Legislature(2007 - 2008)HOUSE FINANCE 519
05/02/2007 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| HB177 | |
| Adjourn | |
| Start | |
| HB177 |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
HOUSE BILL NO. 177
An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming
amendments; and providing for an effective date.
1:40:17 PM
CONOCOPHILLIPS ALASKA
BRIAN WENZEL, VICE PRESIDENT, ALASKA NORTH SLOPE (ANS) GAS
DEVELOPMENT, CONOCOPHILLIPS ALASKA, INC., ANCHORAGE, stated
ConocoPhillips does not support AGIA as introduced by the
Governor or the version adopted by the House Resource
Committee (HRC). The bill requires critical changing in
order to avoid delays. The applicant submitting an
application should be able to obtain the requirements of
AGIA's intent through a combination of terms and
commitments. There should be a comprehensive package
including critical up-stream resource terms balancing the
risks, while continuing to provide maximum benefits to the
State of Alaska.
ConocoPhillips would like to find a way to make the Alaska
North Slope (ANS) development commercially viable; then the
pipeline becomes an afterthought. He reiterated, first,
resource terms must be addressed.
1:42:38 PM
Mr. Wenzel noted the question is in relationship of how to
develop gas resources for the pipeline to succeed. He
discussed the need for dialogue with the Administration in
the attempt to find common ground fiscal resource terms that
allow for the viability of the project. The process should
include negotiations rather than competitive bidding.
1:44:38 PM
Mr. Wenzel encouraged consideration of the full package and
that the proposed version of AGIA does not include that.
AGIA stipulates up-stream terms inadequate to
ConocoPhillips.
Representative Gara asked what "up-stream" means to
industry. Mr. Wenzel replied, that is the portion allowing
production of gas. Up-stream is a tax term.
1:46:01 PM
Mr. Wenzel said ConocoPhillips supports changes to the terms
of AGIA, with specific regards to the up-stream fiscal
terms. The inadequate resource terms of the bill creates a
situation of project risks & uncertainties, which more than
out weigh the returns. He reiterated, unless AGIA is
adjusted, ConocoPhillips is unable to make an application.
1:47:42 PM
Mr. Wenzel discussed comments from the newspaper, indicating
the project has a 50% rate of return. He claimed that the
return could be closer to a zero percent and that the claims
that the project is "wildly economic" are misleading and are
based on assumptions that can not be guaranteed. There are
risks and uncertainties, which out-weigh potential benefits
if there is no clarity incorporated regarding the resource
terms.
Mr. Wenzel commented that the resource risks have always
posed the greatest obstacles. Long-term clarity on State
taxes and royalties is critical to the project.
1:50:02 PM
Mr. Wenzel mentioned previous testimony heard from Ms. King
about AGIA's restrictive approach and that she encouraged a
mechanism be in the bill, allowing the resource lessees,
resource terms. He emphasized that AGIA's bid requirements
must be changed and warned about disadvantages to Alaska
awarding an exclusive license to a single entity.
There is a fundamental flaw in the AGIA plan, which is not
founded on reasonable commercial expectations. The
development of the proposed pipeline will be one of the
largest public construction projects in the world. There
are certain standard practices for structuring, planning and
developing such a resource; AGIA tends to ignore business
realities, requiring certification before all details are
worked out. Sanctioning timelines for commercial projects
this size are unreasonable. He discussed a clause in the
bill, which prevents cost overrides.
1:53:56 PM
Mr. Wenzel argued terms used in AGIA language regarding
investment business criteria; if HB 177 is adopted as
drafted, the State makes the choice to provide inadequate
certainty regarding future tax rates. The manner that it is
structured, every anticipated a tax rate increase would have
to be built into the economics of the project.
The ten-year term proposed in AGIA does not recognize the
long term role of shipping commitments and the language
could force a project developer to amortize their 10-year
investment, increasing the tariff on the pipeline. He
reiterated that AGIA does not recognize realities of
financing the structure of such a large project.
Mr. Wenzel commented on the lack of lending recognition,
dangerous for Alaska trying to off-set the risks for the
project.
1:56:56 PM
Mr. Wenzel encouraged legislative consideration of industry
recommendations that AGIA be changed so that they can submit
a best proposal. As currently drafted, AGIA requires
commissioner's to reject any proposal that does not match
exactly AGIA terms. All processes should be transparent,
allowing the applicant to put forth the proposal, meeting
the needs of all stakeholders.
1:58:43 PM
Mr. Wenzel advised the process-forward requires AGIA to be
amended to include the fiscal terms. He surmised that the
quickest way forward would be for BP, Exxon & ConocoPhillips
to provide a combined proposal; companies that have much
expertise & knowledge in gas resources. They should be
included in the package.
Mr. Wenzel continued, ConocoPhillips wants to adopt &
develop the State's ANS gas resources and participate in a
competitive process, recommending that AGIA be amended. He
claimed that no one in the State can afford to wait for the
proposals. Alaska deserves to see comprehensive and the
best possible proposals.
2:02:15 PM
Representative Gara referenced the up-stream portion of the
project, noting the amount the State has already volunteered
to pay for gas field development costs. Mr. Wenzel
responded that all expectations regarding future resource
terms would be built into future economics of the project.
Currently, Alaska has an insufficient framework regarding
resource terms.
Representative Gara pointed out that the State pays 42% of
the gas field development costs. Additionally, HB 177
reduces royalty by 2% by eliminating the higher overall
costs, worth 2% to the producers. The contract contains a
70/30 debt ratio benefiting producers.
