Legislature(2011 - 2012)HOUSE FINANCE 519
04/04/2011 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB142 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HB 142 | TELECONFERENCED | |
HOUSE BILL NO. 142
"An Act relating to the creation of a rebuttable
presumption that the project licensed under the Alaska
Gasline Inducement Act is uneconomic because of
insufficient firm transportation commitments during
the first open season."
8:39:26 AM
REPRESENTATIVE MIKE CHENAULT, SPONSOR, introduced HB 142.
He provided history; just over three years ago, Alaska
Gasline Inducement Act (AGIA) was passed and TransCanada
was authorized to pursue the project. He reported that
TransCanada conducted an open season for the duration of
April 30, 2010 through July 2010 and announced bids from
multiple parties with a significant interest. TransCanada
expected the negotiation of precedence agreements by the
end of 2010. He informed the committee that three months
later, the self-imposed deadline remained unmet. He stated
that the unmet deadline was not an indication of a failure
on the part of TransCanada.
8:42:21 AM
Representative Chenault explained that the state and
legislature had no knowledge of the bids, the conditions
attached, or negotiations toward the precedent agreements.
Under AGIA, the state promised up to $500 million in
reimbursements to TransCanada. Alaska paid up to 50 percent
of the qualified expenses up to the end of the first open
season, $36 million. After open season, the state would pay
90 percent. TransCanada had not submitted all requests, but
the governor included $160 million dollars in the FY12
budget request. The state paid a great share despite all of
the unknowns, while world economic conditions changed
dramatically. Gas prices remained at extremely low levels.
Major gas discoveries came into production rapidly to serve
potential markets for Alaska gas.
Representative Chenault questioned whether AGIA was still
economical for Alaska. He asserted that the administration
must prove that the investment was sound. He stated that he
did not want Alaska to waste time and opportunity to
develop the resource.
8:45:16 AM
Representative Gara believed the worst thing that could
happen was a breach of contract on the largest future
project for the state. He opined that walking away from a
contract where a party met obligations would prove
detrimental for the state.
Representative Chenault opined that the bill would not
breach the contract but would force the administration to
revisit the legislature and prove the economic viability of
the project.
Representative Doogan clarified that the state paid a
certain amount of money and the governor requested an
increase of funding to $300 million.
Representative Chenault agreed.
Representative Doogan continued that HB 142 presented an
opportunity to the legislature to intervene in the process.
Representative Chenault clarified the intention that the
administration would communicate with TransCanada and
return with a determination whether the project was
economical allowing for a decision to be made.
Representative Doogan asked who would make the decision.
Representative Chenault responded that the administration
would make the decision.
Representative Doogan asked if a valid contract between
state and TransCanada existed to go to Federal Energy
Regulatory Commission (FERC) license.
Representative Chenault pointed out a clause in the
contract that would allow either or both parties to
determine that the project was uneconomical and would be
able to back out of the contract.
8:49:16 AM
Representative Doogan understood the contract differently.
Representative Gara inferred that the project was dead and
uneconomical if TransCanada failed to disclose firm
transportation commitments by July 15, 2011. He asked if
the date of July 15, 2011 existed as a firm transportation
commitment in either the license or the statute.
TOM WRIGHT, STAFF, REPRESENTATIVE MIKE CHENAULT, replied
that the language in the bill should be changed to state
"precedent agreement. He explained that the intent stated
by TransCanada and filed with FERC included precedent
agreements by December 31st 2011. He clarified that the
bill ought to state "precedent agreement" rather than "firm
transportation commitments."
Representative Gara noted that the July 15, 2011 did not
exist in either the license or the statute.
Mr. Wright responded correct.
Representative Guttenberg asked whether the Department of
Law had provided an opinion regarding the contract.
Representative Chenault replied that he had not solicited
the information from the Department of Law. He believed
that the administration had asked the questions of the
attorney general, but he was not aware of an answer. He
suggested that Representative Guttenberg ask the
administration.
Vice-chair Fairclough admitted that her statement was
anecdotal. She continued that when AGIA was passed and a
contract was awarded, an expectation from general public
was established that Alaskans would know whether a viable
project existed. She asked if the expectations were
reasonable.
Representative Chenault agreed with the vice-chair's stated
expectation of Alaskans regarding a viable project. He
asserted that the AGIA process was sold to Alaskans through
previous administrations as the only viable way to bring a
gas pipeline forward in the state. The process did not
outlaw the producers from bidding on the project.
TransCanada bid on the project and he opined that
TransCanada was a world class pipeline corporation. He
respected the organization of TransCanada. The idea was
proposed to get Alaska out from underneath the "thumbs" of
the big three producers. However, within a week of the
issuance of the license, the chairman of TransCanada was
asked when go forward and his response was "When Exxon says
we are ready to go." He described that as the first "eye-
opener" for Alaskans and the legislature.
8:55:32 AM
Representative Chenault believed that the contract had to
be met, although he did not personally agree with the
projects. He thought a crossroads had been reached and
decisions must be made. He stressed that the issue was the
economical nature of the project. He feared that $500
million could be spent, without the finality of gas
production and export.
Vice-chair Fairclough recalled concern by the general
public about spending $500 million. She pointed out that
$136 million had been spent without a clear understanding
of the benefits gained by the expense.
Representative Chenault agreed.
Vice-chair Fairclough understood that tax structure was a
key component of the argument. She noted that the
legislature was fighting internally. She read in the
newspaper that tax certainty was essential and the tax
structure was failing. She suggested that those seeking
economic certainty were in opposition to the bill. She
asked if the terms of the tax structure were sufficient for
the producers to commit gas to the AGIA or Denali projects.
8:58:59 AM
Representative Chenault responded that gas certainty would
eventually become part of any gas project. TransCanada
would not negotiate the tax certainty issue. Alaska would
negotiate with potential shippers. The AGIA process would
address the cost of the project and negotiate without
third-party involvement.
