Legislature(1997 - 1998)
04/06/1998 01:30 PM House FIN
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* first hearing in first committee of referral
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+ 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 emphasized that HB 393 is
enabling legislation. He noted that there were two areas of
concern. The first was gas to liquids. This provision was
taken out, put back in, taken out, and is currently out of
the legislation. He acknowledged the importance of gas to
liquids technology, but maintained that the technology would
not be hurt by its absence in the bill. Some members felt
that gas to liquid should be reviewed separately and have
its own tax policy. A provision to ratify contracts by the
legislature was added. The affect on communities was
reviewed. There would be a community advisory group. He
maintained that mayors and municipalities will have the
ability to express concerns. He stressed that most of the
pipeline communities are very excited about the legislation.
In response to a question by Co-Chair Therriault,
Representative Hodgins clarified that the advisory group
would be on municipal taxation. The group would be put
together if there is a contract or proposal.
Representative Martin questioned if there would be a
guarantee to invest in pipeline equity. Representative
Hodgins stressed that contracts would be in place.
Purchasing countries generally want to be involved in
equity. Contracts for natural gas would be for several
years. The project would not go forward without contracts.
Representative Martin emphasized that purchases should also
be partners in the investment of the pipeline. He also
noted the value of recycled gas.
(Tape Change, HFC 98 -93, Side 1)
Representative Hodgins emphasized that a taxation figures
would be developed to determine the actual and true cost of
the pipeline. He stressed that the pipeline would not be
built for the current projected cost. The intent is to
lower the cost to approximately $12 billion dollars. The
current general analysis is $15 billion dollars.
In response to a question by Representative Davies,
Representative Hodgins reviewed incentives in the
legislation. A municipal taxation exemption would be one
incentive. Tax revenue is anticipated at $12.6 billion
dollars. He suggested that it would be appropriate to give
up as much as two percent of that amount. This would be
approximately $160 million dollars. There would be a
negative impact to communities in the form of
infrastructure. More schools could be required due to
employment expansions. Communities have indicated that they
can manage operational costs but not capital expenditures.
Communities might receive natural gas as a result of their
proximity to the pipeline. The federal government would
receive approximately $26 billion dollars over the course of
the project. Federal relief would help the cash flow
portion of the project. He did not anticipate any allowance
for decreased taxes once the revenue is flowing. The
legislation is an incentive program to indicate that the
State wants to do business.
Representative Martin expressed concern that oil companies
are not threatened by the implementation of taxes.
JOHN T. SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES provided members with a flow chart of HB 393 (copy
on file). Stranded gas is gas that is uneconomic or not
competitive to develop. A qualified project would be
identified and a qualified sponsor would come forward. The
project would have to establish that:
1. Own some or all of the stranded gas; or
2. Have a right to purchase some of the stranded gas; or
3. Have the financial strength to construct the project.
Once a qualified project by a qualified sponsor brings a
project to the commissioner of the Department of Natural
Resources, the commissioner would have to determine if:
1. The gas is stranded;
2. Qualified sponsors requirements are met;
3. The proposed project is a Qualified Project; and
4. There is a Project Plan that reflects a proposal for
diligent development of the gas, and includes reasonable
provisions for providing gas to local communities.
If all the conditions are affirmed than the commissioner of
the Department of Natural Resources may begin to negotiate
an agreement. The commissioner would look at the following
principles:
1. Improve the competitiveness of the Alaska project;
2. Function effectively under a wide range of economic and
market conditions;
3. Link the State's share to project profitability (make tax
"progressive");
4. Make State's share "backend loaded"-lower tax rates in
earlier years, higher rates in later years;
5. Allow Sponsor a share of the project's return
commensurate with the Sponsor's assumed risk;
6. Have the State's share increase under favorable price and
cost conditions;
7. Be clear and unambiguous; and
8. Base payment terms on actual costs if possible.
In addition to fiscal terms, the contract would also:
1. Provide for Alaska Hire within the limits of
Constitutional restrictions;
2. Provide gas for Alaska communities;
3. Provide for a fair and reasonable sharing of revenue with
affected communities;
Development of municipal revenue sharing terms would be
based on the following:
i. The size of the tax base that would be exempted;
ii. The anticipated economic and social burdens imposed
on a municipality from a project;
iii. The need for stable and predictable payments; and
iv. The eight fiscal principles outlined above.