Representative Gara continued, included is an $18 billion
dollar federal loan guarantee for the pipeline construction
and a $500 million dollar offer to help build a pipeline
with a ten-year tax lock-in. He emphasized that HB 177
includes a lot of incentives. Mr. Wenzel thought the listed
incentives had been mischaracterized. He stated that the
Petroleum Production Tax (PPT) had been designed with a
dollar goal for the State. Alaska could receive those
dollars by either a production tax, gross revenue or net tax
and the State chose a net tax because it helped provide
incentive investment.
Mr. Wenzel referenced the 70/30 debt ratio, which he thought
would provide an artificial requirement on the pipeline
owner and would not act as an incentive. At this time, the
federal loan guarantees do not have regulations & the
ability to use them has yet to be determined. That creates
another uncertainty. There will be benefits to Alaska,
however, producers must look forward to the entire mix of
uncertainties and cost requirements for any project.
Representative Gara emphasized that the producers get to
deduct 42.5% of the costs, charging it back to the State.
In a normal situation, a profits tax could not be deducted
until there is a profit. Alaska allows the deduction of the
gas field costs even before there are indicated profits.
Alaska has always been a reliable partner compared to other
places of industry investments such as Argentina, Russia
(nationalization), Nigeria, & Viet Nam; Alaska stacks high
in comparison with those places.
Mr. Wenzel reminded members that ConocoPhillips invests
heavily in Alaska and that every location around the world
carries a mix of uncertainty and promise and that the
recommendations made at the meeting takes that all into
account. Concerns stem from the size of the project and the
dependency Alaska has on the revenue from oil and gas.
2:09:22 PM
Representative Gara voiced concern with a request for tax
certainty. According to the legislative attorney, a ten-
year lock-in might be unconstitutional. He questioned if
the Court rules that the Legislature can not lock-in future
legislature's tax rates, will the producer's back out. Mr.
Wenzel stated that resolving the up-stream resource terms
includes working with the Administration and Legislature to
find the best mechanism to provide clarity on resource
terms. He knew there could not be a 100% assurance on the
project.
2:10:58 PM
Representative Gara asked if ConocoPhillips could commit to
acceptable terms, without the State fearing they would back
out of the project if tax certainty was not allowed by the
courts. Mr. Wenzel recommended determining backup
alternative mechanisms and encouraged that the State work
jointly with ConocoPhillips (CP) to provide the necessary
comfort for the project to move forward.
2:11:49 PM
Representative Kelly questioned if CP could alone make a
proposal. Mr. Wenzel did not know; through AGIA, they
could. However, their ability to advance a project alone
would be less stable. He encouraged that the three
producers work together; he wanted the support of the other
two producers.
Representative Kelly worried that a proposal including all
three major producers could not be competitive. The
Governor's attempt is to take elements including fiscal
certainty. He asked if it was too early to create such a
"deal". Mr. Wenzel did not think that the "deal" had been
lost, not8ing that competitive could work. He stressed if
AGIA is changed, including submission of a comprehensive
proposal with the resource terms, could leave the door open
for competitive bidding.
Representative Kelly did not embrace such a view; he worried
about the "only option" that would be provided by the three
major producers. Mr. Wenzel countered that other bidding
companies could attempt to be included in the proposal. He
warned that there must be a trade off in terms and
conditions of the open-season in order to guarantee that
enough risk is mitigated.
Representative Kelly supported Governor Palin's inclusion of
as much competitiveness as possible in the legislation and
worried about the proposal submitted by ConocoPhillips.
2:18:25 PM
Mr. Wenzel explained in order for the process to move
forward, AGIA needs to be changed to allow for comprehensive
proposals; then the three major producers will come forward
with a package proposal. He addressed the advantages of
competitive bidding.
Representative Kelly recommended reconsideration of both
proposals [PPT & AGIA].
2:21:30 PM
Representative Gara asked if the pipeline is developed,
could there be a guarantee that gas would be sold. Mr.
Wenzel stated that CP wants the pipeline. Regarding Prudhoe
Bay, the fastest move forward would not to be attempting to
nominate the gas, which are practical & legal issues
regarding gas allocations.
Representative Gara asked if the pipeline proposal was
passed, including a low enough tariff to guarantee
production is economic, could Alaska count on an agreement
with CP to sell gas to that project. Mr. Wenzel pointed out
the amount of speculation regarding that concern. He noted
that the goal of CP is development of gas resources. If
there was a mechanism to accomplish that with the criteria
needed, CP will undertake it; economics drive it. There are
big concerns regarding the capital costs of the project.
Representative Gara discussed the determination of the
anticipated profit margins and that the State has determined
the net present value, profit margins, gas production and
best estimated tariff rates. He asked what the current net
value ratio required by CP. Mr. Wenzel explained the rates
can not be disclosed. The best way for the State of Alaska
to manage a development project such as the proposed would
be to align with the project developer and commodity seller.
Alaska obtains revenue from the net cash flow and profit of
the producers.
2:26:16 PM
Representative Gara advised that producers need to inform
the State of the benchmarks in order to address the internal
profit needs. Mr. Wenzel maintained that the Governor has
been attempting to "get around that", offering only
competitive bidding. He argued, a new agreement must be
determined.
Representative Thomas voiced frustration with the process,
pointing out the limited time left in the session. Mr.