Representative Wilson asked about a requirement to inform
the public about the outcome of the open season.
Representative Chenault replied that TransCanada would have
to disclose the information. He believed that disclosure
must occur within ten days of filing for the FERC license.
The deadline regarding results was self-imposed by
TransCanada.
Representative Wilson recalled hearing that the public
would receive information about the open season soon after
the election in November. She asked whether the bill would
allow disclosure sooner.
Representative Chenault believed not since the deadline was
self-imposed.
9:01:42 AM
Mr. Wright provided an overview of HB 142. He urged the
committee to adopt the words "precedent agreement" rather
than "firm transportation commitment." The bill required
the administration to prove to the legislature that the
project was economic. If the bill was not deemed economic,
then the administration was required to submit a report to
the legislature rebutting the presumption before August 15,
2011. The legislature might also state that there was
insufficient evidence to rebut the presumption in
conjunction with a request for an appropriation for the
reimbursement of qualified expenditures for FY 2013 and
provide testimony and evidence that the project had credit
sufficient to finance construction. The administration
shall notify the legislature before August 1, 2011 whether
the commitments are disclosed to the commissioners before
July 15th and report whether the disclosed commitments were
sufficient to support development of the project. The
report should be submitted by August 15, 2011. Should the
administration state that they were unable to rebut the
evidence, they would be requested to initiate abandonment
per AGIA Section 43.90.240. The abandonment clause was
complicated and could be initiated by either one or both
parties.
Representative Gara asked if the legislation presented a
bridge of contract. He maintained that a contract was
signed and a bill passed.
Mr. Wright retorted that the statement existed already in
law in AS 43.90.240 as abandonment of project.
9:05:28 AM
Representative Gara argued that the bill changed the rules
constituting the presumption that the project was not
economic. He pointed out that the new bill was not in the
license or in the original statute as a basis for exiting
the contract. He expressed concern that the bill might be
viewed as a breach of contract and may potentially expose
the state to a large amount of damages rather than moving
ahead toward a gas pipeline.
Mr. Wright responded that changing economic conditions
occurred throughout the country and the world. He stressed
that the legislation did not intend to violate a contract.
He stated that if the project was deemed uneconomic, and
the precedent agreements or firm transportation commitments
were not reached, then the administration was to inform the
legislature.
Representative Guttenberg recalled that the legislature had
access to reports, records, and requirements for
TransCanada. He asked whether the records had been
investigated.
Mr. Wright responded that the Alaska Gasline Project
website provided information. He understood that
TransCanada expected to have precedent agreements in place
by December 31, 2011. He stated that his office did not
have access to internal information as much of it was
confidential and proprietary.
Representative Guttenberg stated that AS 43.92.20 allowed
commissioners access to records. He expected some arbitrary
dates and commitments.
Mr. Wright stated that he did not have the answer. He
believed the administration had more information as well as
TransCanada
9:09:46 AM
DONALD BULLOCK, ATTORNEY, LEGISLATIVE LEGAL SERVICES,
reported that he participated in the drafting of AGIA. He
opined that the proposed legislation did not breach the
contract but instead raised questions of legitimate
legislative concern. He cited the reimbursement in
43.90.110, which stated "subject to appropriation, state
matching contributions in the form of reimbursements." He
noted that the appropriation comes up every year. He
asserted that the bill did not take action; there was clear
division of authority between the legislative branch and
the executive branch. The executive branch was responsible
for carrying out the license: auditing, reviewing
TransCanada's expenditures, access to on-going information.
House Bill 142 raised the question of the viability of the
project. He stated that AGIA provided the "out," AS
43.92.40 if the project was uneconomic. The bill did not
deem the project uneconomic conclusively because of the
response that commissioners can make after August 1st or
August 15th when they were required to respond and provide
information to the state.
Mr. Bullock pointed out the discussed dates addressing the
agreement between the state and TransCanada. He referred to
other relevant documents including the open season notice
published by TransCanada last summer. He pointed out that
the notice included past dates. Some of the dates referred
to public information regarding the open season response
including notices to the bidders. He stated that AGIA
required the open season dates. He mentioned the importance
of the increase in shared contributions and questions about
the open season. He mentioned a provision regarding the
inducements offered to producers who committed during the
first binding open season. He pointed out royalty
provisions for commitments made during the first open
season. The provisions related to the fiscal future of the
state. He maintained that HB 142 did not change the
contract, but provided a request for information regarding
AGIA and commitments.
9:14:01 AM
Representative Hawker spoke to concerns about HB 142
interfering with the contractual agreement between the
state, TransCanada, and Exon Mobil. He clarified the date
of the self-imposed deadline for completion of the
precedent agreement as December 3, 2010 rather than 2011.
He opined that the bill paid careful attention to avoid a
conflict or interference in the existing contractual
relationship. He requested confirmation from Mr. Bullock
that the language in the bill did not involve the
contractual relationship.
Representative Hawker pointed to Page 1, Line 12, and the
action item stating that the commissioners shall notify the
legislature. He pointed out Page 1, Line 14, which stated
that communication shall report whether firm commitments
were disclosed and sufficient to support the project. He
cited Page 2, Line 3, which was under the conditional, if
the presumption in Item 1 is raised. The only mandate was
for the administration to submit a report to the
legislature as stated in Line 3. The other requirement
stated was that the administration provided testimony and
evidence implicitly to the legislature. He stated that
these action items do not address the operation of the
contract.
Representative Hawker pointed out Page 2, Lines 18 - 20,
Section C, which state that nothing in the legislation
proposed, precluded the agreement between the commissioners
and the licensee. The bill clearly stated that it did not
have any effect on the obligations, roles, responsibilities
or possible execution under that provision. He maintained
that the bill created a relationship between the
legislature and the administration.
Mr. Bullock agreed.
9:17:41 AM
Representative Costello asked whether AGIA was a
traditional contract.
