Legislature(2013 - 2014)BUTROVICH 205
02/19/2014 03:30 PM Senate RESOURCES
| 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 | ||
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
3:31:15 PM
CHAIR GIESSEL announced that Mr. Pawlowski would continue
reviewing the sectional analysis of SB 138. She was also
interested in seeing a map of possible pipeline routes.
SENATOR DYSON said they are interested in duplication and wanted
to know what work had been done.
3:32:48 PM
MIKE PAWLOWSKI, Deputy Commissioner, Department of Revenue
(DOR), said he would work with the Gas Pipeline Project Office
at the Department of Natural Resources (DNR) to see what they
have to put out and with the AKLNG project sponsors to see if
anything is upcoming in the studies.
3:33:03 PM
SENATOR FRENCH joined the committee.
SENATOR DYSON asked to include the AGIA and Denali projects and
he wanted to know of any gaps in geotechnical data and land
ownership/access issues.
CHAIR GIESSEL said she would convey that request to the DNR.
3:34:19 PM
MR. PAWLOWSKI said today he intended to go through some of the
tax provisions a little bit slower and call out some critical
issues, and then step back a look at the bill as a whole and
take questions from the committee. He directed members to slide
13 of the sectional analysis presentation where the tax
provisions start. He actually started in section 27 of SB 138 on
page 24, line 7.
3:35:45 PM
SENATOR BISHOP joined the committee.
MR. PAWLOWSKI said when the administration looked at the
challenge of setting tax rates for a North Slope natural gas
project they recognized the dilemma the state faced in that the
legislature and the administration had set a specific tax for
gas produced and used in-state on the North Slope and throughout
the state to mirror the tax rates on gas produced in the Cook
Inlet to equalize the tax treatment of tax across the state as
long as it was used in-state for heat or power. That provision
just like many of the other tax ceilings are set to expire in
2022.
When the administration engaged in the Heads Of Agreement (HOA)
discussions and looked forward to a fixed gross tax rate for
gas, they also recognized that the project was not in any
reasonable way likely to be in effect in 2020, because in-
service date went out to the mid-2020s. Therefore there was no
reason to upset anyone planning around the tax treatment for gas
in the state prior to 2022. One example of that is the Interior
energy project which is looking at procuring gas from the North
Slope, running it through the liquefaction project on the North
Slope, and trucking it to Fairbanks. So, any change in the tax
rate would have affected the price of gas shipped to consumers.
So, the legislature made January 1, 2022 the expiration of these
current ceilings and the changes to the gas tax proposed in SB
138 are only effective for gas produced after that date.
3:37:57 PM
Section 27 starting on page 24, line 7, makes substantive
changes on lines 22-29, which breaks out the tax treatment of
oil and gas. The tax on oil produced on or after January 1, 2022
is 35 percent (in SB 21 last year). The subsequent section 25-
29(b) puts a general levy on gas of 10.5 percent of the gross
value at the point of production of the taxable gas (not the
effective tax rate); offsets could occur.
The HOA introduced the concept that instead of paying a tax
obligation with money, a producer could pay it with gas (the
state would take a larger share of the gas being produced). That
is the change made in section 29 on page 26, line 17. This
introduces at the same time (after January 1, 2022) an option
for a producer to make an irrevocable election to pay a
production tax in kind - AS 43.55.014(a)(b) on page 26, line 18-
page 27, line 12. The key is this is the taxable gas.
3:40:54 PM
MR. PAWLOWSKI said it is important to think of the gas as it
comes out of the ground. When it's produced two events are
created at that moment: one is a royalty event (the state's
right under the leases) and the other is a taxable event - but
royalty gas is not taxable. So, the production tax of 10.5
percent is applied on whatever gas is produced after the royalty
share has already been deducted.
CHAIR GIESSEL asked if the tax in kind set at 10.5 percent and
the state's royalty at 12.5 percent - a total of 23 percent -
equates to the 20-25 percent ownership.
MR. PAWLOWSKI answered no; what is different is the 10.5 percent
tax rate. Assume royalty is 12.5 percent (actually it's not; it
varies by field), the royalty is about 13 percent for this
project (Pt. Thomson and Prudhoe Bay blended). That means the
10.5 percent tax rate is applied to 87 percent of the gas. You
don't take the 10.5 percent plus the 13 percent; you take the
10.5 percent of 87 percent plus the 13 percent, and you come up
with something around 22 percent (which the royalty study viewed
as base cases and reasonable ranges as crossover point for the
state's share of the modified status quo world versus what it
would get through the gross tax rate). The 10.5 percent number
was chosen by the administration, because the state couldn't
introduce a bill with a range in a tax rate. They had to pick a
number and picked what they thought was the crossover number.
3:43:35 PM
SENATOR FRENCH asked why 7-13 percent was the boundaries.
MR. PAWLOWSKI answered that that is roughly what would lead to a
state gas share of 20-25 percent, assuming a certain royalty
rate. This is what the administration agreed to in the HOA,
which should in no way be taken as anything other than that was
what they were able to agree on (the power to levy a tax being
reserved for the legislature).
SENATOR FRENCH asked if a value between 7 and 13 percent is
acceptable to the administration.
MR. PAWLOWSKI said they had agreed in the HOA that a rate
between 7 and 13 percent would be acceptable to the
administration and the other parties have also agreed to it.
Deciding ultimately where it should be is a key knob that the
legislature has a large role to play in. He also reminded
members that the concept in the HOA is that the state will
invest in the infrastructure at a commensurate share of what its
state gas share is. So a 13 percent tax rate gets a larger share
of the infrastructure in the near term and in the medium term a
larger share of the costs. It's the balancing act they looked
at.
SENATOR FRENCH remarked the more you buy the more you pay for.
MR. PAWLOWSKI said that was correct.