Wenzel indicated that producers raised their concerns during
initial discussions & recommended switching bid requirements
to bid variables as a way to provide flexibility. He
recognized time is short & that there is not sufficient time
to deal with changes needed in AGIA. He urged an alternate
proposal.
Representative Thomas asked that the producer's amendments
be brought forward. Mr. Wenzel offered to provide language
creating an alternate proposal.
2:31:33 PM
Representative Joule inquired when the "window" closes. Mr.
Wenzel did not know. He suggested there is a sense of
urgency to move the project forward; ConocoPhillips wants to
see that happen.
Representative Kelly asked about the bid alternate approach
and the economics of the project. Mr. Wenzel advised that
if the project does move forward, ConocoPhillips is willing
to be creative during the negotiating process. He hoped
that applicants would be encouraged to submit multiple
proposals. He spoke against the competitive bidding process
established in AGIA.
Representative Kelly asked if current language prevents that
from happening. Mr. Wenzel indicated for ConocoPhillips,
there is not adequate resource funding and that there are
too many risks and uncertainties.
Representative Kelly suspected that the gas price and fiscal
certainty were the big issues. Mr. Wenzel pointed out in
the current draft of AGIA, the producers were prevented of
from proposing any alternate up-stream terms.
Representative Kelly referenced the production gas tax
issue; he did not think ConocoPhillips was prevented from
offering bid alternate approaches. Mr. Wenzel responded
they would look at that.
2:42:30 PM
Representative Joule questioned the Legislature's role in
this process. Mr. Wenzel responded that the Legislature has
a role in structuring the basic needs for citizens and also
providing checks and balances between the Administration and
the industry. The Legislature must look at diversifying the
State's economy and motivate projects which provide new
industry.
2:46:10 PM
Representative Gara noted that the Governor's proposal seeks
additional bids; it includes twenty terms wished for the
contract to move forward. Mr. Wenzel thought there could be
delays if sufficient bids were not received. He reiterated
the need to receive all bids up-front.
2:48:39 PM
In response to a question by Representative Gara, Mr. Wenzel
stipulated that the procurement process seeks to achieve
uncertainty among the bidders. The applications must
conform to the criteria and create the motivation.
EXXONMOBIL CORPORATION
MARTIN MASSEY, U.S. JOINT INTEREST MANAGER, EXXONMOBIL
CORPORATION, advised that ExxonMobil has been in Alaska for
over 50 years and has been a key player in Alaska's oil
industry development. ExxonMobil holds the largest working
interest at Prudhoe Bay [36.4%] and their current net
production in Alaska is approximately 150,000 barrels per
day. ExxonMobil has benefited from their involvement in the
State of Alaska and believes Alaska has benefited.
Commercializing Alaska's North Slope (ANS) gas would allow
continuation of a mutually beneficial relationship.
2:53:06 PM
Mr. Massey continued that AGIA is important to Alaska, the
nation and ExxonMobil. The project has the potential to
generate billions of dollars in revenues for the State, the
U.S. federal government and Canada; it could provide a
stable and secure source of clean energy for Alaska and
North America for decades to come. For ExxonMobil, the
project is significant and has the potential to add over 1
billion cubic feet per day of gas sales, which would be more
than a 10% increase to the current worldwide daily gas
production. The project could add over one billion oil-
equivalent barrels to proved reserves, nearly enough to
replace a year of production. Given the significant impact
the project could have, ExxonMobil supports efforts to
advance a pipeline project.
ExxonMobil has spent more than $180 million dollars studying
ways to commercialize Alaska gas. Since the 1970's,
ExxonMobil has evaluated LNG, gas to liquids and gas
pipeline alternatives. Based on those studies, it was
determined that a project would result in the best value for
the State & the producers.
Mr. Massey stated that as written, AGIA does not encourage
market-based competition due to its prescriptive nature.
AGIA does not adequately address the significant up-stream
issues and risks associated with the scale and magnitude of
the project. ExxonMobil believes that AGIA would not create
an acceptable framework for the world-scale mega-project
unless it allows parties undertaking risks to make a
proposal that properly manages the risks.
The Administration's model fails to recognize the nature of
such a basin-opening project. The up-stream pays for the
mid-stream, which cannot be split when evaluating commercial
viability. The State's economic model needs to be
corrected. For best results, AGIA must establish the
State's key objectives, allowing applicants flexibility to
compete and define the parameters that are necessary to make
the project commercially viable. Amending AGIA must be
objectively driven, allowing for open competition,
maximizing the number of applicants and allowing those
applicants to propose innovative solutions to meet the
State's needs.
2:56:10 PM
Mr. Massey noted the tendency to underestimate the size and
risk of the project, the largest in North America. Due to
the size, there is a greater chance of cost over runs; steel
prices have doubled since 2001 and worldwide projects are
putting pressure on other resources.
3:05:34 PM
Mr. Massey addressed the importance of alignment between the
State and the producers and the benefits of a producer
project. Maximizing the value to the State of Alaska and
the resource holders means selecting the right design
concept and then executing it to deliver low cost and fast
completion. On this size & magnitude of a project,
construction and operating experience must be a significant
consideration. Only a limited number of companies can
demonstrate the capabilities, financial strength and arctic
experience to effectively participate in and manage world-
scale mega-projects.
Mr. Massey pointed out that the three producers have mega-
project experience in numerous places throughout the world
and have demonstrated success in meeting project objectives.
