Legislature(2013 - 2014)SENATE FINANCE 532
03/05/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 138
"An Act relating to the purposes of the Alaska Gasline
Development Corporation to advance to develop a large-
diameter natural gas pipeline project, including
treatment and liquefaction facilities; establishing
the large-diameter natural gas pipeline project fund;
creating a subsidiary related to a large-diameter
natural gas pipeline project, including treatment and
liquefaction facilities; relating to the authority of
the commissioner of natural resources to negotiate
contracts related to North Slope natural gas projects,
to enter into confidentiality agreements in support of
contract negotiations and implementation, and to take
custody of gas delivered to the state under an
election to pay the oil and gas production tax in
kind; relating to the sale, exchange, or disposal of
gas delivered to the state under an election to pay
the oil and gas production tax in kind; relating to
the duties of the commissioner of revenue to direct
the disposition of revenues received from gas
delivered to the state in kind and to consult with the
commissioner of natural resources on the custody and
disposition of gas delivered to the state in kind;
relating to the authority of the commissioner of
natural resources to propose modifications to existing
state oil and gas leases; making certain information
provided to the Department of Natural Resources and
the Department of Revenue exempt from inspection as a
public record; making certain tax information related
to an election to pay the oil and gas production tax
in kind exempt from tax confidentiality provisions;
relating to establishing under the oil and gas
production tax a gross tax rate for gas after 2021;
making the alternate minimum tax on oil and gas
produced north of 68 degrees North latitude after 2021
apply only to oil; relating to apportionment factors
of the Alaska Net Income Tax Act; authorizing a
producer's election to pay the oil and gas production
tax in kind for certain gas and relating to the
authorization; relating to monthly installment
payments of the oil and gas production tax; relating
to interest payments on monthly installment payments
of the oil and gas production tax; relating to
settlements between producers and royalty owners for
oil and gas production tax; relating to annual
statements by producers and explorers; relating to
annual production tax values; relating to lease
expenditures; amending the definition of gross value
at the 'point of production' for gas for purposes of
the oil and gas production tax; adding definitions
related to natural gas terms; clarifying that credit
may not be taken against the in-kind levy of the oil
and gas production tax for gas for purposes of the
exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit;
making conforming amendments; and providing for an
effective date."
9:12:08 AM
Vice-Chair Fairclough wondered if the forthcoming
amendments should be drafted for the CS version O. Co-Chair
Kelly replied in the affirmative.
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
(DNR) discussed the fiscal notes attached to the
legislation. He explained that FN3: DNR, showed funds for
both FY 15 and FY 16 needed for expenses associated with
supporting the development of contracts. He stated that DNR
was unable to determine ongoing costs associated with the
legislation, because the contracts must be developed and
see if they met with favor from the public and legislature.
He felt that the explanation of the agreements had been
clearly outlined: some upstream with the producers related
to the offtake and balancing agreements; and some
downstream that were targeted toward those midstream
service providers, which included TransCanada in the GTP
and pipeline, and Alaska Gasline Development Corporation
(AGDC) for liquefaction. In addition, DNR would begin the
sales and disposition process for the liquid natural gas
(LNG). He stated that there was some analysis attached to
the fiscal note. He directed attention to the last page of
the analysis, and stressed that some in-house expertise
must be established at DNR, specifically related to the
upstream questions and agreements with the producers.
9:16:36 AM
Vice-Chair Fairclough wondered if the discussion was
related to the fiscal note dated 1/20/2014. Commissioner
Balash stated that he was looking at FN3: DNR, dated
1/24/2014. He did not believe that a new fiscal note had
been generated for the CS that passed from the Senate
Resources Committee.
Co-Chair Kelly asked for a quote from the document that was
referenced. Commissioner Balash replied that the top read,
"SB 138."
Co-Chair Kelly asked for a detail of the page that was
referenced. Commissioner Balash looked at page 3 of the
fiscal note, which was a detail of how the requested funds
would be used and utilized.