Commissioner Shively emphasized that how the State deals
with affected communities is one of the challenges it faces.
Property tax is the most regressive. Assuming that there is
an agreement, the commissioner of Department of Natural
Resources has the ability to negotiate a couple of issues.
The commissioner can provide for a method for valuing the
gas for royalty purposes. He observed that there have been
disagreements about the system of valuing gas. The amount
of the royalty would not be changed. The method of figuring
the royalty could change. The commissioner may also modify
the rights of the State to take royalty in-kind rather than
in-value. Currently, the amount of oil the State takes can
be changed on a monthly basis. Project sponsors will not
want the State to be able to take up to 12 and a half
percent of the gas at anytime during the project. They will
need to know, up front, how much royalty gas will be taken.
Commissioner Shively observed that once the commissioners or
the Department of Revenue and the Department of Natural
Resources are in agreement it goes out to contract. The
commissioner of Department of Revenue listens to the public
and a final agreement is reached. Then the contract would
go to the governor. The governor would submit the contract
to the legislature. If the legislature authorizes the
contract the commissioner of Department of Revenue signs the
contract within 60 days.
In response to a question by Representative Martin,
Commissioner Shively noted that companies have to make a
case for confidentiality. Trade secrets, things that affect
the applicants competitive position, information that has
commercial value that could be significantly diminished by
public disclosure, or public exposure that is not in the
long term interest of the state of Alaska would be standards
for confidentiality. The legislature could still review
information under executive session. The major portion of
the contract would be under public debate.
Representative Martin questioned qualifications for Alaska
hire. He noted that Alaskans would have to be trained for
some skilled positions. Commissioner Shively stated that a
year or more residency would be required. He stressed that
Alaska's work force is more qualified than it was during the
mid 1970's. If the workforce is a large as it was for the
pipeline there will probably be some outside hire. The
companies would be pressured to prove that they exhausted
efforts to hire Alaskans.
JIM SYKES, OILWATCH ALASKA, ANCHORAGE stated that the
legislation is moving in a good direction, but cautioned
that there are some areas that need to be improved. He
emphasized that the project cannot be made profitable if it
is not profitable. He asserted that the state of Alaska
cannot afford to give away valuable resources. He noted
four areas of concern:
- Payment schemes for payment in lieu of taxes;
- No legal assurance that a negotiated contract by the
Administration will fully compensate the people of
Alaska for the public owned resource or other public
cost;
- There has been no discussion about the downside risks
and the effect of the project on the State; and
- How can a competitive environment be assured?
Mr. Sykes observed that cash starved nations maybe willing
to grant greater concessions to get gas extraction activity
started at almost any price. This could hurt Alaska's
competitive position. It is possible that gas from other
nations could flood the nation after the project is on line.
He observed that the system of identifying impacted
communities is based on the question of whether periodic
payments to communities will adequately compensate for the
real cost of providing schools, public safety and other
services during construction. There is no insurance that
there will be money available when the municipalities need
the money the most. He maintained that something more
concrete is needed to assure that municipal needs are met.
He stressed that the only way to assure that those that are
working in Alaska are supporting the benefits they require
is to have them pay an income tax. He observed that the
upside benefits have been addressed but that until the
downside is fully examined the Department of Natural
Resources should not negotiate a contract. He emphasized
that the state of Alaska needs to make sure that there is a
competitive environment to prevent antitrust cases.
DAVID BROOKS, MANAGER ALASKA GAS, BP EXPLORATION ALASKA
INCORPORATED stated that they have prove in Prudhoe Bay
approximately 25 trillion cubic feet of gas. There is
approximately 5 trillion cubic feet of gas in Point Thompson
and the US geological survey suggests that there could be in
excess of another 100 trillion cubic feet yet to be found on
the North Slope. He emphasized the value for the resource
owners and the State if economic ways of transporting the
gas to market could be found. He assured the Committee that
BP is taking the issue of the commercialization of these gas
resources very seriously and continues to dedicate resources
to exploring routes to commercialize it.