Mr. Bullock responded that AGIA was a license issued by the
state including commitments stated in 43.91.10. He stated
that the commitments included that the state share in the
costs of developing the pipeline project and provide the
services of the AGIA coordinator. The consideration offered
by TransCanada included the "must haves" in 41.91.30 or the
commitments required to qualify for the license and receive
the money; contractual aspects and procurement aspects. The
procurement aspects included in advance of the license, the
state advertised it and explained the expectations of the
state in return for a response to the commitments.
Representative Costello asked if when the assertion was
made that the contract or agreement was breached, then a
timeline requiring communication by a specific date was
established by the proposed legislation. She supposed that
the legislation required the communication by a specific
date.
Mr. Bullock agreed, but added that the language was not
limited to the communication between TransCanada and the
state. He opined that the statement made by TransCanada
that they would like to inform the state in December the
extent in which they had enjoyed success during the open
season, was an informal comment. He mentioned other dates
established in TransCanada's open season notes. The dates
were incorporated in the order approving a plan for open
season. Some of the dates had come and gone. House Bill 142
was simply requesting information regarding AGIA. He
highlighted that AGIA stated the commitments and promises
of the state and interest in sharing the contributions,
which were relevant issues of legislative concern. The bill
asked the administration whether the money was spent on an
appropriate project.
Representative Costello understood that the state was
without a project until they heard the words "precedent
agreement." She asked whether project could be economic
based on the existence of bids or was a resolution of
conditions required in the precedent agreement before the
project was determined to be economic.
9:21:37 AM
Mr. Bullock opined that the ideal method of establishing
the viability of the project would include a review of the
standards for abandonment. Timing was a different issue.
The commissioners agreed that additional time was
necessary. The arbitration panel would consider whether the
project was uneconomic. The panel only gets involved in the
events of disagreements between the commissioners and
TransCanada. The arbitration panel would then make a
determination that the project was uneconomic only if the
panel finds that the party claiming the project was
uneconomic as proven by a preponderance of the evidence. He
quoted the statute "the project does not have credit
support sufficient to finance construction of the project
through firm transportation commitments, government
assistance, or other external sources of financing." "The
predicted cost of transportation at a 100 percent load
factor when deducted from a predicted gas sales revenue
using publicly available predictions of future gas prices,
but result in a producer rate of return that is below the
rate typically accepted by a prudent oil and gas
exploration and production company for incremental upstream
investment that is required to produce and deliver gas to
the project." He asked if enough commitment existed to fill
the pipeline and whether the tariff was low enough so that
people putting gas into the pipeline at the Alaska end
could profit.
Representative Gara never thought he would see the
legislature try to kill a project that Alaskans have been
working toward for 30 years. He reported that he once
practiced law as an assistant attorney general on oil and
gas issues. He argued the statement that the proposed
legislation did not breach the contract.
Representative Gara referred to Page 1, which stated that
"by July 15th 2011, transportation commitments have to be
put forward and if they are not, there is a brand new
rebuttable presumption that the project is uneconomic,
which gives the state greater power than to back out of the
contract." He asked if the rebuttable assumption that the
project is uneconomic existed in license, contract, or
statute.
9:24:57 AM
Mr. Bullock questioned the premise of the question. He
stated that TransCanada would not rebut the presumption. He
maintained that there was no additional burden on
TransCanada. He informed the committee that the
administration would rebut the presumption.
Representative Gara asked whether the provision that a
rebuttable presumption existed in license and in statute.
He believed that the language was new and did not exist in
the license and the statute.
Mr. Bullock agreed. He stressed that the legislation did
not amend AGIA, but instead asked questions regarding the
provision included in AGIA. The ongoing issue was whether
the project continued to prove uneconomic.
Representative Gara countered that the rebuttable
presumption provided the state a greater power to back out
of the contract.
Mr. Bullock responded no, the rebuttable presumption did
not provide the state a greater authority to back out of
the contract. The ultimate issue, whether the contract
would be abandoned were within the terms of AS 43.90.240, a
provision enacted before the license was issued. The bill
did not change the provision.
Representative Gara asked if the bill accomplished
anything.
Mr. Bullock replied no.
Representative Gara asked why the bill the bill was
necessary.
Mr. Bullock responded that the legislature required the
information mandated by the legislation. He believed that
the legislature should know how and where the money was
spent. The information would enable the legislature to
determine whether the money was well spent.
Representative Gara found Mr. Bullock's testimony
inconsistent. He asserted that if the existing bill carried
the required contracts then HB 142 was unnecessary. The
existing law created no rebuttable presumption language,
nor did it advise the state to back out in the event of a
rebuttable presumption. The existing law did not create any
July 15th, 2011 language. He argued the need for the bill
unless there was a desire to change AGIA.
Mr. Bullock wondered what questions the committee might ask
the administration and TransCanada following the request of
an appropriation of $160 million.
9:27:44 AM
Representative Gara contended that existing legislation
contained no rebuttable presumption and the bill would
create one. He expressed interest in the attorney general's
opinion of the proposed legislation.
Mr. Wright agreed. He maintained that the bill did not
provide a breach of contract, but he instead viewed the
bill as a means to determine whether the project remains
economic.
Representative Hawker referred to statements that the "bill
kills the gasline" and that "the bill requires
transportation commitments to be put forward by a date
certain." He asked Mr. Bullock if the bill required firm
transportation commitments to be put forward by a certain
date.
Mr. Bullock responded no.
Representative Hawker asked about the statement that the
bill was "attempting to change AGIA law." He asked if any
language included in HB 142 changed the AGIA law.
Mr. Bullock stated that the bill made no amendments to
AGIA.
Representative Hawker asked if the proposed legislation
accomplished any action other than posing the question to
the administration from the legislature.
Mr. Bullock responded no. The bill only requested
information for the legislature for the purpose of their
decision making regarding ongoing appropriations.
Representative Doogan asked who the contract existed
between.
