Legislature(1997 - 1998)
04/04/1998 01:15 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 393
"An Act relating to contracts with the state
establishing payments in lieu of other taxes by a
qualified sponsor or qualified sponsor group for
projects to develop stranded gas resources in the
state; providing for the inclusion in such contracts
of terms making certain adjustments regarding royalty
value and the timing and notice of the state's right
to take royalty in kind or in value from such
projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective
date."
REPRESENTATIVE MARK HODGINS, (TESTIFIED VIA
TELECONFERENCE), KENAI, explained that last year the
Legislature passed HB 250 which enabled commissioners to
establish the needs base for HB 393. The emphasis of the
legislation is to advance the development of Alaska's vast
supply of North Slope natural gas. The legislation follows
the recommendations put forth by the North Slope Gas
Commercialization Team, which was established last year to
build a framework to improve the economic feasibility and
competitiveness of a North Slope gas project.
The bill authorizes the State to negotiate contracts with
project sponsors to improve the economic feasibility of
developing stranded gas on the North Slope. Contract
payments would replace some or all of the State's and
municipal taxes applicable to the gas project including:
? State and municipal ad valorem property taxes;
? Production or severance taxes; and
? State corporate taxes.
The State's royalty share of produced gas would not be
subject to that contract. Contract payments would be
designed to improve project economics by "back-end loading"
tax liabilities to allow project investors to begin to
recoup some of their investment before facing a heavy tax
burden. The contract payments would also be designed to
provide the State with an increased share of the project's
revenue if energy prices increase or if the sponsors are
able to substantially decrease anticipated project
construction costs.
Representative Hodgins stated that it is important to
remember that this is a "for profit" project. The State of
Alaska owns resources on the North Slope and would like to
see those resources moved to a revenue source. There are
several benefits to the approach authorized in the bill.
Fiscal arrangements could be tailored to the specific
economics of a gas project. Contractual payments are more
likely to provide predictability for potential investors in
a project.
Representative Hodgins pointed out that the total cost of
the project is not known. He projected that if the cost
were around $12 billion dollars, it would probably move
forward; although, noted those variables exist. While the
bill is unique in many respects, there are precedents for
the incentive. For example, the Liquefied Natural Gas
(LNG) project on the Kenai Peninsula, which provides
significant jobs, production and property tax revenue,
benefits directly from the Alaska Industrial Incentive Act
which provides tax advantages critical for development.
He noted that oil could be sold on the spot market,
whereas, LNG would be contracted over many years. The
project will not go forward without contracts guaranteeing
sales of the product.
Representative Hodgins commented that from results put
forth from the mayor's recommendations, an advisory group
will be established. The taxable amount of funds coming
into the State would be $12.6 billion dollars. The amount
generated for federal government would be approximately $26
billion dollars. There is room to help increase
profitability by not front-end loading the costs. He
proposed that the State should give up no more than 2% in
order that the project can move forward. He pointed out
that an important addition to the bill is the confirmation
to be given by the Legislature on each contract. He
emphasized the need that the commissioner negotiates
contracts with the Legislature.
Representative Hodgins summarized, the Stranded Gas
Development Act is a critical step in the efforts to
realize the benefits of our gas resources located in the
North Slope.
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, stated
that this proposed legislation was originally submitted by
the Governor, however, the Special Committee on Oil and Gas
made significant changes to it. The Administration
supports the bill as changed by that Committee and the
House Resources Committee.
HB 393 provides a framework for developing a customized
proposed fiscal system applicable for the development of
stranded gas. The bill is particularly focused on the LNG
process, whereby, gas would be pipelined from the North
Slope, liquefied on the southern coast of Alaska, shipped
to Asia and sold as LNG.
The bill acts as framework legislation, designed to
instruct the Executive Branch to develop a
proposal/contract which would provide for payments in lieu
of some or all taxes imposed on the project by State or
local governments. The bill only authorizes and directs
the Executive Branch to bring proposals before the
Legislature in the form of such contracts. Once it is put
before the Legislature, they would in turn need to pass
enabling legislation.
Commissioner Condon noted that several issues relate to the
contracts. He replied that it is unknown if the contracts
would bind future legislatures. He proposed that the
Legislature should determine if they would want to be bound
in that way, which would be a policy call decided when the
contract is brought before the entire Body.
The legislation specifies that if someone applies to create
a stranded gas project and it meets the criteria of the
bill, the Executive Branch is then instructed to develop a
proposal in the form of a fiscal contract, which would
substitute payments for all State and local taxes. The
contract would then come back before the Legislature so
that enabling legislation could be passed.
Co-Chair Therriault pointed out that passage of HB 393
would not bind future legislatures to ratify the contracts.
Commissioner Condon distributed a flow chart for HB 393.
[Copy on File].
Co-Chair Therriault inquired the requests submitted by the
mayors involved. Commissioner Condon replied that the bill
works as follows.
? The bill provides for the filing of an
application; and
? Then the contract is negotiated.
Commissioner Condon added, the legislation would provide
for the establishment of a Municipal Advisory Group and
each affected municipality would provide a member for that
advisory group.
Commissioner Condon touched on the gas to liquid concern.
He stated that the bill should provide for a full range of
opportunities to commercialize stranded gas in Alaska,
although, the fiscal systems would be different.
Co-Chair Hanley pointed out that the application deadline
would be 2001; if no one submitted an application by that
time, it would be over.
Co-Chair Therriault noted HB 250, which established the
North Slope Gas Commercialization team, contained a fiscal
note for $230 thousand dollars which was zeroed out. The
effort was paid for out of the Governor's contingency fund.
He asked the amount expended on creating HB 393.
Commissioner Condon did not know. He stated that most of
the money provided by the Governor's contingency fund was
used, although, other resources had also been included.
HB 393 was HELD in Committee for further consideration.
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