ExxonMobil's arctic experience is extensive, with
developments in multiple types of arctic environments.
ExxonMobil's global project development leads the industry
in project cost and schedule performance. ExxonMobil has
also demonstrated leadership in safety, health and
environmental performance. ExxonMobil has the financial
strength to make the project a reality, maintaining one of
the strongest financial positions of any company in the
world. He added that they maintain the highest credit
rating from Standard and Poor's (S&P) & Moody's triple A
list.
Mr. Massey pointed out that it is important to remember that
the project is a basin-opening project, benefiting the State
and the industry for decades. Basin-opening projects
throughout the world have progressed and been successful
when there is alignment between the host government and the
leaseholders. The producers and the State both want a
pipeline project to commercialize the ANS gas resources and
open the basin to gas exploration. ExxonMobil believes a
producer gas pipeline project would result in maximum value
to the State with maximum incentive to control costs. Low
capital and operating costs will result in lower treating
and transportation costs and access to premium market price.
The State will receive the majority of the revenue from the
value of gas sales via revenue received under the lease
royalty agreements and from production taxes; valued based
on net-back received from the gas.
rd
Mr. Massey commented 3 party owners do not share the same
incentives; they actually benefit from increased capital
costs. Based on the demand for workers which the project
generates, Alaskans are primary to successful project
execution. Financial strength, experience and the ability
to get the job done should be the critical components of any
evaluation of proposals. When available options are
considered, a producer pipeline will provide maximum value
to the State of Alaska.
Mr. Massey addressed the fiscal predictability importance
for a mega-project. ExxonMobil must work with the State to
explore important fiscal issues. Because of the nature and
magnitude of the risks associated with the project, fiscal
terms that are predictable and durable are necessary. The
two risks:
· Geologic and cost risks; and
· Market risk is inevitable in a commodity business such
as oil and gas.
The risk of fiscal terms changing is of a different nature
and outside the producer's control. There must be
agreements allowing development of the project under
predictable and durable terms with an adequate degree of
certainty. It does not mean that taxes cannot change over
the life of the project. Predictability means that the
State's tax and terms are understood, defined and modeled
for the purpose of evaluating the overall project economics.
If fiscal terms can change in unpredictable ways in the
future, then the industry is not able to make well-founded
investment decisions on behalf of their shareholders, nor
would lenders be as confident in providing financing for a
project that size. The project requires massive investments
before any revenue is generated from the investments. As a
result, increases in taxes on oil and gas related activities
during the life of the project could impact the commercial
viability of the project and could increase lender concern.
Because the fiscal terms can be modified under the proposed
AGIA legislation, it does not provide the fiscal
predictability necessary to ensure a commercially viable
project.
Mr. Massey pointed out, it is important to recognize that
for mega-project development, governments need to provide
long-term fiscal stability. Contracts should include fiscal
stability protection and in some cases, it will run for the
length of the contract; others for 40+ years. AGIA must
allow applicants to put forward the best proposal on what is
required to make the project commercially viable, allowing
the State the opportunity to consider the proposals that
have the best chance of actually delivering an Alaska gas
pipeline.
Mr. Massey outlined thoughts on how AGIA could be modified
to ensure the best chance of a successful result, allowing
the State to maximize value. Alignment between the State
and the leaseholders is essential to a basin opening project
of such magnitude; therefore, establishing the right
approach when moving forward is the most important activity
for a project. In calculating up-stream revenue, everyone
must be aware of the taxes and royalties from oil and gas
operations and set at a level, making the project viable and
should be addressed at the beginning. To ensure that the
project is constructed, it must be commercially attractive
to the shippers at the time they make their transportation
commitments. Shippers, particularly those who must
substantially invest, develop and produce gas resources,
will not be willing to enter into a long-term financial
commitment for the transportation of gas if there is
likelihood that initial rates would be increased in the
future to accommodate expansions.
Under the Alaska Natural Gas Pipeline Act, Congress struck
what the proper balance between encouraging investment by
those willing to commit to pay for initial capacity and
encouraging exploration by providing an opportunity for
future access to the pipeline. Because of the unique nature
of the Alaska gas pipeline project, the Federal Energy
Regulatory Commission (FERC) approved policies to enable a
mandated expansion benefiting explorers. In addition, a
pipeline entity should not be required to accept a FERC
certificate irrespective of imposed conditions.
· Under AGIA, the proposed up-stream inducements would
require significant modification to ensure that a
commercially viable project is obtained.
· AGIA prescribes activities that must be completed
within a specific timeframe or date certain. Setting
arbitrary target dates is not consistent with good
project management practices.
· Milestones are not necessary if the project is
commercially viable.
· AGIA lacks specifics on key fiscal terms and other
requirements.
· Because of the complexity and risk associated with the
project, the parties must have an efficient and
impartial means of handling disagreements when they
arise. Arbitration is the method used to resolve
disputes under the State's Royalty Settlement
Agreements.
3:16:48 PM
Mr. Massey concluded that ExxonMobil is committed to the
Alaska Gas Pipeline Project moving forward; however, the
project cannot move forward if it is not commercially
viable. AGIA, as written, does not provide for a
commercially viable project. The Administration's stated
goal for AGIA is to increase competition through an open and
transparent process. The current AGIA form will result in
less competition because it fails to adequately address the
issues raised by parties who will ultimately pay for the
project. AGIA appears to be based on flawed economic
assumptions. The existing prescriptive terms in AGIA would
preclude ExxonMobil from being able to make an open,
competitive and conforming proposal. ExxonMobil possesses
the financial strength and project experience required to
make the project a success. He suggested that AGIA be
amended to provide for a broad, objective-driven process,
establishing how the State wants to achieve the goals and
allows each applicant to propose how to meet the objectives
and identify what is required of the project.