Mr. Bullock responded the commissioners of Department of
Revenue (DOR) and Department of Natural Resources (DNR) and
TransCanada and Foothills Ltd. who represented the
licensee.
Representative Doogan asked if "we" were a party to the
contract.
Mr. Bullock responded that if "we" was the state then yes,
but "we" was the executive branch then no. He furthered
that the executive branch was responsible for implementing
the contract and ensuring that terms were met. He stated
that the legislature was initially responsible for enacting
the terms of AGIA including the required commitments and
the annual appropriation of money toward the contract or to
reimburse the contributions.
9:31:33 AM
Representative Doogan commented on expectations regarding
the passage of HB 142. He understood that AGIA maintained
that TransCanada would do everything it could to get a
pipeline financed and built. He understood that the real
obligation was to go as far as FERC to obtain a license.
The expectation was a $500 million cost, which would be
paid in segments. He asked if his recollection of the AGIA
agreement was accurate.
Mr. Bullock replied that Representative Doogan was correct.
He added that proposed licensees were obligated to disclose
the amount of reimbursement they planned to seek. He noted
that TransCanada's application requested the statutory
maximum, which was 50 percent initially and then 90 percent
after the close of the first open season.
Representative Doogan asked about the $500 million figure.
Mr. Bullock agreed with $500 million as the stated figure.
Representative Doogan clarified that the state was in the
middle of that process authorized by law, yet Mr. Bullock
advised the legislature that they could legally back out of
the deal.
Mr. Bullock corrected that he did not advise backing out of
the deal. He mentioned the provision AS 43.90.240 in AGIA,
which stated the standard for AGIA to continue.
Mr. Bullocks stressed that the legislature could not void
the contract established in AGIA, but they could refuse to
appropriate money for the reimbursement.
Representative Doogan asked if refusal to appropriate the
money for the reimbursement would void the contract.
Mr. Bullock responded that the courts would decide the
issue. He recalled that the legislature had encountered
similar issues in the past. An appropriation remained
necessary for money to be spent. He stated that the issue
may raise contractual questions, but the contract did not
require the legislature to vote for an appropriation.
Representative Doogan opined that if the contract was
voided the state would end up contributing the money
without the benefits of the gasline. He asked if there was
any reason not to suspect that would happen.
Mr. Bullock agreed that the risk existed. He noted that
43.90.240 would apply in the event that the contract ended
because if the project was deemed uneconomic then it would
be ripe for abandonment.
9:35:23 AM
Representative Costello believed that the project created a
compelling interest for the public. The public wished to
understand where the state stood in the instate gasline
process. She stated that the AGIA bill existed without a
fiscal note and HB 142 allowed the legislature access to
information. She requested comments from Mr. Wright
regarding the public's influence on the creation of the
bill.
Mr. Wright responded in the affirmative. He added that the
aspect of appropriation was also a catalyst for the bill.
He corrected an earlier date to December 31st 2010. He
stated that the bill wished to achieve the information
about precedent agreements and TransCanada. He found the
lack of information regarding the success of the open
season disturbing. He discussed concerns regarding
timelines. He wished to know whether AGIA would prove
economic or not. If the project was not deemed economic
then the legislature must explore other options for
Alaskans. The public was considered heavily with the
introduction of the bill.
Representative Costello pointed out that the bill
jumpstarted a conversation regarding confidential
information. She understood that the legislature did not
intend to seek any detailed information. She asked what the
state anticipated that the legislature would achieve in
terms of the status of the project.
Mr. Bullock replied that the question regarding the
viability of the project was in the jurisdiction of the
commissioners. The commissioners were also aware that the
information was confidential, which required a certain
amount of trust. He was sure that confidential information
would not be provided and he did not know what the
legislature would be told. He knew that the bill would
direct the commissioners to consider the questions raised
and they would make decisions about how the answers to the
questions affected the license.
Representative Costello understood that one legislature
could not bind another. She heard the feelings of
uneasiness about changing AGIA and wondered about the
response if one legislature cannot bind another.
9:40:29 AM
Mr. Bullock replied that binding contracts existed, hence
the caution "subject to appropriation." The person that bid
on a contract or responded to a quest for proposal would
understand and determine the appropriate risk.
Representative Costello asked if a project was not funded,
would it succeed.
Mr. Bullock replied that he was unsure about past instances
where the issue had arisen. He explained that if the
legislature did not pay a bill, the state might be sued for
breach of contract. He mentioned timing issues. He
reiterated that the bill was directed to the appropriation
process. He believed it inappropriate to amend AGIA. He
stated that HB 142 approached the issue from the standpoint
of ongoing appropriations and the provision within AGIA.
Representative Guttenberg recalled repeated discussion
regarding the bill and its inability to change the contract
between the state and TransCanada. He asked if the bill
changed the relationship between TransCanada and those
seeking firm commitments. He wondered if the bill would
create a new deadline for those entities seeking a firm
commitment with TransCanada.
Mr. Wright responded that he viewed the legislation as a
benchmark to inform the legislature about the economic
viability of the project. He explained that if the project
was not economic, steps outlined in the AGIA process would
be taken.
Vice-chair Fairclough mentioned AS 43.90.240 and the
abandonment of a project. She read "if the commissioner or
licensee determines that the project is uneconomical" and
added that a dispute would then proceed to the American
Arbitration Association. She concluded that the current
statute addressed the process under consideration.
9:45:33 AM
Representative Hawker asked about the abandonment clauses
and whether they were in the existing statute. He wondered
whether the proposed legislation modified existing statute.
Mr. Bullock replied that the statute was enacted as part of
AGIA and provided for the abandonment of a project should
that project become uneconomic.
Representative Hawker wondered that if the abandonment
clauses were invoked would they trigger any economic
damages located in other provisions in AGIA.
Mr. Bullock answered no. He explained that the damage
provision existed as AS 43.90.440. The damage provision
would arise if the state provides similar inducements to a
competing pipeline that they provided to the licensee.