3:45:33 PM
SENATOR BISHOP said the money in this project is in the
midstream, so consequently one would want a bigger share of the
project.
MR. PAWLOWSKI responded that when they look at the numbers and
ran multiple cases and the consultants are absolutely right in a
large range of the cases: an ownership in the infrastructure is
really where the value is. And there are a lot of other cases
where the cash flow from the sale of the LNG provides meaningful
revenues, as well. Looking between those cases is where
opportunity can be seen that large scale gas sales provide the
state from a revenue perspective. In looking at the upper limit
on what the state's share could be there was a lot of concern
for the scale of investment and commitment the state would be
making.
3:47:41 PM
MR. PAWLOWSKI said page 14 of the HOA, 8.22, is where that tax
as gas provision 7-13 percent is set. He said one of the key
points of this tax-as-gas provision is the phrasing of the
payment in kind of tax for gas on page 26, line 18, and it could
be closer aligned with the concept of tax as gas in the HOA. But
why would the Department of Revenue (DOR) allow a producer to
make an irrevocable election for the payment of the tax as gas?
One of the things they looked long and hard at was that the
irrevocable nature of the election provides stability for both
the state and the producers. Just as the producers are concerned
about the ability of the state to switch in the royalty shares
back and forth from in value or in kind the DOR was concerned
about the ability of a producer to do that to the state.
Remember the concept is that the state's gas would be committed
through long term contracts to the marketplace through Asian
buyers. The concern was that if the state made commitments for
delivery of gas through the LNG plant to the market as LNG, and
a producer had the opportunity to decide they didn't want to pay
their taxes with gas anymore the state would find itself short
of molecules to meet those contracts. That is why they view the
irrevocable nature of this commitment being done initially and
needs to be irrevocable to provide stability for the state.
3:50:39 PM
SENATOR FAIRCLOUGH asked on page 26 to clarify the irrevocable
election in section 43.55.014 is for a defined piece of molecule
and not for all molecules.
MR. PAWLOWSKI said that was an important clarification. As
members will see on page 26, beginning on line 19, the payment
is from oil and gas leases that have been modified under AS
38.05.180(H)(h), the key being that the DOR recognized the state
does not have the relationship at the civil level that the DNR
does in the lessee/lessor relationship where they have an
ability to work with the lessee to manage, in oil, the barrels
and, in gas, the molecules. What concerned the DNR was they
needed the nexus of the state's engagement on those particular
leases to allow this opportunity. So, in order for this
opportunity to even become available, it has to be on production
from the specific leases that DNR has modified in the previous
section to commit to this project. So, they are very careful
about when this possibility is available, and it's only
available in the specific molecules produced from leases that
DNR has actively been engaged in the management of in the
state's interest.
SENATOR FAIRCLOUGH said what that might mean in more simplistic
terms is that DNR will decide which molecules may be committed
and they may be committed but the producers still would have an
opportunity to pay in cash for other molecules that they might
produce somewhere else.
MR. PAWLOWSKI said that was exactly correct.
3:53:03 PM
SENATOR FRENCH asked what the ability to switch between in kind
and in value on the oil side and now on the gas side is worth;
he understood the rationale.
MR. PAWLOWSKI couldn't answer that because it was outside his
realm of his expertise.
SENATOR FRENCH asked if there was any thought given to making a
10-year reopener. In the past they have had second thoughts
about bills they passed and things they do where they later
wished they had given themselves a little more leeway - just a
year to two after - for example, treble damages on the
TransCanada line and the $500 million constriction. They should
pause over the word "irrevocable" and ponder how long that is.
MR. PAWLOWSKI said when DOR paused over "irrevocable," they
asked themselves how to provide the maximum stability to the
state. This is an election offered to a producer and the state
wants the maximum ability to protect its interests, in this
case, which in the DOR may be different than the DNR, which has
a constant relationship with the lessee. They put a lot of
thought into making sure that the provisions do not apply until
after January 1, 2022, and if anything, that telegraphs the
preliminary nature of a lot of these discussions. The HOA
describes the work on these future questions of durability and
how to implement consistency in the long term. So, the idea that
this exact provision is forever locked and unchangeable at this
stage is not what is being put on the table. This is an option
that is structured to provide stability to the state that the
legislature will have an opportunity to revisit as the project
continues along.
3:56:36 PM
SENATOR FAIRCLOUGH wanted to confirm that line 20(e) said "may"
giving the state the flexibility to have as much knowledge as
possible at a particular point in time before entering into that
type of agreement.
MR. PAWLOWSKI answered that the "may" is required because of the
subjectivity of whether the leases are modified or not. The
"may" doesn't modify the irrevocable election in a way that she
was concerned.
SENATOR FAIRCLOUGH said the department "may" allow a producer to
do that. Is that correct?
MR. PAWLOWSKI said that was correct.
SENATOR FAIRCLOUGH said a producer could have different
molecules moving from different projects and asked if the
department "may" choose to allow that to be in kind or not if it
benefits the state.
3:58:11 PM
MR. PAWLOWSKI answered that the state would have an option to
not modify leases and, therefore, they would get paid in cash,
the traditional way taxes are paid.
SENATOR FAIRCLOUGH asked if the administration considered that
the irrevocable election is made on a particular number of
molecules that move. She was wondering if one reason the state
wants it to be irrevocable is if you are entering into a 20-year
contract the person who is receiving the gas also wants
stability in the price they are paying and builds that into
their contracts. Would the state negotiate that particular lease
so it could be modified in another number of years based on
matching market conditions or something different? Could a time
period or a volume production be part of the irrevocable
conversation?