Mr. Brooks observed that over the past year BP has worked
with the legislature, the state administration, other gas
owners and interested parties on the commercialization of
the North Slope gas. The Gas Commercialization Report
published in January of this year was an outcome of that
work. He highlighted two issues that BP believes ought to be
considered. He emphasized that a key option today is gas to
liquids technology. Although the technology is currently
uneconomic many companies including BP have extensive work
programs in progress to drive down the costs of the process
and make it competitive.
The gas to liquids technology would convert the gas on the
North Slope to a liquid hydrocarbon such as diesel. That
diesel could be transported in the TAPS oil pipeline and
sold out of Valdez in the normal way. Although this would
not require the development of a gas line it would have
other significant benefits.
First, a gas to liquids plant on the North Slope would
increase the flow of oil through the TAPS line, which would
help to keep down transportation costs. This could help
facilitate the production of crude oil from some of the
smaller accumulations on the North Slope.
Secondly, enhanced flows down TAPS would prolong the useful
life of TAPS and ensure that refineries and communities
along the pipeline continue to have access to energy derived
from North Slope reserves.
Mr. Brooks added that the options of LNG and Gas to liquids
are not mutually exclusive. The vast quantities of gas
already proven on the North Slope means that BP could do
both a LNG project and a gas to liquids project.
Mr. Brooks urged that the scope of the legislation be
widened to include all options for gas commercialization, in
particular the options of LNG and gas to liquids technology.
Mr. Brooks noted that BP's second area of concern is the
sunset clause on page 10 of the Bill. The clause limits the
applicability of the legislation to projects making an
application before the end of June 2001. He stressed that
this would close off options for the future.
Mr. Brooks stressed that BP cannot control the development
of technology or markets for the gas. He felt that a cut
off date would reduce options and gives a negative message
to the potential developers of technology and stranded gas
resources. He recommended that the sunset clause be
deleted.
Mr. Brooks emphasized that the HB 393 is enabling
legislation that does not commit the State. He maintained
that the legislation provides a positive signal to industry
and to developers of stranded gas that the State is open for
business.
Representative Davies asked for a summary of work by BP to
commercialize stranded gas through a reduction in
transportation costs. Mr. Brooks noted that BP has worked
with Arco and Exxon to look at reducing costs by sharing
infrastructure. He stated that the cost of the project is
between $12 and $15 billion dollars. He expressed
confidence that the project could be built for $12 billion
dollars. He maintained that the project is not competitive
at either $15 or $12 billion dollars. The next stage of
their work program tries to find innovative ways to reduce
costs, particularly the pipeline. A workshop with experts
in building and operating a pipeline in harsh conditions was
held two weeks ago with other companies. Plans to bring a
pipeline from the North Slope to Cook Inlet are being
addressed.
Representative Mulder asked if they would be concerned about
the applicability of gas to liquid still warranted. Mr.
Brook stated that there are people discussing gas to liquid
plants. The issue is site specific. The technology is
present. He emphasized that the legislation is enabling
legislation. Removal of the sunset clause would allow work
to progress. The clause would potentially remove options
from the State for discussions of ways to develop stranded
gas at a later date.
Representative Martin asked how much investment would be
needed to liquid gas, would the same pipeline be used, and
where is the market.
Mr. Brooks stressed that the cost is unknown. The gas could
be sent down the pipeline, blended into the crude oil. It
would increase the value of the crude oil. This would
increase the value of Alaskan oil.
JIM JOHNSON, DEVELOPMENT MANAGER, ALASKA REGION, PHILLIPS
PETROLEUM COMPANY observed that the Alaska Region in
Phillips includes North Slope assets operated by other
companies, and the Tyonek Platform in the North Cook Inlet.
Gas from the North Cook Inlet Unit goes to the Kenai LNG
plant for processing and shipment as LNG to Asia.
