told members that he and the bill sponsor had a lengthy
discussion about paragraph (C), which relates to any other
technology. The issue is the commercialization of North Slope
gas through a transmission line down to the Lower 48 or
tidewater, which this bill allows. The concern was that playing
with that language could compromise the possibility of using LNG
for the petrochemical industry in the state. He and the sponsor
agreed to [the new] language because if this [act] is expanded
to other projects, the legislature will be in the loop.
REPRESENTATIVE FATE acknowledged that he and Chair Ogan worked
on the change in the committee substitute and the only change is
the addition of the North Slope. That addition should not, in
the opinion of legal counsel Jack Chenoweth, prevent other gas
from flowing through the pipe if that gas were available. He
said this is the same bill that he presented to the committee
before, with that one exception. He believes this bill is still
a "clean" bill. He urged the committee to support the measure.
CHAIR OGAN announced the committee would take public testimony
and that Senator Lincoln was present.
MR. DAVE MCDOWELL, Director of External Affairs for BP's Alaska
Gas Business, gave the following testimony.
As you know, significant time and effort and money has
been dedicated to develop a viable gas pipeline
project and to commercialize Alaska's enormous gas
resource. Through 2002 and continuing on into this
year, BP has undertaken further technology and design
optimization work in an effort to reduce the cost of
this $20 billion project. However, technical work
alone won't be sufficient to make an Alaska gas
pipeline a reality.
Before a project can proceed to the next expensive
stage, three key government actions are needed: a
clear and predictable regulatory process with the
Canadian government and First Nations; a clear and
predictable state fiscal framework for gas in Alaska;
and third, the passage of important U.S. federal
legislation. While success is needed on all three
fronts, the one thing Alaska itself can do to advance
an Alaska gas pipeline is to work with industry to
develop a fiscal framework that provides confidence
that the rules of the game are clear and certain.
Achieving a mutually agreed framework will also send a
powerful signal to Washington, D.C. that Alaska is
ready to see a project advance.
That's why we believe reauthorizing the stranded gas
act by HB 16 is a good idea. HB 16 can provide a
framework that supports negotiation toward a clear and
predictable fiscal regime in the State of Alaska and,
as such, it will help to support forward progress on
North Slope gas commercialization. And, of course,
under any circumstance, agreements worked with the
state require legislative review and approval.
We do believe it's important that the bill retain its
focus and simplicity as it moves through the
legislative process. Otherwise there's a potential
risk that the bill becomes burdened with extraneous
provisions.
In closing, I'd like to say we're encouraged by the
priority and attention this bill has received so far.
We hope that it continues and we stand ready to work
productively with the state toward a clear and certain
fiscal regime that will support North Slope gas
commercialization. Thanks for the opportunity, Mr.
Chairman. We'd be happy to take questions if there are
any.
CHAIR OGAN told Mr. McDowell that this bill is a high priority
and is being expedited through the legislative process. The
legislature has been told that a negotiating team will be ready
to go at an early date. The bill crosses party lines. The
legislature hopes the producers negotiate in good faith and do
everything possible to get North Slope gas commercialized. He
thanked Mr. McDowell for his testimony.
MR. MCDOWELL thanked the Chair and committee members for making
this legislation a priority.
SENATOR ELTON moved to adopt the proposed committee substitute
(Version W) for HB 16(FIN) am.
There being no objection, CHAIR OGAN announced that Version W
was adopted.
MR. ROBBIE SCHILHAB, the Alaska Gas Development Manager for
Exxon Mobil Production Company, told members:
Alaska North Slope gas is an important asset for Exxon
Mobil with a gross known resource of 35 trillion cubic
feet (TCF). Exxon Mobil owns over one-third of the gas
and is the largest gas interest owner on the North
Slope. We've been diligently working for over 30 years
to commercialize this gas since discovery in 1968,
spending more than $150 million on this effort.
Exxon Mobil appreciates the interest of the Alaska
Legislature in considering legislation that can help
progress commercialization of North Slope gas. Exxon
Mobil supports legislation that reauthorizes the
stranded gas act with provisions to allow its use for
all potential technologies. The act allows project
sponsors in the state to establish a fiscal contract
that defines how Alaska revenues will be determined in
a manner that would be simple to apply and would
minimize the possibility of costly disputes and
litigation.