Representative Crawford asked if the criteria were changed,
would ExxonMobil then team-up with the two other major
producers. Mr. Massey anticipated that they would work
together, pointing out that nothing prevents submitting
their own proposal. In the end, the final deal needs to be
acceptable to all three majors and the State before a
pipeline is built.
3:24:12 PM
Representative Thomas questioned what will happen if the
Administration does not accept the industry's proposal and
decides to use the earnings from the Permanent Fund for
financing the project. Mr. Massey stated that a decision
could be made from an analysis of commercial viability and
determination.
3:26:22 PM
Representative Thomas inquired if ExxonMobil had amendments
prepared. Mr. Massey responded that they would provide
recommendations for legislative consideration.
3:28:05 PM
Representative Gara suggested that the producers should take
their recommendations and concerns to the Administration
rather than to the Legislature. He asked how long
ExxonMobil has known that they would not submit a bid under
the AGIA plan. Mr. Massey indicated they have made it clear
since the beginning, they would not apply under the AGIA
form.
Representative Gara noted for the record, he was more
comfortable with the AGIA proposal and feared that
ExxonMobil would not be willing to sell gas to any of the
other bidders; he asked if ExxonMobil would be willing to
make a public commitment. Mr. Massey proposed that the
process be open and that all bids are public record. AGIA
does not allow for that. At this time, ExxonMobil can not
determine if they will commit their gas and will look at
each proposal for commercial viability.
3:32:29 PM
Representative Gara asked if Exxon would commit to sell gas
to any pipeline project that provides an economic return.
Mr. Massey reiterated, they would look at each project as
proposed and would make a determination then.
Representative Gara grilled ExxonMobil regarding withholding
of gas. Mr. Massey informed members, he would want to
consult ExxonMobil's attorneys.
3:34:29 PM
Representative Gara agreed that a predictable, fiscal system
is important. Mr. Massey maintained that in any mega
project, fiscal certainty is the norm. He would not address
specifics & terms.
Representative Gara mentioned the 10-year tax lock-in and
that it might not be enforced by the Alaska Court System.
Mr. Massey commented that the State could maintain their
long-range, predictable terms under the State Constitution
and acknowledged it could be challenged.
3:38:16 PM
Representative Kelly understood that each contract has terms
and conditions; he questioned which items are of concern to
the producers. Mr. Massey stated the structure is too
detailed and that the State should establish objectives. He
addressed the inappropriate target dates, which would lead
to poor management.
3:41:17 PM
In response to a question from Representative Nelson
regarding deadlines, Mr. Massey responded that producers
would be dictated by attempting to meet the unreachable
deadline. The project will be completed at the maximum
viable pace; deadlines are not necessary.
Representative Kelly asked the greater issues. Mr. Massey
responded that the expansion requirements are too detailed.
Additionally, the rolled-in rates need work. He added that
the $500 million dollars is not in the State's best interest
and establishes an opportunity for those that should not be
involved, to be players. Representative Kelly indicated
that the $500 million dollars is not mandatory.
Mr. Massey spoke to the Alaska hire, indicating that any
applicant should propose how they would maximize Alaska
hire; however, there must not be a Project Labor Agreement
(PLA).
3:46:59 PM
In response to further questioning by Representative Kelly,
Mr. Massey noted the PPT gas tax rate that is too high. He
observed that the Administration has acknowledged a need for
predictable and durable terms; he emphasized that all terms
must be predictable throughout the agreement and must occur
in all forms.
Representative Kelly asked when the industry needs to know
about the PPT taxes. Mr. Massey replied, they must know
before the project is started.
3:49:46 PM
Representative Kelly asked about any "sweet deal" supported
by the industry. He questioned how Exxon justified a no-
agreement with a 15% floor, inquiring if that would affect
the project. Mr. Massey stipulated that the 15% was not the
only variable but significant. Currently, there are only 35
TCF discovered resources & 50 are needed to keep it full.
There must be a structure which encourages exploration. He
noted that up-stream terms will determine if & when
exploration is done.
3:55:54 PM
Representative Kelly asked if the PPT up-stream elements
were set aside, would Exxon then accept the floor and
provide bid variables. Mr. Massey advised they could not
present a "commercially viable proposal" with those
restrictions and that the 15% must be removed.
3:58:13 PM
Representative Gara inquired if ExxonMobil operates in other
places around the world that are subject to rolled-in rates.
Mr. Massey commented that the difference is the significant
size of the proposed project.
Representative Gara asked if there was a risk for
affordable, new shipper pipeline expansion. He thought
there would be competing economic interests and asked if
they were subject to rolled-in rate requirements for
expansions around the world. Mr. Massey did not know. He
said he has discussed regulating facilities throughout the
United States (U.S.) and Canada. The State has available
options for addressing that scenario & requires, initially,
the shippers to subsidize. In dealing with the up-stream
concerns, dictates if the project will move forward.
Representative Gara acknowledged the State might need to
adjust the gas tax; however, did not accept the industry's
unwillingness to discuss lack of up-stream incentives. PPT
subsidizes the gas field development cost by 42.5%. He
reiterated that the incentives are substantial. Mr. Massey
replied that the PPT taxes had increased and that there is
no way to know the terms; without knowing the terms, the
economic projection is un-determinable.