Co-Chair Kelly wondered if the first word was "allocation."
Commissioner Balash responded in the affirmative.
Commissioner Balash stated that the total request was
slightly less than $9 million for DNR to support the
development of the contracts. Some of the funds would be
aid to the Department of Law (DOL) to support the contracts
for outside council. There was a present budget of
approximately $3 million. The above items, with regard to
the marketing expertise, was a total of six positions: one
lead, four supporting, and one administration project
assistant. He stated that there had been discussions
related to where the positions would be housed and who
would do the hiring. He shared that there was an option to
work with AGDC, which was equipped with certain tools that
could be useful in attracting the kind of talent needed for
this effort. He felt that AGDC could provide some marketing
services, in addition to transportation and liquefaction
services. He stressed that the decisions about royalty
sales would be for DNR and the legislature. He announced
that there was a significant travel expense, because the
team of marketing experts should travel to Asia and the
various marketplaces often. He observed that the fiscal
note from Department of Revenue (DOR) was quite low,
relative to the DNR fiscal note, because there was an
effort to focus all of the work in a single agency to avoid
duplication.
9:21:07 AM
Vice-Chair Fairclough looked at the $340 million, and
wondered how the salaries were determined a reasonable
amount in the market. Commissioner Balash replied that the
specific number was a result of a starting salary of
approximately $250,000, which came from a conversation with
prospective employees that DNR was seeking to hire in the
year prior. He felt that the salary should attract the kind
of talent necessary for the task, but understood that it
was not a normal salary for a state agency.
Senator Bishop wondered if the proposal was an adequate
amount of money. He stressed that he wanted the best
possible people working in these positions. Commissioner
Balash replied that he felt the budget could work to
support the efforts of the state. He understood that there
could be a possibility for more money.
Commissioner Balash stated that the likelihood of the
expenditures carrying through year to year depended
entirely on the negotiations and actions of the
legislature. He felt that the funding should be maintained,
but the development of contracts and terms would be
completed at a certain point. The largest expenditures
moving forward would be based on monitoring and carrying
out the contract terms. He hoped to see a reduction of the
budget amount over time.
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, (DOR) looked at the fiscal note
dated 1/20/2014, which was fiscal note number 4 with a
number in the FY 15 column of $750,000. He stated that it
was a one-time request for FY 15, and the analysis was on
page 2 of the fiscal note. He noted that there was the
establishment of the mechanism as tax as gas, so the state
could take a larger share of the molecules than a
traditional tax. The second request was for a reimbursable
services agreement with DOL to develop the regulations
called for by the implementation of the tax provision. The
total request from DOR was $750,000. The intent was to work
consultatively with DNR and AGDC to conduct the majority of
the contract development support.
9:27:40 AM
Mr. Pawlowski explained the new fiscal note dated
2/24/2014. The FY 15 column had a request for $500,000, and
an additional request in FY 16 for $160,000. The analysis
was on page 2, and was a response to the direction from
Senate Resource that DOR prepare a plan to allow individual
Alaskans to invest in the project. The analysis outlined
the contractual costs for DOR to prepare the plan and
conduct the due diligence and structure the opportunity to
provide a recommendation for the legislature to allow
Alaskans to engage in the project.
DANIEL FAUSKE, PRESIDENT, ALASKA GASLINE DEVELOPMENT
CORPORATION (via teleconference), (AGDC) introduced
himself.
MILES BAKER, DIRECTOR, GOVERNMENT RELATIONS AND EXTERNAL
AFFAIRS, ALASKA GASLINE DEVELOPMENT CORPORATION (via
teleconference), spoke to two fiscal notes prepared by
AGDC. He began with FN: 2 (CED), dated 1/20/2014. He looked
at the FY 15 column with a total amount of $3.802 million,
with one full-time position. The FY 16 column also had a
request for $3.802 million, and the FY 17 column had a
request for $410,000 for personal services. He remarked
that there was an FY 14 supplemental request of $700,000.