MR. PAWLOWSKI said yes, that is part of the ultimate discussion
the administration is asking for the ability to enter into. He
mused that no one can predict which of the two fields will be
produced first - Prudhoe Bay or Pt. Thomson - how much, how it
will blend. That is part of what the HOA balances. The
agreements between the state and producers whose leases are
being modified to enable this will have to encapsulate all of
those very complicated issues before those contracts come back
to the legislature for consideration.
4:00:19 PM
SENATOR MICCICHE added that the irrevocable elections can vary
in duration and quantity dramatically.
MR. PAWLOWSKI responded that they had caveated this with "under
regulations adopted by the department" to protect the state. The
word "irrevocable" describes a very high standard that was used
for the state's stability.
SENATOR FRENCH said he appreciated the amount of dialogue they
are having on these issues, because for the 30-50 year duration
of this pipeline the state's gas will be royalty gas and gas as
tax.
MR. PAWLOWSKI disagreed saying the concept of tax as gas goes
back to specific leases. If the gas in Prudhoe Bay and Pt.
Thomson is exhausted, the concept of state gas filling the pipe
would depend on whether it's from state lands and is available
for this type of election. There may be other gas that comes
into the project to fill that capacity. Prudhoe Bay and Pt.
Thomson will fill up a majority of the project for the
foreseeable future, but the election here and taking in kind and
value really comes back to how many reserves there actually are.
It's well in excess of 20 years.
4:03:06 PM
He said the third bullet recognizes language from the HOA that
this election like RIK is subject to the execution of project
enabling contracts including satisfactory arrangements for
disposition of the state's gas share of LNG. That telegraphs the
administration's recognition that the full commitment to this
concept depends on working out more details before finalization
to guarantee how the state is going to get gas that is produced.
Slide 14 reiterates to the public that the levy on the tax as
gas is 10.5 percent of the taxable gas produced (AS
43.55.014(b). As the production happens then the tax obligation
is created.
4:04:30 PM
A couple of other points are dealt with in AS 43.55.014(b) that
are important to attend to; on page 27, lines 2-7, talk about
what happens if there is a deficiency on the tax as gas. It
can't be made up in terms of additional molecules if there isn't
the ability to sell them. So, the department said in subsection
(d) if there is somehow a fax deficiency the penalties will be
calculated as if it were in value.
4:05:28 PM
The filings will be on an annual basis just as they are with the
regular production tax and section 25 on page 23, lines 12-16
says: in tax law a person is the taxpayer and the amount of gas
produced subject to the gas as tax election will be public
information.
SENATOR FAIRCLOUGH asked for clarity on tax deficiency in the
calculation (AS 43.55.011(e)) and if that would calculated on an
annual basis.
MR. PAWLOWSKI deferred to the online auditor.
4:08:04 PM
LENNY DEES, Audit Master, Department of Revenue (DOR), Juneau,
Alaska, explained that although the production tax is a yearly
tax, there is a requirement for monthly installments. So, the
deficiency would be determined on a monthly basis. If it were to
be handled the same way deficiencies are handled now, that gas
would be valued at the prevailing value of like-kind product in
the month that deficiency occurred and the interest would be
based on from the point of the deficiency until the point the
payment is made.
SENATOR FAIRCLOUGH said that sounds like it is in regulation and
maybe it should be inserted for clarity.
4:10:23 PM
SUSAN POLLARD, Assistant Attorney General, Department of Law
(DOL), Juneau, Alaska, said her answer was probably partially
already in statute, because the monthly gross value at point of
production already has to be done. So, they made amendments to
the bill on page 34, line 26, where it says 10.5 percent gross
value at the point of production for the gas that is levied
under AS 43.55.011(a)(3). Mr. Dees might want to point out how
the regulations for prevailing value works.
MR. PAWLOWSKI said the reference on page 34 is to a section that
begins on page 28, lines 9-10, which describes how tax gets paid
in a calendar year and that is the amendment for the monthly
description of value.
4:12:03 PM
MR. PAWLOWSKI said the other provisions that are important for
development of this tax as gas provision are how the state takes
delivery of the tax as gas, and that is found on page 26, lines
27-29. Rather than 10.5 percent of the value, it's 10.5 percent
of the taxable gas produced, but that is delivered to the state
at the entrance of the transportation facility specified by the
state. The intent behind that language was to be very clear
about where the point of production is, because of how lease
expenditures work upstream or downstream from the point of
production. He recommended that the subjectivity of the facility
specified by the state may want to be revised to be specifically
"at the point of production." He explained that in drafting
this, they looked at all of the ways to protect the state and
thought that that level of flexibility may cut both ways in a
way that doesn't derive the necessary clarity and the intent is
that the state designate the point of production and that should
be specified.
4:15:01 PM
He explained that the state would receive molecules; those
molecules will be managed under previous sections of the bill as
the DNR in the normal course of its business is managing the RIK
gas; the DOR doesn't have the expertise or people to manage
those molecules and DNR does. The bill contemplates that the DOR
would essentially piggyback on the expertise of the DNR and the
tax molecules would be managed just as the royalty molecules are
with the same rules about how they are valued, handled, sold,
but that the DOR commissioner would direct the disposition of
revenues from the tax as gas. DNR puts portions of royalty into
the Permanent Fund and tax is directed to the General Fund, he
explained.
The state created a fixed tax rate of 10.5 percent of the gross
value on all gas post-January 1, 2022. For certain gas from
specific leases that the DNR has modified, the election to pay
tax with molecules (instead of with revenues) will be an option.
After that there is still the dilemma of what to do with lease
expenditures, because now lease expenditures are deductible
against the company's production tax value. He went to section
42 on page 43, line 13, that treats how lease expenditures would
be deducted. For oil produced on and after January 1, 2022 this
is how the production tax value is calculated and basically it
says that gas produced doesn't go into the calculation of the
production tax value, because the tax is being levied on the
gross value. While this looks like a conforming change, one of
the effects it has is when a company is making an expenditure on
the North Slope to develop oil or gas the facilities are co-
mingled.