4:04:30 PM
Representative Crawford realized that consumers would end up
paying for the pipeline. If AGIA does not pass, perhaps the
State could initiate a reserves tax. He observed that the
industry has not compromised with the State. Mr. Massey
agreed with Representative Crawford for a need of good-faith
negotiations. He acknowledged that the project is huge,
complex and involves significant risks.
4:08:37 PM
Representative Kelly concurred that a deal should not happen
until it is favorable for both sides. Mr. Massey stated
that ExxonMobil will not give up because of the importance
of the pipeline to the State, the industry and the nation,
but reiterated the need for producers to have a commercially
viable project. He lobbied for further consideration to
open-up AGIA to a more flexible process.
DAN DICKINSON, LEGISLATIVE BUDGET AND AUDIT
4:10:39 PM
Co-Chair Chenault summarized previous questions received
from the Administration:
· How gas was taxed under the PPT and the PPT credit
implications of the gasline;
· Are PPT gas credits applicable to GTP in the AGIA bill;
· How does PPT progressively work on gas;
· What is the link to oil; and
· How attractive is the pipeline using the IRR method.
DAN DICKINSON, CONSULTANT, LEGISLATIVE BUDGET AND AUDIT
(LBA) DIVISION, referenced the questions, indicating that
gas is taxed the same as oil, on net value. When the net
value is calculated, if there are investments down-stream to
the point of production, they would not be eligible for the
credit. In order to determine how gas is taxed under the
PPT, it is important to look in five different places.
AT EASE: 4:14:57 PM
RECESSED: 4:15:20 PM / MAY 2, 2007
RECONVENED: 8:29:42 AM / MAY 3, 2007
DAN DICKINSON, CONSULTANT, LEGISLATIVE BUDET & AUDIT
COMMITTEE, present a power point addressing answers from
questions asked by the Legislative Budget and Audit (LBA)
Division.
The first question:
• How gas is generally taxed under the PPT and what were
the PPT credit implications of gasline work
Mr. Dickinson stated that gas is taxed the same as oil on
net value. He added that investment down-stream of the
point of production is not eligible for credit. He pointed
out how gas taxed occurred under the PPT and that oil and
gas are taxed under five different measures:
• 22.5% of net value
• North Slope floor triggered by oil price
• Progressivity triggered by single taxpayer net value
• Private royalty @ 1.67% for gas - 1/3 of oil
• Cook Inlet ceiling
Representative Hawker noted that progressivity is a
production tax and in addition to royalties. Mr. Dickinson
said correct, pointing out that royalties are a large piece.
8:33:39 AM
Mr. Dickinson added that production taxation amounts to
22.5% of the net value. To calculate net value:
• Total up-stream costs deducted from the revenue streams
from oil and gas sales
• Gas Revenue Exclusion (GRE) mechanism provides an
administratively simple way of adjusting the effective
rate without changing the nominal rate or making many
allocations
8:35:23 AM
Mr. Dickinson directed comments to the North Slope floor,
which is triggered by the oil price including an alternative
floor and applicable to those prices.
· In considering the future, if Prudhoe Bay is producing
250,000 bbls oil and 3 bcf of gas and
· If the heating value is 1,000,000 btu per mcf, that
translates to the equivalent of 500,000 bbls a day
One-third of the field's production would be used to
establish the trigger.
8:36:53 AM
Mr. Dickinson noted that Question #3 addresses how PPT
progressivity works on gas and the link to oil.
Progressivity is triggered by a single taxpayer net value.
• Progressivity is determined for each taxpayer on its
total mix of oil and gas and all up-stream costs.
• It is calculated on a monthly basis & monthly up-stream
costs are one twelfth of the total annual costs.
Slide 8 indicates an example of the progressivity triggered
by a single taxpayer's net value with a destination value of
$63.76 dollars; the gross value left to the State would be
$58.76 dollars and a 2.94% progressivity percentage. He
thought that gas price could "drag down" progressivity on
oil. A significant influx of gas will probably reduce the
progressivity paid on oil.
8:41:06 AM
Representative Gara noted that at this time, there is no
proposal to rewrite the PPT; he asked the value of Mr.
Dickinson's presentation comparison to PPT. Mr. Dickinson
stressed that there needs to be a change made to the PPT.
From conversations last year, there was discussion on the
comparison of distance gas to oil and assumed it was part of
Question #3. Representative Gara asked if the intent was to
"gear up" for another special session in order to discuss
PPT. Co-Chair Chenault thought eventually that would need
to be discussed.
8:42:58 AM
Mr. Dickinson referenced Slide 9, which establishes
progressivity charges at various destination values,
including net deductions.
Representative Gara inquired about the tax rate charged
during those periods tax payments had been made. Mr.
Dickinson could not respond.
8:44:15 AM
Mr. Dickinson highlighted the private royalty amount of
1.67% of the gross for gas. The Cook Inlet area has
specific ceilings:
• With no direct effect on North Slope gas;
• Expiring in 2022;
• If a gas line is built from the North Slope to Cook
Inlet, it could effect the differential taxation rates;
• A ceiling is potentially different for each producer,
with an average of 4.947% of $3.585 per mcf.