Representative Hawker wondered who had the authority to
invoke the abandonment provisions, within the context of
AGIA. He asked if the legislature had the authority to
invoke the abandonment provisions.
Mr. Bullock replied that the legislature did not have the
power to initiate the abandonment provision in AS
43.90.240. TransCanada or the commissioners had the
authority to initiate the provision. Upon disagreement,
arbitration would be the next step. If both parties agreed
that the project was uneconomic, the project would be
abandoned.
Representative Hawker asked if the proposed legislation
imposed a duty on the legislature with regard to the power
to appropriate.
Mr. Bullock replied no, the bill made no change in the
legislature's ability to make an appropriation for the
project.
Representative Gara requested testimony from Larry Persily
prior to the passage of the proposed legislation from
committee.
Vice-chair Fairclough responded that she would pass the
request on to the co-chair.
Representative Gara agreed that the price of gas had
fallen. He asked if the state would have the ability to
become a part owner of the pipeline, if the project were
deemed uneconomic. He recalled testimony that the state
could become part owner of the pipeline for a 7 percent
rate of return, which could substantially reduce the
tariff. By reducing the transportation cost or the tariff,
the price of gas might become more competitive. He
encouraged creative solutions. He wondered if the proposed
legislation might prevent the opportunity for a creative
solution.
9:49:26 AM
Mr. Wright replied that the proposed legislation would not
prohibit the potential solutions expressed by
Representative Gara. He noted that the bill did not address
negotiations between TransCanada and the commissioners or
the administration.
Representative Gara pointed out the two proposed gas lines
that were discussed throughout the Capitol building. One
option, the instate line, included testimony stating that
the tariff cost would be four times larger than the other
proposed option. He assumed that the instate line would
require a subsidy to enable affordable gas for Alaskans. He
added that the downside for the instate line was the lack
of taxation, which limits state revenue. He added that the
other proposed project would produce revenue for the state,
which led to his support of the larger gasline. He wondered
whether HB 142 contained language that might prevent the
state from taking the necessary subsidy.
Mr. Wright believed that Representative Gara's statements
amounted to a presumption, and he felt unqualified to state
whether the instate gas line would or would not produce
revenue for the state. He stated that he could not comment
about the necessity of a state subsidy for the instate
gasline.
Mr. Bullock commented that AGIA allowed both a gasline and
an AGIA licensed gasline. The AGIA licensed gasline was a
result of issuing a solicitation under certain requirements
that commitments be made in return for that offered by the
state. If the terms of AGIA were changed, then the project
would no longer be termed an AGIA project.
Representative Gara understood. He pointed out that the law
stated that the gas sold in state was not taxed under the
production tax regime. The advantage of the proposed export
gasline was the revenue produced. He mentioned a study
performed by the Alaska Gasline Development Corporation
(AGDC) showed that the inefficiencies of an instate gasline
would require the balance of a tariff in the 17 dollar
range, compared to a 3 or 4 dollar tariff for the export
gas line.
Mr. Wright admitted that he was unaware of the AGDC study.
He discussed Representative Gara's request for testimony
from Mr. Persily. He noted that Mr. Persily's area of
expertise included regulating and permitting for any Alaska
natural gas transportation project in the Lower 48. He
stated that Mr. Persily might not be qualified to discuss
the economics of the project.
Vice-chair Fairclough asked Representative Gara about the
documents that he was quoting.
Representative Gara stated that he was happy to distribute
the document through the committee aide. The AGDC
distributed an estimation of the cost of an instate
gasline, which was $17 in MCF. He added that Anchorage paid
$8 for gas, which included transportation, lifting, and
production. He commented on the change in prices of gas
products in the Lower 48. He believed that Mr. Persily made
a good case that while shale gas produced a low price, the
downside was groundwater pollution. He understood from Mr.
Persily that the price of gas would increase due to
increased regulation and he wished to hear testimony from
Mr. Persily on the issue.
9:56:07 AM
Vice-chair Fairclough asked for proof that shale gas
contaminated water. She cautioned the statement of
absolutes without the accompanying proof.
Representative Gara agreed that all fracking and all shale
gas were not the same, but some states are proposing
substantial and expensive regulations for the development
of shale gas. He mentioned reports from the Lower 48 that
asserted contamination of water leading to legislation
proposed that will increase the production of shale gas.
Representative Wilson stressed that the responsibility lies
with TransCanada to prove that AGIA is economical.
Mr. Wright clarified that it was the state's responsibility
through the commissioners of DNR and DOR to determine
whether the project was economic.
Representative Wilson commented on Representative Gara's
argument that the state must contribute financial resources
to enable economic viability of the project. She disagreed
with Representative Gara's argument.
Mr. Wright agreed.
Representative Wilson added that the best action for the
state may mean an increase in economical fuel oil rather
than revenue.
Mr. Wright wished to avoid a debate about revenues. He
maintained that an instate gasline would provide
opportunities for Alaska. He stressed that HB 142 addressed
the AGIA process rather than the instate gasline.
Representative Wilson asked about the potential to spend a
large quantity of state money without acquiring a gasline.
Mr. Wright responded yes, the potential did exist. He added
that the question would be better addressed by the
administration.
10:00:03 AM
Representative Wilson noted that the administration might
deem the project uneconomical, since the commissioners are
privy to information that was not available to the
legislature. She stated that the legislature wished to have
access to the same information.
Mr. Wright opined that the legislature's interest included
the viability of the project and the wisdom of the
expenditures.
Representative Doogan echoed the request of Representative
Gara regarding the testimony of Larry Persily. He believed
that the opinion of the federal coordinator was valid. He
asked Mr. Bullock's opinion regarding a potential dispute
between the administration and TransCanada.
Mr. Bullock explained that any agreement carried risk that
might result in a court battle and damages paid. He opined
that one potential was that the project might be deemed
economic, yet the state decides not to go forward, which
would raise the issue that the state was no longer acting
in good faith and could lead to litigation.
