Legislature(2001 - 2002)

04/29/2002 01:56 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 519                                                                                                            
     An Act  authorizing priority treatment under  the Right-                                                                   
     of-Way  Leasing Act  for an Alaska  North Slope  natural                                                                   
     gas project;  expanding the scope  for the kinds  of gas                                                                   
     development projects that  may become qualified projects                                                                   
     under   the  Alaska   Stranded   Gas  Development   Act;                                                                   
     extending  the  deadline   for  submitting  applications                                                                   
     under   the  Alaska   Stranded   Gas  Development   Act;                                                                   
     exempting  an Alaska  North  Slope  natural gas  project                                                                   
     from state  property tax and all municipal  taxes during                                                                   
     construction; and providing for an effective date.                                                                         
Co-Chair Mulder advised that he  had invited industry members                                                                   
to  provide  Committee  members  a presentation  on  the  gas                                                                   
project study.                                                                                                                  
JOE MARUSHACK, (TESTIFIED VIA  TELECONFERENCE), PHILLIPS OIL,                                                                   
ANCHORAGE, introduced  the "Alaska Producer  Pipeline Update"                                                                   
handout.   (Copy on  File).   He referenced  Page 4,  Project                                                                   
Overview from the handout, which:                                                                                               
     ·    Developed  feasibility cost estimates for  a world-                                                                   
          class pipeline project, Gas Treatment Plant, and a                                                                    
          Natural Gas Line (NGL) facilities.  The cost                                                                          
          estimates accounted for:                                                                                              
     ·    $125 million spent for that phase of the project;                                                                     
     ·    110  owner  company   representatives  and  over  1                                                                   
          million staff-hours (including contractors) with                                                                      
          about 20% in the field;                                                                                               
     ·    Performed  multiple   environmental  field  studies                                                                   
          along 5,400 miles of right-of-way.                                                                                    
ROBBIE SHILAB, (TESTIFIED VIA  TELECONFERENCE), EXXON ALASKA,                                                                   
ANCHORAGE, referenced Page 5, the Conclusions:                                                                                  
     ·    Project  currently not  commercially viable  as the                                                                   
          risks outweigh  the rewards.  There  is substantial                                                                   
          additional  engineering work  not justified  at the                                                                   
          present  time and  the future  activity must  match                                                                   
          progress    with   governments    and    commercial                                                                   
     ·    Governments will play a key role in reducing                                                                          
          project  costs and  schedule risks.   He noted  the                                                                   
          U.S. Federal  regulatory enabling  legislation, the                                                                   
          NEW/First  Nations regulatory  process clarity  and                                                                   
          the Alaska fiscal certainty.                                                                                          
KEN   CONRAD,   (TESTIFIED   VIA   TELECONFERENCE),   BRITISH                                                                   
PETROLEUM   (BP),   ANCHORAGE,   referenced   Page   7,   the                                                                   
Statistical  Summary (Alaska  to  L-48).   The project  would                                                                   
begin  with a  gas  treatment plant  moving  the supply  from                                                                   
Alaska  into an  Alberta pipeline,  moving into  a NGL  plant                                                                   
along the way and then into Alberta to a L-48 pipeline.                                                                         
     ·    4.5 (bcfd) pipeline design rate                                                                                       
     ·    5.6 (bcfd) expansion potential                                                                                        
     ·    24-28 compressor stations                                                                                             
     ·    1.2 - 1.4 million total pipeline horsepower                                                                           
     ·    1,800 - 2,100 miles Alaska to Alberta                                                                                 
     ·    1,500 miles - Alberta to market                                                                                       
     ·    52 inches pipe diameter                                                                                               
     ·    2,000 - 2,500 (psi) operating pressure                                                                                
     ·    5 - 6 million tons of steel                                                                                           
     ·    50 million + construction staff-hours                                                                                 
Mr.  Conrad  pointed  out  that  Page  8  indicates  the  gas                                                                   
treatment  plant (GTP),  located  on the  North  Slope.   The                                                                   
picture  indicates  the  central compression  plant  and  the                                                                   
central  gas facility.    The primary  purpose  of the  plant                                                                   
would be to remove  carbon dioxide from the gas  stream.  The                                                                   
facility  would use  as an amine  system to  remove the  acid                                                                   
gas,  and then  dehydration  using glycol.    The total  cost                                                                   
would be  approximately  $2.6 billion  dollars.  The  average                                                                   