8:45:29 AM
Mr. Dickinson pointed out that Slide 12 addresses Question
#2, regarding PPT gas credits being applicable to the GTP in
the AGIA bill, and that under the PPT, the GTP was not
eligible for the credits. He added there are only up-stream
costs qualifying as credits indicated in AS 43.55.023 (a),
AS 43.55.023 (k) & AS 43.55.165 (a).
Mr. Dickinson addressed "point of production", noting those
areas are defined so that the gas processing is up-stream of
the point of production and gas treatment is down-stream of
the point of production.
• In AS 43.55.900
• (21) gas processing
• (23) gas treatment
• (27) point of production
8:47:16 AM
Mr. Dickinson provided the definitions from Statute (AS
43.55.011(27) of the point of production for oil:
• (i) not subjected to or recovered by mechanical
separation or run through a gas processing plant, the
first point where the gas is accurately metered;
• (ii) subjected to or recovered by mechanical separation
but not run through a gas processing plant, the first
point where the gas is accurately metered after
completion of mechanical separation;
• AS 43.55.011(27) "point of production" means
• (B) for gas;
• (iii) run through a gas processing plant, the first
point where the gas is accurately metered downstream of
the plant;
• (C) for gas run through an integrated gas processing
plant and gas treatment facility that does not
accurately meter the gas after the gas processing and
before the gas treatment, the first point where the gas
processing is completed or where gas treatment begins,
whichever is further upstream.
AS 43.55.011 (21) provides definition of gas processing:
• (A) means processing a gaseous mixture of hydrocarbons;
• (i) by means of absorption, adsorption, externally
applied refrigeration, artificial compression followed
by adiabatic expansion using the Joule-Thomson effect,
or another physical process that is not mechanical
separation;
• (ii) for the purpose of extracting and recovering
liquid hydrocarbons [producing ngls/oil].
The PPT definition for gas treatment is found in AS
43.55.011 (23):
• (A) means conditioning gas and removing from gas non-
hydrocarbon substances for the purpose of rendering the
gas acceptable for tender and acceptance into a gas
pipeline system.
• (B) includes incidentally removing liquid hydrocarbons
from the gas.
Mr. Dickinson referenced Slide 20, which defines gas
treatment, language taken from AS 43.55.011 (23):
• (C) does not include
- (i) dehydration required to facilitate the
movement of gas from the well to the point where
gas processing takes place;
- (ii) the scrubbing of liquids from gas to
facilitate gas processing.
He continued that under current law:
• Gas Processing: Starts with gaseous mixture of
hydrocarbons, producing natural gas liquids and gas by
removing hydrocarbon liquids.
• Gas treatment: Starts with produced gas and removes
non-hydrocarbons to prepare the gas for tender to the
pipeline. Nothing is produced.
8:49:29 AM
Mr. Dickinson explained that Slide 22 demonstrates the
definition of gas processing taken from AS 43.55.900 (7)
"Gas processing" means the treatment of gas downstream of
the point of production to extract natural gas liquids"; &
AS 43.55.900 (7) "Gas processing" means post-production
treatment of gas to extract natural gas liquids".
Mr. Dickinson pointed out the AGIA definitions of gas
processing found in AS 43.55.900 (7) has the same meaning as
"gas processing" in AS 43.55.900 (21). He noted the graph
on Slide 24 of the PPT point of production chart for gas.
8:53:51 AM
Mr. Dickinson stated that if gas simply comes out of the
ground, the point of production is measured from where it
comes out, the first time. If there is a mechanical
separation, it is again, the first point measured after
mechanical separation. He referenced Slide 27, indicating a
gas processing plant. Slide 28 is the most important focus,
the integrated gas processing and treatment plant, with a
point of production furthest up-stream, where either
treatment begins or processing ends. Slide 29 indicates the
Prudhoe Bay point of production under the PPT, central gas
facility.
8:56:31 AM
Mr. Dickinson explained that if CGF remains a separate plant
and sends gas to a Gas Treatment Plant (GTP), gas would be
produced as it is metered out of the plant. The GTP would
be down-stream of the point of production for the gas and,
thus, associated operating and capital costs would not
qualify as lease expenditures under AS 43.55.165 (a) nor
would capital costs qualify for credit treatment under AS
43.55023 (a).
8:58:13 AM
If CGF remains integrated into a gas treatment plant (GTP)
(produced gas is not metered), then the gas would be
produced within that integrated facility, at the furthest
point up-stream of the beginning of gas treatment or the end
of gas processing. If the plants are integrated, the risk
is that some gas processing will move downstream of the
point of production, not that gas treatment will move up-
stream of the point of production.
Slide 35 uses Prudhoe Bay as the point of production under
the PPT with an integrated GTP. If the two processes were
to become intertwined or integrated, the point of production
would move into the central gas facility, up-stream. As
currently written, the law protects from situations where
gas treatment plants are eligible for up-stream credits.
8:59:29 AM
Mr. Dickinson discussed Question #4, regarding a
determination of how attractive an investment pipeline would
be. Previous testimony by Antony Scott, Commercial Analyst
in the Department of Natural Resources, indicated that by
using the IRR metric, the project could have high rates of
return particularly, when a third party line is involved.
That would not include the cost of the shippers'
transportation commitments when comparing the independent
pipeline with a producer owned pipeline. The question
surrounds how that could affect the results.
9:00:14 AM
Mr. Dickinson addressed the firm transportation commitment.
• The shipper makes a transportation commitment (FT) to
pay the capital portion of the tariff whether they use
the pipeline or not.