Representative Doogan recalled the phrase "treble damages."
He asked to know the value of the legislature intervening
in the operation.
10:04:35 AM
Mr. Bullock likened the situation to buying a car and
having it evaluated for proper function.
Representative Doogan expressed that the value of a car was
far less than the value of the proposed pipeline.
Representative Hawker stated concerns that the latitude
allowed in the committee was mischaracterizing HB 142. He
asked whether the discussion was remotely relevant to the
bill.
Mr. Wright stated that the discussions were not totally
relevant; but indirectly.
Representative Hawker asked whether the bill contemplated
competing projects.
Mr. Wright responded no.
10:06:42 AM
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, delivered the PowerPoint presentation
"Changes in North America Natural Gas Market Outlook
Between 2008 & 2011" (copy on file). He noted his
background working for DOR tax division for 25 years
beginning in 1983. His prime responsibilities for DOR were
to analyze commerciality of North Slope gas from 1983 to
2008; for 15 years he was the only state employee doing
that. He stated that he built Alaska's first comprehensive
economic model of North Slope gas commerciality. He
participated in crafting stranded act negotiations under
Governor Tony Knowles and Governor Frank Murkowski.
Mr. Marks discussed the optimistic outlook which had
changed between 2008 and current time period. He provided a
brief history, pointing to graph "Henry Hub Spot Prices"
(Slide 2). Until the year 2000, gas prices were too low for
commercial consideration. Beginning in the year 2000, the
Lower 48 saw declining "low priced gas" and more expensive
gas entered the market, which increased the price. The
trend continued through 2008 gas prices and the opinion was
that the high gas prices were permanent. He explained that
the current outlook was different and a North Slope gas
project, if it existed, would lose money.
10:11:05 AM
Mr. Marks referred to Slide 3: "2008 DOE/EIA Henry Hub
Forecast" graph for Department of Energy/Energy Information
Administration (DOE/EIA). The forecast was used by the
administration to determine findings for awarding the
license in 2008. He noted that the forecast displayed were
representative of the consensus. The prices shown were in
2009 dollars.
Mr. Marks displayed Slide 4: "2008 Wood Mackenzie Henry Hub
Forecast" and Slide 5: "2008 Black & Veatch Henry Hub
Forecast."
Mr. Marks referred to Slide 6: "U.S. Shale Gas Reserves."
He stated that shale changed the outlook. Shale is
sedimentary rock that was rich in gas. The graph
illustrated the increase in shale gas reserves between 2008
and 2011. Shale gas did not require a $30 to $40 billion
pipeline to bring it to market.
Representative Gara noted that the least expensive shale
gas was currently produced and the more expensive shale gas
will be produced in the future.
Mr. Marks explained that one of the key unknowns regarding
Representative Gara's comment would be discussed later in
the presentation.
Mr. Marks continued that hard data between 2008 and now
illustrated that shale gas had increased eight billion
cubic feet per day (equivalent of two North Slopes). He
reported working extraordinary technological advances in 3D
seismic horizontal drilling and fracturing technology. The
technology was still very new. Similar reserves discovered
in Canada as well. The technological revolution was
remarkable.
10:15:39 AM
Mr. Marks detailed Slide 7: "2008 vs. 2011 DOE/EIA
Unconventional Gas Production Outlook" referring to shale,
tight gas, coal bed methane. He explained that the forecast
in 2008 was for 25 Billion Cubic Feet (BCF) per day to be
produced by 2030.
Mr. Marks explained Slide 9: "DOE/EIA Forecasted U.S.
Natural Gas Supply 2008 vs. 2011." He pointed out that the
outlook in 2008 was that the gas supply would be 53 BCF/day
in 2030. Current outlook was 68 BCF/day, which was an
increase of approximately 15 BCF/day. The 2008 forecast
included Alaska North Slope coming on in 2020. In the
current forecast the Department of Energy did not include
Alaska gas in their forecast.
10:18:49 AM
Mr. Marks described Slide 10: "DOE/EIA Forecast of U.S.
Supply & Demand." He explained that a combination of the
supply and demand was illustrated in the slide. The current
situation for the United States involved importing
approximately seven BCF per day.
Mr. Marks detailed Slide 11: "U.S. Natural Gas Supplies."
He explained that the additional production from shale was
not envisioned in 2008.
Mr. Marks explained Slide 14: "Growth in World Natural Gas
Reserves (excl. new shale)(tcf)." The slide illustrated the
total domestic gas production predicted from shale, which
increases approximately 45 percent in 2030.
Mr. Marks discussed "New/Sanctioned LNG Plants," (Slide
15):
· Sakhalin, Russia; opened 2009;
Shell/Mitsui/Mitsubishi; 1.5 bcf/d
· Tangguh, Indonesia; 2009; BP/Mitsubishi/Nippon Oil/LNG
Japan/CNOOC/Korea Gas; 1 bcf/d (short subsea pipes to
shore)
· Yemen LNG, Yemen; 2009-2010; Total/Hunt Oil/Korea
Gas/Hyundai/Yemen government; 900 mmcf/d (tidewater)
· Qatargas II, Qatar; 2009; Exxon/Total/Qatar Petroleum;
2 bcf/d (tidewater)
· Ras Laffan III, Qatar; 2009 and 2010; Exxon/Qatar
Petroleum; 2 bcf/d (tidewater)
· Qatargas III, Qatar; 2010; ConocoPhillips/Mitsui/Qatar
Petroleum; 1 bcf/d (tidewater)
· Melchorita LNG, Peru; 2010; Hunt Oil/Marubeni/Repsol;
600 mmcf/d (260 miles of overland pipe)
· Pluto LNG, Australia; under construction, 2011;
Woodside/Tokyo Gas/Kansai Electric; 1.7 bcf/d by 2014
(includes planned expansions) (17 miles of subsea
pipe)
· Soyo LNG, Angola; under construction, 2012;
Chevron/Eni/Total/BP/national oil company; 700 mmcf/d
· Qatargas IV, Qatar; 2011; Shell/Qatar Petroleum; 1
bcf/d (tidewater)
· Gorgon LNG, Australia; under construction, 2014;
Chevron/Shell/Exxon/ Tokyo Gas/Osaka Gas/Chubu
Electric; 2 bcf/d (expansion contemplated) (subsea
pipe, measured in the dozens of miles)
· Port Moresby, Papua New Guinea; under construction,
2014; Exxon/Nippon Oil/several other partners; 850
mmcf/d (450 miles of pipe, mostly subsea)
· Queensland Curtis, Australia; under construction,
2014; BG/Tokyo Gas/CNOOC (China); 1.1 bcf/d
· Gladstone, Australia; under construction, 2015;
Santos/Petronas/Total; 1 bcf/d (260 miles of overland
pipe)
10:22:27 AM
Mr. Marks continued with Slide 16, "Key Price Variables:"
· How much of shale reserves are economic
· Environmental fracking issues
· Controls on greenhouse gas and air emissions
o Affects coal demand, which competes with natural
gas
Mr. Marks detailed Slide 17, "Cost to Produce Shale
Reserves?"