fuel consumption would be over  150 million cubic feet a day.                                                                   
Mr. Conrad commented that Page  9 shows the Alaska to Alberta                                                                   
technical challenges.  Those common challenges are:                                                                             
     ·    Permafrost                                                                                                            
     ·    River Crossings                                                                                                       
     ·    Skilled Labor                                                                                                         
     ·    Pipe availability                                                                                                     
     ·    Logistics                                                                                                             
He continued,  Page 10  indicates the  elevation profile  and                                                                   
the  route  profiles  for  both  the  northern  and  southern                                                                   
routes.  The northern route takes a more gradual incline.                                                                       
Mr. Conrad  continued,  Page 11 demonstrates  the Alberta  to                                                                   
market route.   He pointed out that it would  run 1,469 miles                                                                   
from Ft. Saskatchewan area to Chicago.                                                                                          
Mr. Conrad pointed  out that Page 12  indicates Environmental                                                                   
Field Studies:                                                                                                                  
     ·    Vegetation & soil surveys;                                                                                            
     ·    Wildlife, including threatened and endangered                                                                         
     ·    Wetlands, fisheries, hydrology & water quality;                                                                       
     ·    Cultural & archaeology resources;                                                                                     
     ·    Marine mammal studies, and                                                                                            
     ·    Traditional knowledge consultation.                                                                                   
Mr.  Marushack  overviewed  the   project  feasibility  study                                                                   
outlined on Page 14.                                                                                                            
     ·    Joint project feasibility work results in                                                                             
          significantly  improved  project  definition and  a                                                                   
          better    understanding    of   the    risks    and                                                                   
     ·    Updated study results indicate higher capital                                                                         
          costs,    increased   volumes   delivered,    lower                                                                   
          operating costs, reduced  fuel consumption, current                                                                   
          capital    cost   estimates   have    accuracy   to                                                                   
          approximately  +/-20%,  and achieving  lower  costs                                                                   
          and   less    cost   uncertainty    would   require                                                                   
          substantial future investment.                                                                                        
     ·    The project continues to have significant risks                                                                       
          such  as regulatory,  political, and fiscal  costs,                                                                   
          long-term prices and market volatility.                                                                               
Vice-Chair Bunde  understood that the producers  would prefer                                                                   
the  northern  route,  as  it   would  be  shorter  and  less                                                                   
challenging.   He asked  if incentives  would continue  to be                                                                   
made available if the northern route was chosen.                                                                                
Mr. Conrad emphasized  that it was not the  intention to move                                                                   
forward with a project unless  both governments supported it.                                                                   
Routing   concerns  would   be   a  decision   made  by   the                                                                   
governments.   To  make a  project happen  of this  magnitude                                                                   
requires the support of all governments.                                                                                        
Mr. Marushack added  that Phillips would be  "happy" to focus                                                                   
on the southern  route.  He referenced Page 15,  a Summary of                                                                   
the  Capital Costs  and  Tolls,  comparing the  southern  and                                                                   
northern  routes.  Alaska's  project  share for the  southern                                                                   
route would  be $19.4  million dollars  and for the  northern                                                                   
route,  $18.6  million  dollars.   The  uncertainty  of  each                                                                   
project creates a +/- 20%.                                                                                                      
Representative   Croft   understood    that   under   federal                                                                   
legislation,  guaranteed  $3.25/bbl  price  in Alberta  or  a                                                                   
$3.75/bbl  price within  the  U.S. market.    At that  range,                                                                   
there  would be  a tariff  even at  the 20%  number and  that                                                                   
would  provide less  than one  dollar  of minimum  guaranteed                                                                   
wellhead price.                                                                                                                 
Mr. Marushack explained  that with the $3.25  price and given                                                                   
the $1 dollar wellhead cost, the  operating costs would still                                                                   
have to pay the royalty and severance  costs.  That mechanism                                                                   
currently  covers  only  the market  risks.    The  mechanism                                                                   
referenced by  Representative Croft  would not cover  capital                                                                   