He explained that the wells are producing oil and gas on the
North Slope and the department has made a policy call not to try
and distinguish and count the expenditures separately. So, the
lease expenditures would be deductible against the production
tax value on oil and a separate payment on gas would be made.
This is not immediately recognizable to people, but the effect
is that lease expenditures can be deducted against the
production tax value on oil if and when gas is produced.
4:19:59 PM
MR. PAWLOWSKI said the impact that has takes them to section 39
on page 41, line 21. When lease expenditures are deductible, the
state has an implicit support for whatever that spending is
based on what the tax rate is and 35 percent provides an
incentive for reinvesting in the state when the lease
expenditures happen. The lease expenditures in section 39 allow
the expenditures of - say - a gas-only producer to generate a
loss carry forward credit - providing the same benefit for that
producer who may not have other expenditures. Everyone has the
same benefit and that includes a new gas producer.
4:20:36 PM
Section 26, on page 23, line 17, is another substantive section
that amends the state's corporate income statutes. Now when a
producer pays production tax, they have still produced the
resource. This section insures that the business activity
happening in Alaska - that creation of production - whether it's
paid to the state in molecules or not is still counted as part
of a company's business activity in the state. That matters for
the calculation of corporate income tax. So, they are ensuring
that the payment of molecules is counted in the extraction
factor for the purposes of calculating the corporate income tax.
If this were not done, it would reduce the corporate income
taxes to the state.
4:22:26 PM
MR. PAWLOWSKI said the last substantive provision in the tax
sections is in section 45 on page 47, beginning on line 28, the
definition of "point of production." Earlier he explained the
deduction of lease expenditures as a deduction in the
calculation of a production tax value, and lease expenditures
are those upstream of the point of production. So, where the
point of production is fixed is very important for what is
available to be deducted in the lease expenditures.
He explained that previous statute was not as specific as the
department thought was important for this particular project and
in general when it came to gas (because the state has not had to
deal with large-scale gas before). This section (page 48, lines
9-13) sets the point of production "the furthest upstream of the
inlet of any pipeline transporting the gas to a gas treatment
plant or the inlet of any gas pipeline system transporting gas
to a market." According to the HOA and the MOU, that means the
inlet to the Pt. Thomson transmission line or the inlet of the
transmission line from Prudhoe Bay to the GTP. He explained that
presentations by the AKLNG project indicate that the
transmission line from Prudhoe Bay to the GTP may actually still
be within the Prudhoe Bay unit and this ensures those millions
of dollars in expenditures are not lease expenditures and are
not deductible. That capital will be recovered through the
tariffs, not through the deductions in the lease expenditures.
SENATOR FRENCH asked what section in the HOA buttresses that.
MR. PAWLOWSKI directed him to page 5, number 1.4 in the
definition of the AKLNG project. It means collectively: the
project components consisting of the LNG plant, gas pipeline,
gas treatment plant, the PBU (Prudhoe Bay Unit), gas
transmission line and the PTU (Pt. Thomson Unit) transmission
line.
SENATOR FRENCH remarked that there is maybe a half billion or so
riding on that transmission line and he wants to make sure it's
as clear as can be.
4:25:42 PM
SENATOR MCGUIRE joined the committee.
SENATOR MICCICHE clarified that he was saying if the Pt. Thomson
pipeline was completed several years before this project even
kicks off that those expenses could be included as the cost of
the project.
MR. PAWLOWSKI responded that in designing the general law on the
point of production, they have made it very clear that a Pt.
Thomson pipeline whether it goes to this project or is just
built on its own is downstream from the point of production, so
it would not be included in the lease expenditure.
4:27:06 PM
SENATOR DYSON asked if the Pt. Thomson gas gets treated before
it is sent west and would not go through the central gas
treatment plant.
MR. PAWLOWSKI answered the exact mechanics of what goes on with
the Pt. Thomson gas was outside of his expertise to answer. But
language on page 48, lines 9-25, set even more stringent
examples of what it has to be upstream of: there's the inlet of
any pipeline transporting the gas to the GTP or any pipeline
system transporting gas to market or the inlet of the furthest
upstream of the first point where the gas is actually metered
downstream of. They are trying to fix a very specific point of
production that is as far upstream as possible in the concept
around the projects.
SENATOR DYSON asked him to repeat what he said about where that
point is on the Pt. Thomson pipeline.
MR. PAWLOWSKI said it's the inlet of the point where the gas is
leaving the unit and going to the treatment plant. But he was
not knowledgeable about what level, if any treating, would go on
a Pt. Thomson.
4:29:02 PM
SENATOR BISHOP wanted that question answered by an expert.
CHAIR GIESSEL noted that Commissioner Balash would answer that
at a future meeting.
4:31:32 PM
MR. PAWLOWSKI said those were the broad substantive changes in
the tax sections of the bill and there are conforming changes. -
-Section 27 establishes the gross tax rate on gas produced after
January 1, 2022,
-Section 29 allows the ability of certain gas tax to be paid in
molecules for the state to get a larger share of gas as opposed
to tax payments,
-Section 42, which provides for the calculation of lease
expenditures,
-Section 39, which allows for the creation of the carry forward
loss credit,
-Section 26, which is that clarification about the corporate
income tax treatment of gas paid in molecules, and
-Section 45 around the point of production
It's also important to note a couple of things that aren't
happening in SB 138, Mr. Pawlowski said. They talked before
about the AGDC's core missions (1-3) in AS 31.25.005 and those
are not amended. The oil and gas exploration production pipeline
transportation property taxes in AS 43.56 are not modified in
this bill either. The HOA has a broad description of the
administration's intent subject to consultation with local
governments, to begin working on the property tax issues around
this project but the power to set tax rates is the province of
the legislature. The administration contemplates working with
local governments in the HOA to bring back conceptual changes
that the legislature will consider in the future. It would be
done as a consensus work with local governments. Nothing in this
bill changes the current state of property taxes in the State of
Alaska; it does not change the disposition of royalty or tax
revenues and where they go. It makes no changes to deposits to
the Permanent Fund and with royalty revenues it leaves all the
underlying architecture about how revenues are distributed the
same. It doesn't change the oil and gas production tax
limitations.