• It is that financial commitment that underwrites the
pipeline:
- Required by FERC before approving a project and
- Required by lenders before lending money to a
project.
9:02:52 AM
Representative Gara commented that the shipper only cares
about the costs of getting the gas out of the ground,
shipping it and knowing what the tariff is. Once costs
equal the tariff, the shipper's costs are free. He
referenced previous comments made by Mr. Scott. Mr.
Dickinson noted the figures in doubling the internal rate of
return (IRR). [Addendum Page #7 & #9].
Vice Chair Stoltze asked if it was fair that no negative
rate of return had been indicated, only profits. Mr.
Dickinson agreed; however, pointed out that there have been
negative rates of return and that a low rate of return is
enough to "kill" any project.
Representative Gara noted that in last year's proposal, the
State was responsible for selling the gas. In the current
proposal, the producers will be selling that gas and the
risk of low prices has taken precedence. An entity could
make a lot more money if they are both producing and
pipeline owners of the gas, but the profit margins decline.
The profit margins on production are higher and combining
the two makes more absolute money. Mr. Dickinson pointed
out that the attached slides indicate the opposite.
Vice Chair Stoltze observed that Mr. Scott had rolled-in the
risk factor into the model. Mr. Dickinson disagreed.
9:09:01 AM
Mr. Dickinson provided an overview of the following slides,
which demonstrate the internal rate of return (IRR):
· Slide 40 - Calculated IRR at various price levels
· Slide 41 - The IRR on a model of an owned project
· Slide 42 - The IRR for a model capital component of
tariff
rd
· Slide 43 - The IRR model 3 party line with no FT but
with a tariff
rd
· Slide 44 - The IRR model 3 party line with some
additional capital
rd
· Slide 45 - The IRR model 3 party line with even more
additional capital
rd
· Slide 46 - The IRR model 3 party line with even more
additional capital
9:16:50 AM
Representative Gara understood that the FT was a significant
cost to the producers. Last year, under the proposed PPT
contract, the State had to cover 12.5% of the FT commitment
- royalty in-kind. No one mentioned that could be a very
risky cost to the State and asked Mr. Dickinson why it had
not been indicated at that time. Mr. Dickinson responded
that had been a 20% commitment for the FT. He agreed that
it had been very risky and that he was sorry that it had not
been identified. Representative Gara acknowledged that he
had known it was risky and had asked those questions. Mr.
Dickinson responded that the State concluded it was a risk
the State could assume.
9:20:08 AM
Mr. Dickinson continued, Slide 47 addresses the disclosure
of long term obligations. The statement requires that an
enterprise disclose commitments under unconditional
obligations that are associated with suppliers financing
arrangements. Such obligations are often in the form of
take-or-pay contracts and throughout.
Slides 48-51 provide examples of disclosure.
9:23:44 AM
Mr. Dickinson referenced Slide 53, using a financial
statement from BP, listing the unconditional purchase
obligations, representing any agreement to purchase goods or
services, enforceable and legally binding and specifying
significant terms. The amounts shown include arrangements
to secure long-term access to supplies of crude oil, natural
gas feed-stocks and pipeline systems. The obligations are
set out for five year periods of time. That information is
required for disclosure.
Slides 55 - 59 explain why that information matters to
companies [listed below] who sell their investment services:
· Moody' Investors Service
· Standard and Poor (S&P)
9:27:34 AM
Mr. Dickinson summarized by reading from an article written
in the 1980's from the magazine "Society of Petroleum
Engineers", addressing the perspective of people within a
company, making errors in an analysis.
Mr. Dickinson pointed out that even within the large
companies, there is discussion regarding "creative financing
solutions"; typically involving a lease like structure and
not representing the true costs to the company. Instead,
when those types of commitments are made, they need to be
properly valued. He suggested that when the high rates of
return are indicated, it could be because costs of the FT
commitment are not properly valuated.
9:29:40 AM
Representative Gara referenced comments made previously by
Mr. Scott regarding the profitability analysis. Mr.
Dickinson attempted to demonstrate how that presentation
omitted the rates of return.
Representative Gara questioned the accuracy of the proposed
number. Mr. Dickinson suggested that there are problems
with any analysis recommending avoidance. He encouraged FT
be incorporated correctly.
Representative Gara stated that it will be a profitable
project at those prices and asked if Mr. Dickinson would
dispute that. Mr. Dickinson acknowledged that it could be
profitable, however, challenged the idea that it is "wildly"
profitable.
Representative Thomas believed that in theory, the State
owns over 12 years worth of gas in Prudhoe Bay and asked why
the State should not own those rights. Mr. Dickinson
responded that such questioning was "treading on legal
ground". The State of Alaska owns 12.5% of the hydrocarbons
produced - when they come out of the ground.
Mr. Dickinson advised that there are two aspects and one is
putting the gas back into the ground, which helps the oil
flow. The State receives 12.5% of those benefits. The
State does not own any percentage until the gas is actually
produced.
9:35:08 AM
Co-Chair Chenault referenced Slide 42, inquiring how to
identify the 10% interest charge on the FT. Mr. Dickinson
explained that the assumption was using some information
from the model. By using any arbitrary number & placing it
into the formula, changes the payment amount.
Representative Kelly asked 10% was the combined interest
rate and profit. Mr. Dickinson replied it is.
9:36:37 AM
HB 177 was HELD in Committee for further consideration.
| Document Name | Date/Time | Subjects |
|---|