· Still too new to tell. Unknowns :
o How do shale wells perform long term?
o Ultimate recoveries and production potential for
wells?
· Costs will go up?
o Production tends to drop off quickly
o More rigs will be needed: cost pressure
o Land access
o Water availability
· Costs will go down?
o Exploration continues
o Cost cutting technologies possible
o Reserves and production of new energy resources
tend to increase over time
10:24:44 AM
Mr. Marks discussed "Hydraulic Fracturing Issues," (Slide
18):
· Can fracking fluid migrate from deep underground to
contaminate shallow aquifers?
· Sloppy drilling practices have occurred
· Currently under state oversight
o Updated standards for well design, drilling,
waste disposal
o Federal possible
· Compliance and environmental costs will increase
o Not overwhelming (5%-20% per well?)
· New technologies for water treatment are emerging
Mr. Marks detailed the process of fracturing or "fracking."
He noted that problems with pollution might be avoided if
the fracturing was done properly. He added that the
"mainstream" would believe that fracking was unlikely to be
banned, but regulatory costs might increase.
Representative Gara asked about Slide 18. He asked about
the increase in costs of 5 to 20 percent. He asked about
reported estimates of increased environmental regulations.
Mr. Marks responded that general consensus regarding
estimates of the potential state and Environmental
Protection Agency (EPA) oversight were those included in
his presentation. He agreed that various other estimates
could be found.
10:28:12 AM
Representative Gara asked about potential credible
estimates showing that the cost of shale fracture would be
greater than 20 percent.
Mr. Marks stated that most estimates were in the range
provided in the presentation, but many different estimates
existed. He reiterated that the recent advent of shale
fracture was the reason for the unknowns.
Vice-chair Fairclough asked if the intent of the estimates
was to provide an understanding that increased costs may be
incurred with fracking.
Mr. Marks responded correct.
Vice-chair Fairclough concluded that a large supply of gas
existed and shale fracture included a great deal of
unknowns.
Mr. Marks discussed the issue of greenhouse gas and air
emissions with Slide 19, "U.S. Electricity Generation by
Fuel (billion kilowatt-hours). He stated the Department of
Energy's forecast showed that 48 percent of the fuel for
power generation was derived from coal. He added that one
quarter of natural gas was used for electricity. Insofar as
regulations increase the cost of coal, gas could become a
more popular supply for power plants.
10:30:49 AM
Representative Doogan asked about the nuclear line. He
wondered whether the increase represented a new plant.
Mr. Marks replied that there had not been a new nuclear
plant licensed in the United States since before 1979.
Representative Doogan questioned the graph on Slide 19 and
its referral to nuclear energy.
Mr. Marks replied that in 2010 there were approximately
3200 billion kilowatt-hours.
Vice-chair Fairclough noted that the graph provided a
layered approach.
Representative Doogan stated that he understood that
nuclear energy was rising according to Slide 19.
Mr. Marks explained that nuclear energy contributed
approximately 800 billion kilowatt hours in 2010 and 2030.
He explained that the top line of the graph represented the
total of all of the different sources of energy.
Representative Doogan understood.
Mr. Marks discussed Page 20, "Regulation of Greenhouse
Gas."
· Near term -insufficient support for comprehensive
climate change legislation coming out of Congress
· 2009 -EPA begins regulating GHG under the Clean Air
Act
· Subject to judicial challenge
· Congress may try to limit regulatory action under CAA
Mr. Marks deemed it unlikely that there would be any
greenhouse gas legislation coming out of Congress in the
near future. In 2009, the Environmental Protection Agency
began regulating greenhouse gas under the Clean Air Act. He
moved on to address "Regulation of Air Emissions" on Slide
21. The EPA would soon issue tougher air emission standards
for nitrogen dioxide, sulfur dioxide, and mercury.
· EPA will soon issue tougher air emission standards for
nitrogen dioxide, sulfur dioxide, mercury
· Large compliance costs for old coal plants:
o Upgrading plant vs.
o New natural gas plant
· Decision depends on severity of regs and coal/gas
price spread
o At low gas prices coal plants will be shut down
· Do not underestimate coal and railroad lobby
10:35:21 AM
Mr. Marks discussed the graph on Slide 22, " 2008 vs 2011
DOE/EIA Henry Hub Forecast ($/mmbtu) (2009 dollars). He
reiterated that alternative forecasts could be found.
Mr. Marks detailed Slide 23, "2008 vs. 2011 Wood Mackenzie
Henry Hub Forecast ($/mmbtu) (2009 dollars).
Representative Gara opined that the EIA and Wood Mackenzie
oil forecasts were typically wrong. He asked if the natural
gas forecasts were more accurate.