risks.   The  project  is not  design  engineering and  those                                                                   
costs  amount to hundreds  of  dollars.  Any  overrun in  the                                                                   
project  would  be  directly  reflected  in  higher  tariffs.                                                                   
There is  no cost containment  in the number.   He emphasized                                                                   
that  the project  has an  extreme  amount of  risk and  that                                                                   
there is a lot of caution around the project.                                                                                   
Mr. Conrad  added that  to make  the project successful,  the                                                                   
industry is attempting to reduce  costs and other risks.  The                                                                   
project will  require substantial  future investment.   There                                                                   
is a history in Alaska of lawsuits  resulting from regulatory                                                                   
over-runs.  He  indicated that a +/- 20% had  been the number                                                                   
Representative  Whitaker  asked  if the  wellhead,  less  the                                                                   
operating  costs,  would  result  in the  pipeline  or  field                                                                   
operational costs.                                                                                                              
Mr. Marushack replied  that it would result in  costs for the                                                                   
field operations.                                                                                                               
Representative   Whitaker   remarked    that   the   pipeline                                                                   
operational costs would be included in tariff fees.                                                                             
Mr.  Marushack  responded  that  would  be the  cost  of  the                                                                   
pipeline operation plus the profit  on that plus depreciation                                                                   
and taxes.                                                                                                                      
Representative  Whitaker  asked  if the  operation  would  be                                                                   
separate from the  operation on the pipeline and  if it would                                                                   
include the return on the investment.                                                                                           
Mr. Marushack stated that what  had been included was all the                                                                   
operational  costs  of the  pipeline  and the  gas  treatment                                                                   
plant and  would include  the servicing  costs for  those new                                                                   
buildings.   That price has nothing  to do with what  it will                                                                   
take to get the gas to the treatment facility.                                                                                  
Mr. Conrad added  that it would not address  costs associated                                                                   
with royalty taxes or the oil losses.                                                                                           
Representative Whitaker  asked if there would be  a return on                                                                   
the investment over and above the wellhead cost.                                                                                
Mr. Marushack  remarked that  was correct  and that  it would                                                                   
amount  to  an  assumed percentage  of  70/3%,  projecting  a                                                                   
minimum of a 12% rate of return.                                                                                                
Mr. Shilab  interjected that  the 12% would  be used  for the                                                                   
pipeline portion.                                                                                                               
Mr. Marushack  referenced Page  16, the Estimated  Government                                                                   
Take.    He  advised  that  the  revenues  would  be  roughly                                                                   
equivalent for  both the northern  and southern routes.   The                                                                   
increased  government  take  was  based on  a  higher  system                                                                   
throughout,  the longer project  life and  the 51 TCF  Alaska                                                                   
gas reserves  produced including 16 TCF  yet-to-be-discovered                                                                   
gases.    He  suggested  that   the  State  of  Alaska  could                                                                   
anticipate $50 billion dollars in revenue.                                                                                      
Co-Chair Mulder  asked about the  $28 and $50  billion dollar                                                                   
discrepancy in the  numbers as provided by the  Department of                                                                   
Revenue.   He asked if  that was the  known reserves  and the                                                                   
estimated reserves.                                                                                                             
Mr. Marushack  responded that he  did not know how  the State                                                                   
achieved their numbers.   He added that if  the pipeline were                                                                   
built, people would discover gas.                                                                                               
Representative Whitaker  asked about the distribution  of the                                                                   
income number and the amount that  the industry would receive                                                                   
on that amount.                                                                                                                 
Mr. Shilab understood  that the industry would  receive about                                                                   
40% of the government amount,  making nearly a 60%-40% split.                                                                   
Representative  Whitaker  inquired  what  40%  would  be  the                                                                   
amount of.                                                                                                                      
Mr. Shilab responded  that it would be 40%  of the government                                                                   
Representative  Whitaker asked  if that  amount would  be net                                                                   
Mr.  Shilab thought  that  they  would be  net  dollars.   He                                                                   
explained  that the $120  billion dollars  would be  "net" to                                                                   