4:33:22 PM
SENATOR FRENCH asked if the changes to the tax starting in
section 27 affect the legal status of the repeal effort of SB 21
effort.
MR. PAWLOWSKI said he would ask the Department of Law (DOL) to
answer that.
4:33:57 PM
MS. POLLARD said the department was not prepared to address that
broader question today, but they had reviewed this bill and did
not see anything in Alaska law that would prohibit bringing this
bill forward now.
SENATOR FRENCH asked if this bill would knock the repeal of SB
21 effort out.
MS. POLLARD repeated that the department was not ready to answer
that broader question today.
4:36:45 PM
SENATOR FRENCH asked how much the state paid for work on the
AGIA project that will be obsolete if this bill goes forward.
MR. PAWLOWSKI said the full AGIA report with the geographic
breakdown had been emailed to members and they were continuing
to work on the map format that Senator Dyson had requested.
SENATOR FAIRCLOUGH said she thought TransCanada said probably
30-50 percent of the material they collected would still be
relevant to this new project.
CHAIR GIESSEL said she had posed Senator Dyson's earlier
question about the data collected for the stand alone pipeline
and Denali pipeline.
SENATOR FRENCH asked if the legislature decides to go forward
with SB 138 and gets to FID and decides not to go forward, what
the state would owe TransCanada.
MR. PAWLOWSKI answered that was presented in a previous hearing
and it was in the $360-390 million range at FID and it depends
also on who terminates. TransCanada might terminate in a number
of situations. There are off ramps well ahead of FID, but until
you go through the pre-FEED stage those are broad estimates.
4:40:55 PM
SENATOR MICCICHE asked how much it would cost if the state
terminates the agreement before FID; that number might not exist
at all.
MR. PAWLOWSKI said the range of the number depends a lot of
whether or not the state has exercised the equity option with
TransCanada to re-assume 40 percent of the costs of the
midstream.
The development cost concept is the underlying agreement with
TransCanada that they will spend money on behalf of the state
and if they terminate and walk away, the state will not pay any
interest on that money. So, it's like a zero interest loan if
they walk away. If the state terminates the relationship with
TransCanada, which can be done for multiple reasons, the state
would pay the AFUDC, which is significantly below TransCanada's
return on equity in general. That is the business trade off the
state made in the MOU and should be separated from the state's
dollars at risk, because regardless of the relationship with
TransCanada, the state is contemplating a 20-25 percent share of
this project.
4:42:57 PM
SENATOR FRENCH asked where in the big line process they stop
working on the bullet line.
MR. PAWLOWSKI said that decision would be made at the end of
pre-FEED around 2016. Look at HOA on page 3, subsection (i) that
talks about the relationship between the AKLNG project and the
ASAP project during the pre-FEED phase. Another important point
was in the HOA on page 12, Article 6.5, about the relationship.
Thinking about the work the ASAP project is doing over the next
year; they are going to hold an open season. The idea is the
AKLNG will be pushing towards the FEED decision in the later
part of 2015, so there is a nice synergy between the two.
Article 6.5 recognizes that the off take points will be done as
determined by the administration in consultation with AGDC,
which will have gone through the process of gathering
information, and bids about demand for gas in-state. At FEED the
decision to maintain both projects will be up to the
legislature, and that is seen as natural.
4:45:53 PM
CHAIR GIESSEL asked why they chose the approach of an AGDC
subsidiary, because it seems so complex in that AGDC is not a
state entity, has a separate board, and they are not state
employees. Yet, under them, they are creating a subsidiary that
is a state entity and consists of state employees.
MR. PAWLOWSKI said they were trying to build on the concept of
the Alaska Industrial Development and Export Authority (AIDEA)
and the Alaska Energy Authority (AEA), which are co-located with
each other. The intent of the administration is to preserve the
ace in the hole: keep that ASAP project with momentum moving
forward at the same time they are pursuing this AKLNG option.
The bright lines in the division between the accounts of the
subsidiary and the parent corporation were done recognizing at
this stage those are two horses. But what happens in the future
is an open question.
SENATOR MCGUIRE asked if there was another way to do it.
MR. PAWLOWSKI said potentially; at this stage part of their
initial concern is nexus to the state in that there is a big
difference between the projects as they are now contemplated.
One is a large scale energy export project and one is primarily
geared for in-state use. They explore continually for better
ways to maximize the efficiency and are still wrestling with it.
SENATOR MCGUIRE wanted to hear more conversation about
preserving our ace in the hole.
4:52:53 PM
MR. PAWLOWSKI replied the work AGDC is doing on the Alaska Stand
Alone Project (ASAP) is critical in continuing progression of
options available for Alaskans no matter what. One of the
benefits TransCanada brings to this project is it's working on
the pipe just as AGDC is working on the pipe aspect of the ASAP
project. At the same time the state doesn't have an agency
working on the liquefaction side; just as TransCanada is
valuable in the momentum, trying to stand up and entirely new
corporation to stand in the state's shoes in that liquefaction
plant for four or five months. We're on an aggressive timeline
and AGDC has the expertise and a lot of the power, and they saw
it as expanding their powers and mission while providing the
degree of insulation to protect ASAP. "It is all about the
momentum," he said, and having people in place to execute these
agreements and get the projects going forward on those parallel
paths for the near term as fast as possible.