While a pipeline project is the most promising option
to date, it is not currently commercially viable. Even
though that is the case today, we believe it is
important to put the framework in place now.
Regardless of the option or options that are
ultimately chosen to commercialize the gas, achieving
fiscal certainty will be an important step in
progressing the project. The risks resulting from such
a large investment with a long payout period make it
imperative that the sponsors have the opportunity to
work with the state to establish a stable and
appropriate fiscal system. Exxon Mobil recommends that
the legislature avoid placing any additional
requirements or hurdles in this legislation. As we
said earlier, let's keep it clean. Any project to
commercialize North Slope gas will be a marginal
project economically due to the distance from markets.
Therefore, any mandates or additional requirements
should be avoided as they could increase costs and
hamper or delay a project becoming commercially
viable.
Exxon Mobil supports the passage of HB 16 as a
positive step in the commercialization of North Slope
gas. We're also simultaneously pursuing the passage of
U.S. federal enabling legislation that will provide
the regulatory framework for securing the necessary
federal permits. Again, thank you Mr. Chairman for
allowing me to comment on this bill today. I'd be
happy to answer any questions you might have.
SENATOR SEEKINS noted that Mr. Schilhab said the North Slope gas
delivery system is not economically viable now and asked what
will make a project commercially viable.
MR. SCHILHAB said several factors could make a project
economically viable. The sponsors and owners of the gas continue
to work toward those ends, primarily in the area of reducing
capital costs. They are looking at construction techniques and
new materials to find breakthroughs to reduce the overall
capital costs. He said they have also talked about reducing the
rent, which comes in many forms. That could be done in the area
of the government framework: getting the permit process in place
and getting certainty in the fiscal terms they would operate
under to help reduce the risk.
SENATOR SEEKINS asked what the risk factor is.
MR. SCHILHAB said there are numerous risks, both political and
fiscal, to this project as it is a large undertaking. If the
project is built based on the royalty and taxation scheme in
place today, any changes down the road would create a big risk
because the investor will not know what the cash flow or tax
bill will be. In addition to the fiscal risk, building a high-
pressure pipeline over the required distance brings risks that
involve construction techniques and materials.
SENATOR SEEKINS said he has not been able to get a handle on
what challenges must be overcome to make this project
commercially viable and is been unable to make an independent
evaluation without knowing the risks.
CHAIR OGAN told members that last year the Joint Natural Gas
Pipeline Committee spent about $500,000 on consultants and held
hours and hours of hearings on this issue but that committee
never produced a final work product. The committee never got any
definitive numbers from the producers because that information
was proprietary. He said he has no doubt, from looking at the
bigger picture of the price of gas and expense of the project,
that the legislature has to be mindful that some incentives are
necessary from the federal government in the form of a floor
price, otherwise the well head value could be negative. He then
commented that one of the state's concerns is access by other
producers who might not be primary owners of this pipeline. The
state has issued leases on the North Slope for the first time to
develop gas. The producers have invested a considerable amount
of money and they are not entirely certain they will have access
to the pipeline to sell that gas.
MR. SCHILHAB said the committee should feel some comfort from
the fact that the pipeline would be regulated by the Federal
Energy Regulatory Commission (FERC). Once this pipeline project
goes forward, the owners of the pipeline would file applications
with FERC and go through the open season process. During the
open season period, any company that wants to ship gas on that
pipeline can nominate its gas. That procedure is overseen by
FERC and is non-discriminatory. Those companies would enter into
contracts with the pipeline owner.
CHAIR OGAN questioned whether FERC directly regulates open
seasons or whether open seasons are based on an understanding
and agreement between the producers and the people who have gas.
MR. SCHILHAB said in the normal run of things, FERC would not
regulate the open season. However, the enabling legislation that
is part of the federal energy bill contains a provision saying
that FERC would script the way the open season process would
work for this particular project.
CHAIR OGAN said that is assuming the federal legislation passes
and the provision remains in the bill.
MR. SCHILHAB agreed but said if that provision does not remain
in the bill, FERC will still have oversight in that it would
have to issue the permit of necessity and public convenience. If
FERC felt discrimination was involved during an open season, it
could step forward and use its power over issuing permits.