The total request for the fiscal note was $8.714 million,
and represented the operating costs that would be incurred
by AGDC to participate in the pre-FEED through the end of
FY 16. It was anticipated that there would be additional
costs in the out years, but it was too early to anticipate
the exact cost to the state. The second page of the note
was a high-level description of the AGDC involvement, and
it was anticipated that the subsidiary would be a true
subsidiary of AGDC with the utilization of existing staff.
He explained that an executive would be hired to oversee
the new subsidiary, and contract council would conduct the
majority of the negotiations for the major documents. He
noted that there would be significant travel costs
associated with participation with other signatories of the
HOA.
9:33:38 AM
Senator Hoffman looked at the first page of FN: 2, and
asked for further explanation of the capital request for FY
15. Mr. Baker responded that the $83.7 million was the
amount that needed to be capitalized. He stated that there
was a cross-reference to FN: 1.
Co-Chair Meyer asked for assurance that there was not a
duplication of effort. He wondered if the state was paying
for the same service twice. Mr. Fauske replied that AGDC
was not going to duplicate efforts. He explained that the
work was on the liquefaction side of AKLNG.
Co-Chair Meyer wondered if the expertise could be used for
the standalone line, if the large line did not come to
fruition. Mr. Fauske responded that the expertise could be
used, as long as the state had access or had possession of
the data that was developed. He felt that there could be a
fairly seamless transition.
Co-Chair Meyer asked if the $83 million request could be
reappropriated to the standalone pipeline. Mr. Fauske felt
that it was at the will of the legislature.
Co-Chair Meyer recalled that the legislature had
appropriated $335 million to AGDC the year prior. Mr. Baker
clarified that the appropriation was for $355 million.
Vice-Chair Fairclough wondered if there were
confidentiality agreements with the subsidiary within the
subsidiary, and asked if AGDC was allowed access to that
date. Mr. Fauske responded that it was a possibility that
the subsidiary would be under a confidentiality agreement.
He stressed that the legislation outlined a separate
division that was created which would be separate from
AGDC. The new subsidiary would be completely separate. He
stressed that the language was currently slightly
confusing. He explained that there were confidentiality
agreements regarding the sharing of data. He understood the
concerns about managing the money.
9:40:50 AM
Vice-Chair Fairclough surmised that there would be cost
savings, if the enterprise entity within AGDC was the
repository of all of the data. Mr. Fauske agreed, and
announced that there were cost savings and some
efficiencies that should be made before moving forward.
Co-Chair Meyer stressed that the finance committee was
focused on savings. He looked at the $355 million
appropriation from the year prior, and wondered if the
$83.7 million could be reappropriated from that amount to
apply to the project. He surmised that it would not be
possible, because this was a separate project. Mr. Fauske
responded that the reappropriation was possible, but it
would affect the ability of the standalone project to move
forward at its current pace.
Senator Hoffman looked at page 3, item I of the HOA, which
explained the current situation. He noted that the third
sentence said that the administration and AGDC intended
that AGDC would participate in the project. He noted that
AGDC would continue to pursue the standalone pipeline
project. He queried the priority of AGDC. He wondered how
AGDC was prioritizing the projects. Mr. Fauske responded
that there would be a point in time where prioritization
must occur. There would be an eventual shift of project
development.
9:48:28 AM
Senator Hoffman remarked that the ASAP would have open
season in 2016, which was also the first year of FEED for
the proposed project within the legislation. He wondered
how that would affect each other. He also noted that the
board membership was critical, but stressed that there
should be specifications and guidelines of the board
memberships. He felt that there should be a focus on
delivering gas to all Alaskans. Mr. Fauske responded there
could be one board to focus its energy and efforts toward
the change. The current board had a strong and experienced
membership, and brought expertise to a wide array of
discussion topics.