SENATOR MCGUIRE asked what would be involved in creating a
subsidiary that was not derived from AGDC statutes, but involved
the AGDC board chairman.
4:55:44 PM
MR. PAWLOWSKI answered it was fairly close to what is in SB 138
now on page 7, line 7.
SENATOR MCGUIRE said one fear is potential cross pollination
between missions and she might want to keep AGDC completely pure
and asked what she would lose by doing that.
MR. PAWLOWSKI said that was a difficult question and when you
start to reinvent wheels you start to lose things. She probably
recognized that AGDC isn't just about the ASAP project. Their
mission on page 3 gets some of the language from HB 4, because
they are amending it by expanding AGDC's powers. Subsections (2)
and (3) are broader missions to get gas to Alaskans. It's long
term strategically in the interest of the state to have that
sort of combination of effort so that if the ASAP project stops,
there are people who are aware of what is going on with the
AKLNG project to start working on all of the questions that
really matter to the state at that point.
4:59:17 PM
SENATOR BISHOP asked who's to say AGDC's mission is still to get
gas to Alaskans as cheap as possible and their core mission
revolves down from a lateral to a community getting gas to
Alaskans as cheap as possible.
MR. PAWLOWSKI said his reading of existing AGDC statutes is that
language on page 3, lines 10-14, talks about developing natural
gas pipelines and other transportation mechanisms to deliver
natural gas, propane, and hydrocarbons to public utility and
industrial customers in areas of the state, may be delivered at
commercially reasonable rates, and providing access for other
shippers for that gas. That mission is baked into AGDC long
term.
SENATOR BISHOP said his point was that they still have a
mission.
5:00:41 PM
At ease from 5:00 to 5:30 p.m.
5:30:20 PM
CHAIR GIESSEL opened public testimony on SB 138.
5:30:54 PM
BILL WARREN, representing himself, Nikiski, Alaska, opposed SB
138. Fire TransCanada and move AGDC forward, he said - must have
in-state gas. Bring a small service line to Fairbanks and use
hi-tech plastic to Wasilla and down the Parks Highway. The cost
is cheap compared to what has been spent and what will be spent.
This smaller system could be tied into a larger export line
later. "Remember, Alaskans first!"
5:33:04 PM
JEREMY HOLAN, Teamsters Local 959, Fairbanks, Alaska, supported
SB 138. He based his support on: 1. gas for Alaskans; 2. jobs
for Alaskans; and 3. more revenue for the state. He added that
they as elected officials are assure that the bill meets those
points and in the end is cost effective for the state.
5:34:17 PM
LISA WEISSLER, representing herself, Juneau, Alaska, opposed SB
138. She said she was staff council to the House Democrats while
the Stranded Gas Development contract was being discussed and
rejected and she was astounded to see that the HOA had
essentially the same terms. She did a side-by-side comparison of
the two for the committee and noted that the 2006 Legislature
was smart enough to reject those terms because they were bad for
Alaska. They are still bad for Alaska and she hoped they would
also reject them. It offers no guidelines or criteria for the
DNR commissioner's negotiations and the starting place is at the
rejected terms from eight years ago.
SENATOR FRENCH said he would like to see the side-by-side
comparison.
CHAIR GIESSEL said she would attach it to the bill as a
submitted document.
5:36:07 PM
RACHAEL PETRO, President and CEO, Alaska Chamber of Commerce,
supported the principals in the HOA and SB 138, but were still
evaluating SB 138. They chiefly like: the state participation in
an Alaska gas project, the state taking a percentage gas share
and participating in an Alaska gas project at the same
percentage of gas share, and establishing a very clear process
to move the project forward, which must include the necessary
tools for confidentiality to be able to develop the various
project enabling arrangements that any business needs to do, and
having a clear public process and steps along the way for
legislative oversight, review, and approval.
5:38:18 PM
SENATOR MICCICHE asked why this project is important to the
Alaska Chamber.
MS. PETRO answered that access to Alaska's resources is
important to all Alaska businesses and Alaskans. They very much
support sustainable and sound development of them.
SENATOR MICCICHE asked if it's safe to say that businesses just
don't exist because reasonably priced energy is not available.
MS. PETRO replied absolutely; economies of scale are a
challenge.
CHAIR GIESSEL commented then maybe we could compete with Iceland
that has cheap power and refines aluminum.
5:40:04 PM
PAUL GROSSI, Alaska Pipe Trades and Ironworkers, Juneau, Alaska,
supported SB 138. They support the building of a pipeline for a
number of reasons, the main one being the direct jobs building a
pipeline would bring. Another one is that their members live
here and in-state gas is important to them. It's important
because it will allow for future development and having the kind
of capital budgets that promote jobs that is important for the
building trades.
5:41:58 PM
MIKE NAVARRE, Mayor, Kenai Peninsula Borough, Kenai, Alaska,
supported the project and said there was a great deal of
potential in it, but consulting with communities is not really
adequate in terms of negotiations. They would like to the
opportunity to negotiate on their own behalf be a part of
determining what the local tax structure will be, particularly
if the state is going to own an equity interest, which creates
somewhat of a conflict with the state and local governments.
They will live be living with the impacts long after the project
is finished.
SENATOR DYSON asked if he was talking about more than property
taxes.
MR. NAVARRE no; property taxes is what they are interested in,
because that is their tax base.
SENATOR FAIRCLOUGH asked if he had suggested language for
putting in the bill.
MR. NAVARRE said yes.
SENATOR FAIRCLOUGH asked if he heard earlier testimony today
that indicated that particular issue had not been resolved nor
does the language in SB 138 limit that opportunity.