He observed that Phillips has looked at the implementation
of a North Slope gas project, and believes that it has the
potential to be economic, although with current conditions
it is not economic. He observed elements that will be key
in determining the ultimate economic viability of such a
project:
1. The project costs (pipeline, plants, LNG tankers);
2. The market for LNG sales overseas; and
3. The regulatory and tax structure.
He stressed that Phillips believes that timely definition of
a project structure, including potential improvements in all
three of these elements, is important for such a project to
ultimately come to fruition. As companies work toward
addressing project costs and marketing arrangements, it will
be important to be able to define any improvements in the
tax structure that will be available to bring the project
into being.
MICHAEL HURLEY, SENIOR TAX ADVISOR, ARCO ALASKA, ANCHORAGE
testified in support of HB 393, The Alaska Stranded Gas
Development Act. He pointed out that ARCO has been
aggressively pursuing the development of North Slope gas
resources for some time now. As one of the major gas
interest owners on the slope, these resources represent one
of Arco's most significant undeveloped assets. Finding a
way to commercialize them is an important priority.
Mr. Hurley stated that their most encouraging work to-data
has been in the development of plans to commercialize the
gas as LNG sold into Far East markets. While this project
is not yet economically viable, ARCO has been working on
four key areas which, if successfully addressed, could lead
to an economically viable project:
1) Reduction in the cost of the project;
2) Development of a viable project structure;
3) Development of a viable market; and
4) Pursuit of federal and state fiscal & commercial
regulatory matters.
He stated that ARCO believes HB 393 represents an important,
indeed a vital, component of their plan to develop a viable
economic project.
(Tape Change, HFC 98 - 93, Side 2)
Mr. Hurley observed that while they have been pursuing their
plan for an LNG project to commercialize these gas
resources, alternative plans to commercialize the gas have
been and continue to be studied. Over the last twenty years
several serious efforts were initiated to move the gas in
conventional gas pipelines through Canada to lower-48
markets. Unfortunately, none of those efforts achieved
economic viability. Other, more technologically
challenging, alternatives for commercializing the gas
continue to be researched, including gas to liquids
technology.
Mr. Hurley maintained that HB 393 is important because it
puts in place a process and structure within which sponsors
or sponsor groups may work with the administration to
develop alternative fiscal regimes more appropriate to the
kind and structure of project. These alternative fiscal
regimes would then be open to public comment, and would
ultimately return to the legislature, in the form of
contracts.
In response to a question by Representative Davies, Mr.
Johnson observed that the legislation accepts several kinds
of project structures. The bill is flexible enough to take
care of different kinds of structures. He stressed that the
legislation should be broad in the sense of time.
BEVERLY MENTZER, ALASKA GAS COMMERCIALIZATION MANAGER, EXXON
COMPANY U.S.A.'S observed ways that the legislation would
facilitate the commercialization of Alaska's gas and
highlighted key areas of interest during the prior hearings.
She assured the Committee that Exxon continues to have a
keen interest in commercializing Alaska's North Slope gas,
which represents over one-half of Exxon U.S.A.'s gas
resources. Since discovery of Prudhoe Bay, Exxon has
devoted a significant amount of their technical and
financial resources searching for a way to commercialize the
gas. They have spent in excess of $100 million dollars on
these efforts.
Ms. Mentzer emphasized that this work has demonstrated that
it will take a combination of fiscal and regulatory
modifications and certainty, favorable market terms and
significant cost reductions for a North Slope gas project to
be economic. She observed that the State's fiscal
consultant, Pedro Van Meurs said that, "In order to make the
Alaska North Slope LNG project economic, three objectives
have to be achieved:
1. The costs of the project have to be reduced
substantially.
2. The profitability of the project has to be improved
through a fiscal package in which federal, state and
local governments cooperate, and
3. The risks of the project have to be considerably
reduced."
Ms. Mentzer noted that risks include such things as gas
price, cost overruns, fiscal stability and market access.
To help reduce fiscal risk, the legislation provides
reasonable guidelines and boundaries for development of a
fiscal contract. It includes the opportunity for input from
the legislature, local municipalities and the public during
the contract development stage. It also appropriately
requires legislative review and authorization of any fiscal
contract.