9:52:04 AM
AT EASE
10:00:07 AM
RECONVENED
10:01:37 AM
DEEPA PODUVAL, PRINCIPAL CONSULTANT, NATURAL GAS AND POWER
FUELS GROUP, BLACK AND VEATCH MANAGEMENT CONSULTING,
displayed the PowerPoint presentation, "Senate Finance
Committee, Clarifications on Previous Presentations" (copy
on file).
Ms. Poduval discussed slide 2, "Long-term North Slope Oil
and Gas Revenues are Driven by AKLNG Project Success." She
announced that the question on this slide, which showed the
projected revenue forecast for the state. There was a
remarkable difference of approximately $4 billion between
revenue from oil only versus oil and gas combined, from
2024 to 2040.
10:03:18 AM
Vice-Chair Fairclough wondered if oil was included in the
green line, and to what extent it was included in the graph
analysis. Ms. Poduval replied that the green line included
oil and gas, and the green line should be considered the
blue line, plus the revenues from the AKLNG project.
Ms. Poduval highlighted slide 3, "Preserve Value to State
from Royalty and Taxes." She stated that the revenues were
only attributed to the AKLNG project. The graph showed the
distribution between royalty production tax, state
corporate income tax, and property tax. She stressed that
there were some oil revenues that were included, which came
from two different sources. It was assumed that Pt.
Thompson would produce more oil with the investment that
would be made to produce gas out of Pt. Thompson, than it
would without the incremental capital investment. The
revenue at its peak was approximately 30,000 to 40,000
barrels per day, with the additional oil production assumed
from Pt. Thompson. The production had a fairly aggressive
decline to approximately 15,000 barrels per day. The value
at Pt. Thompson came from the gas. The second source of oil
related revenues were from "yet to find" fields, later in
the project's life. It was assumed that production at
Prudhoe Bay and Pt. Thompson would begin to decline by
2040, but new fields would be discovered on the North Slope
to keep the project intact.
10:07:51 AM
Vice-Chair Fairclough wondered if the graph represented
terminology that would be considered "blow down."
Co-Chair Kelly asked Vice-Chair Fairclough to restate her
question. Vice-Chair Fairclough clarified that there had
been discussions regarding where the gas would be
available. She stressed that there was a challenge to
define the actual reservoir of gas, in order to understand
what could be recovered. She wondered if the 6 percent on
the chart would be considered "blow down."
Commissioner Balash stated that the oil impacts were
accounted for, but were not a part of the 6 percent that
was displayed on the graph.
Vice-Chair Fairclough queried what the 6 percent
represented. Ms. Poduval replied that the 6 percent
referred to how much of the revenues displayed on the chart
came from the oil assumptions.
Co-Chair Kelly handed the gavel to Co-Chair Meyer.
10:10:34 AM
Senator Hoffman looked at 2018 through 2023, and noted that
the green line was below the blue line on slide 2. He felt
that the green line would always be above the blue line.
Ms. Poduval replied with slide 3, "Preserve Value to State
from Royalty and Taxes." She stressed that there would be a
negative impact to the state before the project was
operational.
Senator Hoffman noted that enalytica showed the same dips
in value, but total for the years would be in the billions
of dollars. He queried the assumptions on graph 2. Ms.
Poduval replied that graph 2 was used in an earlier
presentation to level set, and display the picture of the
North Slope project without any state equity investment.
Senator Hoffman felt that there was not a reconciliation of
the numbers that were presented by enalytica.
Co-Chair Meyer remarked that the state would continue to
heavily invest in the project in the downstream, but
wondered if it was too risky to have no say or investment
in the upstream portion of the project. Ms. Poduval
stressed that the project was extremely expensive, and the
only way the producers made money was through investment
with the return of production from the North Slope.
Co-Chair Meyer stressed that the producers had many more
global opportunities than the State of Alaska.