MR. NAVARRE said that it does not, but the HOA suggests that
they will consult with local governments. But when the state is
negotiating the local governments will likely not be in the room
with them. So, it doesn't give them a comfort level that when it
comes back to the legislature for consideration particularly if
it's late and it could be a close call. He spoke with the
governor who said it's too early for that type of discussion.
But Mr. Navarre said he had been in the legislature for a number
of years and knew that it's never too early to start a
conversation.
SENATOR FAIRCLOUGH said she wanted to hear his proposal.
5:45:30 PM
MR. NAVARRE said it would amend section 10 to read:
...in consultation with the commissioner of Revenue
participate in the negotiation of contract and
development of terms for including a proposed
contracts associated with North Slope natural gas
project provided the contract shall not alter the
taxation of property taxable under AS 29.45 or AS
43.56 including the taxability, rate of taxation or
full and true value of property. A contract negotiated
under this paragraph to which the state is a party is
not effective unless the legislature authorizes the
Governor to execute the contract.
He said they don't want to stand in the way of a gas pipeline,
but at the same time they want to protect the interests of local
governments' ability to tax.
SENATOR MICCICHE commented that he spoke to the mayor earlier
who made it clear that the municipalities he represents are not
wolves waiting to hop on the taxation bandwagon and even had
talked about a holiday during construction and that sort of
thing. Just the long term impacts would be taxed.
MR. NAVARRE added that the HOA provides for impact money, which
makes sense, and he recalled how they double-shifted at schools
for a while when Cook Inlet was being developed because so many
people came in.
SENATOR FAIRCLOUGH said she appreciated protecting local
determination, but what happens if communities set up different
criteria. One of the challenges in establishing a tariff charge
on TAPS has been continued property value changes which have
resulted in litigation.
5:48:46 PM
MR. NAVARRE said conflicts are there not because local
governments are setting different types of criteria; it's
because of how the value is determined. It's always struck him
with TAPS that the state at least has a neutral position on that
if not an incentive to reduce the tariff, because it nets back
to a wellhead, whereas local governments would rather see a
higher value on the pipeline even if that means a higher tariff,
because that is where their tax base comes from.
5:49:32 PM
SENATOR FAIRCLOUGH said his language seemed to define the issue
in each community and letting them come up with their own way to
resolve the valuation and asked if he would have the time to
work with Alaska Municipal League (AML) folks to come up with
how value should be determined. People are looking for certainty
in the way it is done and to have it consistent across the
state.
MR. NAVARRE said yes and he thought there was a way to get to a
value determination to apply different mil levies against and to
have the ability to go beyond the 20 mil cap for bonding.
SENATOR MICCICHE asked which entities he worked with on the
letter he presented them.
MR. NAVARRE replied the Fairbanks North Star Borough, the Kenai
Peninsula Borough and Valdez. Valdez and Fairbanks are worried
that some fiscal agreement would roll into including existing
oil and gas infrastructure, which would undermine their existing
tax bases and bonding that is already in place.
5:52:39 PM
MERRICK PEIRCE, CFO, Alaska Gasline Port Authority (AGPA),
Fairbanks, Alaska, opposed SB 138. He said they have a voter
mandate to see a large-diameter gas line built from the North
Slope to Valdez and this legislation nearly guarantees a gas
pipeline will not be built reasoning that:
The same consultants who have failed to make any
progress on the gas line after wasting hundreds of
millions of dollars and half a decade of time are now
asking for cart blanche. One critical problem this
administration has is its failure to understand its
alignment with a transnational corporation that has
LNG projects that compete with Alaska ensures that no
pipeline is built unless these outside interests
provide approval. Why would we want Alaska to be in
such a foolish subordinate position?
He related a story about Governor Parnell and ExxonMobil had
"effectively sabotaged" a project under the Alaska Gasline
Inducement Act (AGIA).
SENATOR FRENCH asked Mr. Pierce his background for working on
matters relating to oil and gas and pipelines.
MR. PEIRCE said he worked with Governor Palin on her transition
for the Department of Revenue and then on this issue for the
last seven years on behalf of the voters. Their mandate is
straight-forward: large diameter gasline North Slope to
tidewater. He was doing this because the voters were right; they
picked a project that was economic and makes a lot of sense.
5:56:40 PM
JASON RUTMAN, Director of Operational Projects, Nana Development
Corporation, Anchorage, Alaska, supported SB 138. He said Nana
has over 35 years of expertise on Alaska's North Slope and more
than a dozen companies aligned to meet the needs of the oil and
gas sector. Many of these companies provide direct services to
the Alaska oil and gas industry that is one of the largest
employers in the state with over 4,000 Alaskans (1,000 of which
are Nana shareholders) working with a payroll of over $180
million.
They recognize that passage of SB 138 will allow the AKLNG
project to move through the next phase, which is the initial
step in identifying challenges and evaluating feasibility. They
understand that the results from this phase including detail on
state participation in the project would come before the
legislature in the next session to determine whether the state
would proceed to the next stage. They also recognize the
opportunity presented by recent announcements. As the Governor
stated, for the first time all the necessary parties have
aligned to make an Alaska gasline project go: three producers, a
preeminent pipeline builder, the AGDC, and the state agencies
responsible for the people's royalties and taxes. Capitalizing
on this necessary alignment they support the effort to maximize
the benefit of Alaska's gas for Alaskans and growing Alaska's
economy.
5:58:54 PM
GEORGE PIERCE, representing himself, Kasilof, Alaska, commented
on SB 138 that the state should own 52 percent of the pipeline.
But public process is missing. The state signed off on an
agreement before discussing any of the details with the public.
The same thing happened with the Pt. Thomson settlement.