Ms. Mentzer pointed out that a key objective of the bill is
to keep options open for the state of Alaska, so that it can
maximize the value of its gas resources. She noted that the
bill is not field-specific, but keeps options open by
defining criteria for a qualified project. She observed
that there are only criteria to judge the intent and
financial strength of potential qualified sponsors. She
added that there are only guiding principles for future
negotiations, and options for taxes to be considered and
that there are only three years to apply for a fiscal
contract.
Ms. Mentzer asserted that following recent removal of the
gas-to-liquids language, it is debatable whether Alaska
wants to keep the door open today to encourage the valuation
of new technology which may expedite commercialization of
Alaska's gas.
Ms. Mentzer explained the options and issues surrounding
gas-to-liquids conversion. She noted that the most
frequently asked question is whether gas-to-liquids
conversion is really an option worthy of Alaska's serious
consideration today. From Exxon's perspective the answer is
"yes." Exxon has spent over $300 million dollars on
technology development and acquired 1500 patents worldwide.
They have completed a feasibility study with the Qatar
General Petroleum Company and are currently in negotiations
with them on commercial terms for a possible project. She
stressed that the issue is not whether the technology is
ready, but whether or not the technology is economic. The
site-specific economics will be determined by such factors
as product price, construction, operating and transportation
cost and fiscal terms. A Department of Energy report, which
compared the economics of similar size LNG and GTL projects
for Alaska, concluded that "both options are economically
promising and warrant consideration in industry and
government decision making."
Ms. Mentzer concluded that the passage of House Bill 393 is
a necessary step in the process of developing appropriate
fiscal terms that could be specified for the life of the
project. Such a fiscal contract could increase the
competitiveness of an Alaska gas project, while meeting the
long-term fiscal interests of the state.
Representative Mulder asked if there are any successful gas
to liquid projects. Ms. Mentzer observed that there are
three operating plants in the world. They are not economic.
Co-Chair Therriault pointed out that the economics are
different. He was not supportive of adding gas to liquid
back into the legislation. Ms. Mentzer stressed that HB 393
is a general framework. The criteria in HB 393 would be
applicable to any major resource development project. She
pointed out that LNG and gas to liquid are both uneconomic,
they face some of the same hurdles. The issue is whether
the door will remain open.
In response to a question by Co-Chair Therriault, Ms.
Mentzer clarified that the gas to liquid process is about 60
to 65 percent energy efficient. It is a heat intense
process and requires a lot of fuel. The BTU potential can
be more valuable than LNG. The energy lost in the process
is not regained directly in the product. However, heat can
be used for electric power generation or waste heat based on
site-specific opportunities. The third step of the gas to
liquid process can result in a range of high quality
products.
In response to a questions by Representative Davis, Ms.
Mentzer explained that some products could be used in the
community without additional processing. The climate is not
a significant detriment to the processing. Arctic
conditions, in general, raise operation costs. She
emphasized that they do not know when the Asian economy is
going to recover and take increasing amounts of LNG from
Alaska. She spoke against the sunset provision.
In response to a question by Representative Martin, Ms.
Mentzer interpreted the removal of the gas to liquid option
to indicate that it is not the intent of the legislature to
consider the option.
Representative Davies observed that communities are
concerned that fiscal terms not prohibit an appropriate
return to the community at some place and time. They are
also concerned about having input into contracts.
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE stated
that communities have several opportunities to voice
concerns. The bill creates a municipal advisory group that
would be consulted throughout the negotiation of the
contract. The commissioner of Revenue is directed to
consult with and seek the advice of the municipal advisory
group. There is a period of public comment. The
commissioner must consult with municipalities and others
during the public comment period. The contract can be
amended to address concerns before legislation is presented.
Legislation can also be amended. The proposing group would
be consulted on amendments.
Representative Mulder MOVED to report CSHB 393 (RES) out of
Committee with the accompanying fiscal notes. There being
NO OBJECTION, it was so ordered.
CSHB 393 (RES) was REPORTED out of Committee with "no
recommendation" and with two fiscal impact notes, one by the
Department of Revenue and one by the Department of Natural
Resources, both dated 2/11/98.
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