10:16:45 AM
Vice-Chair Fairclough asked if AOGCC would define the
highest benefit for the particular reservoir. Commissioner
Balash responded that the off-tick was what mattered the
most for DOR and DNR.
Ms. Poduval looked at slide 4, "Preserve Value to State
From Royalty and Taxes."
IMPLICATIONS:
AKLNG is currently out of the money:
~340 MTPA new supply, more than required to meet
global LNG demand (~250 - 300 MTPA) AKLNG faces
significant competition
supply stack which will compete with AKLNG
However, the risk levels of competing LNG
projects also needs to be considered
some in the money projects may be
delayed/cancelled, leading to range of needed
capacity
Ms. Poduval displayed slide 5, "On the Global Supply Curve,
AKLNG Appears to Currently be Out of the Money,
Modifications Required for Competitiveness."
IMPLICATIONS:
AKLNG is currently out of the money:
~340 MTPA new supply, more than required to meet
global LNG demand (~250 - 300 MTPA)
AKLNG faces significant competition
supply stack which will compete with AKLNG
However, the risk levels of competing LNG projects
also needs to be considered
some in the money projects may be
delayed/cancelled, leading to range of needed
capacity
Ms. Poduval explained that the slide showed the Alaska
project within the context of the other global LNG
programs.
10:25:12 AM
Co-Chair Kelly stated that Mr. Persily had delivered a
detailed presentation of the projects.
Ms. Poduval stressed that the graph displayed a moving
picture. It was one point in time which was analyzed. She
remarked that every project would undergo the same kind of
analysis and scrutiny. The position of the project inside
the queue was dynamic, but she stressed that other projects
would be more expensive and attempt to lower their cost
structures to satisfy market demand.
Senator Hoffman looked at the AKLNG project, and remarked
that it was the largest bump of the second tier of
projects. Under the assumptions of the range of the
projects, he queried the production costs in the graph. Ms.
Poduval explained that the assumption was the midpoint of
the range.
Senator Hoffman wondered if the assumption was $35 billion.
Ms. Poduval explained that the $45 to $65 billion project
cost was for upstream and midstream costs. The midstream
component was only the GDP pipeline and LNG plant, and was
approximately $37 and $54 billion. The rest of the costs
would be spent at Pt. Thompson. The capital cost that was
assumed for the GDP pipeline and LNG plant on the graph was
$45 billion.
Senator Hoffman assumed that the construction costs would
be $55 billion, and the breakeven for Alaska would be
$12.30/MMBtu. Ms. Poduval agreed, and furthered that the
lower side of the range after the FEED work was complete,
it would move further left.
Senator Hoffman queried where the state would be at $45
billion and $65 billion. Ms. Poduval agreed to provide that
information.
10:30:05 AM
Commissioner Balash stressed that the slide showed that
Alaska needed to participate in the project soon.
Senator Hoffman looked at slide 4, and wondered if
Commissioner Balash could speak to the state's cash flow
and the displayed potential drawdowns. He would like the
numbers from 2017 to 2024, and the cash demands of and
impacts to the states. He understood that the decisions
would be made at the end of 2017, but would like see a
comparison. Commissioner Balash agreed to provide that
information.
10:34:00 AM
RECESSED
11:00:14 AM
RECONVENED
SB 138 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 030514 SB 138 SFIN Black Veatch.pdf |
SFIN 3/5/2014 9:00:00 AM |
SB 138 |
| 030514 SB138 SFIN enalytica Mar 5.pdf |
SFIN 3/5/2014 9:00:00 AM |
SB 138 |
| SB138-CS(RES)-DOR-TRS-03-04-14.pdf |
SFIN 3/5/2014 9:00:00 AM |
SB 138 |
| 030514 SB138 Kelly Requests to Enalytica.pdf |
SFIN 3/5/2014 9:00:00 AM |
SB 138 |