Mr. Marks replied that "everyone's forecast is always
wrong." He believed that the opinion of the producers was
of greater importance.
Representative Doogan asked why each forecast graph began
with the year 2015.
Mr. Marks replied that DOE's forecast was released in five
year increments making the 2015 forecast the most relevant
in 2011.
Representative Doogan asked if a substantial difference
existed between the 2010 and the 2015 forecast.
Mr. Marks replied no.
10:38:35 AM
Mr. Marks clarified that both DOE and Wood Mackenzie
forecasted prices declining from $10 to $6.50 in 2030.
Mr. Marks continued with Slide 24, "2008 vs. 2011 Black &
Veatch Henry Hub Forecast." He noted that Black and Veatch
predicted a drop of $2.50. He reiterated the importance of
the opinion of the investors. He noted that every forecast
decreased since 2008 due to the increase in shale supply.
Mr. Marks detailed Slide 25, "Alaska North Slope Gas
Pipeline Rate of Return." He stated that every drop in
price of one dollar was approximately one and one half
percent drop in the rate of return. He added that one and
one half percent on a $30 billion project was substantial.
Mr. Marks finished with Slide 26, "Conclusion: What has
Changed between 2008 and Now?" (Slide 26):
· Short-medium term:
o Grim market outlook
o Imprudent for investors to proceed while
uncertainties playing themselves out
o Outlook for North Slope gas commercialization has
been deferred
· Longer-term
o Depending on how certainties play out
o Possible alternative opportunities
10:42:47 AM
Mr. Marks added that Russia had a fleet of Liquefied
Natural Gas (LNG) ice-breaking tankers. He thought that the
tankers might gain popularity in Alaska.
Representative Doogan asked how the information presented
informed the discussion about HB 142.
Mr. Marks responded that a clause existed in AGIA regarding
the term "uneconomic." He believed that great ambiguity
existed in the clause, which could lead to long-term
litigation.
Vice-chair Fairclough requested the specific citation
quoted.
Mr. Marks stated that he referred to AS 43.90.240(c)(1) and
(c)(2), which attempts to define that which makes a project
uneconomic.
10:46:54 AM
Representative Doogan asked if the situation changed
sufficiently in the last three years to call into question
the project's economics.
Mr. Marks responded that a significant change in market
outlook occurred between the time that the license was
granted and the present. He opined that ambiguities in the
statute could result in various interpretations based on
forecasts.
Representative Doogan wondered if forecasts might appear
substantially different three years in the future as well.
The future could not be accurately predicted.
Mr. Marks agreed that forecasted numbers could change in
three years. If the clause in the statute had meaning, then
it must include a time dimension.
Representative Gara opined that the larger export driven
gasline was most important to Alaska's future. He was
concerned that the bill created deadline that did not exist
before, and might potentially compromise the project. He
pointed to the uncertainty about shale oil prices. Mr.
Persily testified that natural gas would be more stable. He
asked whether Mr. Marks shared any of the concerns.
10:51:46 AM
Mr. Marks responded that the consensus outlooks were low.
He believed that investors would wait to see how those
outlooks evolved. He understood that TransCanada would
apply for their certificate in 2014; if project was not
built for ten years, what was achieved for the money spent.
If the project was delayed, new open season markets could
change.
Mr. Marks discussed the potential for a future supplemental
EIS, which could be as expensive as the original depending
on changes such as new species on the endangered species
list. He questioned the value of what the state was putting
in currently if the data and technology became obsolete.
10:55:23 AM
Representative Gara asked about Slide 25. He understood
that the rate of return was lower on natural gas.
Mr. Marks replied that the rate of return represented the
fact that projects require money from equity and debt. He
stated that the project had great risk. If the project was
built five years ago, producers would be losing money. He
did not know rate of return required.
Representative Costello stated that HB 142 would provide
additional information as opposed to invoking the
uneconomic clause of AGIA.
Vice-chair Fairclough concurred.
Representative Guttenberg asked whether there was value in
Alaskan gas in the future.
Mr. Marks responded that the North American natural gas
market outlook was less optimistic than it was during the
time that AGIA was passed. As a result, the timeframe for
the commercialization of North Slope gas was deferred.
Representative Guttenberg clarified that TransCanada was
spending money on projects that could be 90 percent
reimbursed. He asked why moving forward.
Mr. Marks thought the questions should be asked of
TransCanada, who believed that the project was eminent.
10:59:26 AM
Representative Hawker clarified the committee statement
that HB 142 "moves up deadline that did not exist before."
He argued that the statement contradicted the statement of
Mr. Bullock. He challenged the statement that
ConocoPhillips received a higher rate of return in Alaska.
He stated that the concept of rate of return was specific
based on various calculations and interpretations. He noted
the difference between profitability and rates of return.
HB 142 was HEARD and HELD in committee for further
consideration.
11:01:35 AM
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 142 TC Payments.xlsx |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| AGIA.pdf |
HFIN 4/1/2011 1:30:00 PM HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| AS 43.90.110.docx |
HFIN 4/1/2011 1:30:00 PM HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| AS 43.90.240.docx |
HFIN 4/1/2011 1:30:00 PM HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| AS 43.90.900.docx |
HFIN 4/1/2011 1:30:00 PM HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 Fact Sheet.pdf |
HFIN 4/1/2011 1:30:00 PM HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 Sponsor Statement NEW.pdf |
HFIN 4/1/2011 1:30:00 PM HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 AGIA Reimbursements.docx |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 Gara ASAP Handout.pdf |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB142-NEW FN LAW-CIV-04-01-11.pdf |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB142-NEW FN DNR-CO-04-01-11.pdf |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 Gara ASAP Handout.pdf |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 AK Pipeline--Apr 4 2011.pdf |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |
| HB 142 natural gas market conditions0404 2011 (3).pdf |
HFIN 4/4/2011 8:30:00 AM |
HB 142 |