CHAIR OGAN said that is not the impression he got from the FERC
Chairman who he met with last week. He said it is his
understanding that is a contractual relationship between the
owners of the pipeline and the producers. He said it's an issue
the legislature will continue to monitor. The legislature is
interested in encouraging gas development as something other
than a byproduct of oil exploration.
SENATOR ELTON clarified that he meant to say CSHB 16(RES) rather
than CSHB 16(FIN)am in his earlier motion to adopt the proposed
committee substitute. He noted that Chair Ogan correctly
identified CSHB 16(RES) as Version W.
CHAIR OGAN said with no objection, the correction was noted. He
then said he wanted to establish, for the record, that the
committee has received a legal opinion from Jack Chenoweth,
legal counsel, who stated:
In my judgment, as long as the project principally
involves movement of the North Slope natural gas to
market, the pipeline contemplated could be used also
to transport gas from other sources.
He asked Mr. Banks if he concurs with the opinion.
MR. KEVIN BANKS, Division of Oil and Gas, Department of Natural
Resources (DNR), said the division's principal concern is that
North Slope gas certainly would include gas produced from the
foothills. He stated:
I think your concurrence with that opinion - it seems
to me that if most of the gas flowing in this pipeline
is coming from the North Slope, that production from
other sources along the route could be also included
and that HB 16 would allow us to negotiate those kinds
of terms if need be.
CHAIR OGAN indicated that he and the bill sponsor hope the
language that allows other gas to be put into the pipeline might
spur interest in gas development along the pipeline route, or
from the Cook Inlet area if there was a big find there or
anywhere else. He asked Mr. Banks if he concurs.
MR. BANKS said he believes that would be the best alternative
for the state and agrees that is the way to treat the expression
"principally involved."
CHAIR OGAN thanked Mr. Banks. He then asked who would be on the
negotiating team.
MR. MARK MYERS, Director of the Division of Oil and Gas, DNR,
said he shares the committee's curiosity. He then said he
concurs with the comments made earlier. He believes adding the
North Slope phrase is fine and believes HB 16 is still a great
bill.
SENATOR SEEKINS said one of his campaign promises was to do
whatever he could to get the God-given natural resources in
Alaska to market to put new money into the economy, and he does
not care where the resources come from. He said if a project in
Ketchikan qualified, he would want to provide these incentives
to get those resources to market as soon as possible. Therefore,
while he does not object to the bill, he does not care what area
of the state the natural gas comes from. He believes this kind
of an incentive should be applied across the entire state to get
any project going.
CHAIR OGAN said he believes it is important that the legislative
branch retain its policy-making authority on a case-by-case
basis because this bill has far reaching implications. It allows
the commissioner of the Department of Revenue to preempt local
law and local taxation. The municipalities have signed off on
this particular issue for this project. He fears if the
legislation is too broad, the commissioner will have that
authority for any project anywhere. He believes the legislature
should make sure the affected communities have the opportunity
to publicly weigh in and that the legislature needs to make a
conscious decision to delegate the authority to the executive
branch.
SENATOR SEEKINS said he understands that and would plan to make
a conscious effort to take a look at any project that surfaces
between now and the sunset date [2005]. He believes in opening
the door to consideration of projects anywhere in the state.
CHAIR OGAN said the door could be easily opened by simply
extending the sunset date but he wants to make sure these
projects are done with the local governments' concurrence.
SENATOR LINCOLN said she reads the legislation to open the door
wide. She cited Mr. Chenoweth's memo, which reads, "A proposed
project is not expected to serve exclusively as the means to
move North Slope stranded gas and should have some latitude so
as to the sources of natural gases that may eventually be
transported." She said it opens it up beyond the North Slope but
identifies the North Slope as the primary area.
SENATOR SEEKINS replied, "If the door's open, call it open." He
repeated he is not criticizing the legislation, he is just
clarifying his philosophy.
CHAIR OGAN thought it was fair to say that a company that found
gas in the Mat-Su or Kenai would not be able to connect to the
gas line under this bill. That is a separate issue that he would
be happy to consider with the concurrence of the affected
communities because it affects their taxing powers.
SENATOR WAGONER moved SCS CSHB16(RES) from committee with
individual recommendations and its attached fiscal notes.
CHAIR OGAN announced that with no objection, the motion carried.
He then announced a five minute at-ease.
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