6:02:00 PM
KRISTA GONDER, Alaska Support Industry Alliance, Wasilla,
Alaska, supported SB 138. She said their members know Alaska
needs a gas pipeline whether it is a large diameter natural gas
pipeline or the Alaska Stand-Alone Pipeline (ASAP) that focuses
on in-state gas delivery. The members do not want the
legislature to spend years studying the issue; they need real
progress now. The Alliance supports many of the basic concepts
in SB 138: an opportunity for state ownership, a simplified tax
structure, the ability for AGDC to continue to pursue the ASAP.
They appreciate that this legislation requires the state to
return to the legislature for review and approval as the project
moves forward.
6:03:45 PM
LUKE HOPKINS, Mayor, Fairbanks Northstar Borough, Fairbanks,
Alaska, supported SB 138. One of his concerns was the same as
Mr. Navarre's, specifically with how the HOA has already
negotiated that a (Payments in Lieu of Taxes) PILT would be put
forth for the municipalities without consulting with them.
Property taxes under AS 29.45 and AS 43.56 are how his
municipalities have worked - both on the TAPS line and now as
they hear about the large diameter gas line. They are asking for
an opportunity to be at the table to actually be in the
negotiations and be a part of the decision making, as they have
in the past, not just sitting on the side. They do not want to
renegotiate property taxes on existing oil and gas
infrastructure.
SENATOR FAIRCLOUGH said that Fairbanks is requesting hundreds of
millions of dollars to meet its energy needs, and asked if there
was a way to come up with a standard valuation so that those
costs are incorporated into the structure and still make it
economical to actually sell gas in a foreign market.
MR. HOPKINS said the issue in AS 43.56 for oil and gas
properties says: "for the determination of full and true value."
They think there is a way to go forward, but they want to be at
the table in the discussions and seek a way to acquire a revenue
stream for the impacts that will happen to their community and
property values that others will have to pay.
6:09:42 PM
RICK RODGERS, Executive Director, Resource Development Council
(RDC), Anchorage, Alaska, supported SB 138. Alignment and
durability are important to this discussion and the HOA brings
alignment that is unprecedented. It has made him much more
optimistic about this process "getting to where we want to be."
In terms of durability LNG, unlike oil, is sold in long-term,
multi-decade contracts requiring durable fiscal terms. SB 138
has a lot of the elements in place to hold this together. It
will require a lot of work and he added that he was impressed
with the deliberate due-diligence this committee is undertaking
in weighing the risks and rewards with a realistic eye on the
need to compete globally with dozens of other jurisdictions and
projects in hoping to secure project backing.
The most beneficial gas line in his view for Alaskans is a large
capacity line, if it's sanctioned by the producers in
partnership with the state, has a much better chance of success,
but most of the project economics that will determine whether
this project goes forward are largely out of our control.
MR. RODGERS summarized that we need to maintain a robust oil
industry on the North Slope; oil pays the bills and supports the
vast complex infrastructure. He encouraged due diligence and
passing SB 138 this session recognizing that there are more
legislative gates and off ramps to take.
6:12:57 PM
LAKE WILLIAMS, President, International Union of Operating
Engineers Local 302, Fairbanks, Alaska, supported SB 138. They
are looking forward to the construction jobs associated with
this project as well as the jobs afterwards, energy relief for
Alaska, and value-added jobs that could come with industry
coming in.
He thought the larger diameter pipeline would be the best for
the state and a small diameter just wouldn't provide the tax
revenue needed. He urged anything they could do to strengthen
local hire provisions and state ownership. TAPS has proven you
have to be at the table. It's a big bill, but their job is to
"trust but verify."
6:15:27 PM
DOUG TANSY, President, Fairbanks Central Labor Council, and
Business Representative, International Brotherhood of Workers
(IBEW) Local 1547, Fairbanks, Alaska, supported SB 138. He said
Mr. Lake had already made a lot of his points. He was happy with
the process, so far, and supported this project, and giving
Alaskans priority.
6:16:36 PM
JOHN HOZEY, City Manager, City of Valdez, Valdez, Alaska,
supported SB 138, but had concern that such momentum undermines
the ability of local governments to adequately provide for
municipal services that residents depend upon, their tax base.
They were concerned that under previous agreements to
commercialize natural gas both the oil and gas infrastructure
were offered up as tax incentives to the producers to pursue
development of the gas line. So, it's reasonable to think that
what was once negotiated could be negotiated again. He implored
them to not change property tax structures without consulting
the municipalities. He supported the comments of Mayor Navarre
and Mayor Hopkins, and the language Mayor Navarre read into the
record.
He said the City of Valdez would be willing to be involved in
any discussions to determine certainty. So, to the extent they
could help get there they welcome that effort, but they have to
be part of the discussion now and going forward.
6:19:12 PM
LISA VONBARGEN, representing herself, Valdez, Alaska, supported
previous comments and SB 138 if municipalities are at the table.
Her prepared remarks echoed almost exactly what Mayor Navarre,
Mayor Hopkins and Mr. Hozey already said, so she relinquished
the floor.
CHAIR GIESSEL thanked everyone, and finding no further comments,
closed public testimony. [SB 138 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES SB 138 Sectional Analysis Presentation.pdf |
SRES 2/19/2014 3:30:00 PM |
SB 138 |
| SB 138 LisaWeissler Comments 20140219.pdf |
SRES 2/19/2014 3:30:00 PM |
SB 138 |
| SB 138 Supp Letter JerryDewhurst 20140219.pdf |
SRES 2/19/2014 3:30:00 PM |
SB 138 |
| SB 138 Supp Letter UnionofOperatingEngineers 20140219.pdf |
SRES 2/19/2014 3:30:00 PM |
SB 138 |
| SB 138 Supp Testimony RickRogers 20140219.pdf |
SRES 2/19/2014 3:30:00 PM |
SB 138 |