the  government   and  the  $40  billion  would   go  to  the                                                                   
Mr. Marushack  interjected  that the industry  was using  the                                                                   
Environmental Impact Assessment (EIA) forecast.                                                                                 
Representative Croft  noted that if the government  takes 60%                                                                   
and the  producers take  40%, the  producers would  be making                                                                   
$80 billion dollars.                                                                                                            
Mr.  Conrad suggested  that they  get back  to the  Committee                                                                   
with the correct numbers.                                                                                                       
TAPE HFC 02 - 96, Side B                                                                                                      
Mr. Conrad indicated that the  industry is attempting to make                                                                   
the risks  balance with  the rewards.   Substantial  revenues                                                                   
are anticipated.  He added there will be substantial costs.                                                                     
Mr. Marushack  referenced Page  17, the expansion,  and major                                                                   
expansion with new discoveries.                                                                                                 
     ·    Expandability built into the system design;                                                                           
     ·    System de-bottle-necking likely to yield small                                                                        
          volume improvements;                                                                                                  
     ·    Approximately 1 bcfd expansion with intermediate                                                                      
     ·    Cost effective expansion facilitated by large                                                                         
          diameter pipe; and                                                                                                    
     ·    Expansion will provide access to new gas                                                                              
Representative  Whitaker understood  that there  would be  no                                                                   
expansion  until there is  an additional  bcfd added  per day                                                                   
for efficiency.                                                                                                                 
Mr. Conrad advised that an expansion  of such magnitude would                                                                   
be a function of how much horsepower  the State wants to add.                                                                   
It would  depend on  what the customers  want and/or  need at                                                                   
that time.   He added  that lower  volume expansion  could be                                                                   
done but might  be less efficient if there is  a continuum of                                                                   
opportunity depending on the needs of the market.                                                                               
Mr. Shilab  referenced Pages 18,  19, & 20, the  Three-legged                                                                   
Stool for Government Framework:                                                                                                 
     ·    Viable Government Framework is Essential;                                                                             
     ·    U.S. Enabling Regulatory Legislation; and                                                                             
     ·    Alaska Fiscal Certainty.                                                                                              
If  all the  stakeholders  do not  support  the project,  the                                                                   
investors,  the   government,  the  1   Nations   and  Native                                                                   
communities and  the consumers will determine  the success of                                                                   
the  pipeline.   Predictable  expenditures  require having  a                                                                   
framework  in  place.    Hopefully,  once  the  framework  is                                                                   
established, a viable pipeline project will be found.                                                                           
Mr.  Shilab pointed  out  that  the U.S.  regulatory  process                                                                   
follows the  Senate Energy bill  and creates a  market-driven                                                                   
process for any  viable project.  That office  will create an                                                                   
office  in the  executive branch  to  coordinate all  related                                                                   
federal agency activity.                                                                                                        
Mr. Shilab  discussed Page 20,  The Alaska Fiscal  Certainty.                                                                   
That aspect  will provide certainty  in the State  government                                                                   
take  for  predictable  disposition  of  State  royalty  gas,                                                                   
consistent with:                                                                                                                
     ·    Firm transportation commitments;                                                                                      
     ·    Clear, simple predictable gas valuation for                                                                           
          royalty and severance tax payments;                                                                                   
     ·    Severance tax rates and the economic limit factor                                                                     
     ·    Ad valorem tax rates and valuation methodology;                                                                       
     ·    Corporate income taxes; and                                                                                           
     ·    Stable fiscal terms over the life of the pipeline                                                                     
Co-Chair Mulder  inquired about  the federal ceiling  and the                                                                   
floor agreements.                                                                                                               
Mr. Conrad stated that the process was moving forward.                                                                          
Mr. Marushack pointed  out that the bill had  made it through                                                                   
the Senate  and through the  Conference Committee.   The bill                                                                   
needs to  be thoroughly  debated.  The  State of  Alaska must                                                                   
help move the bill, adding that this is not a "done deal".                                                                      
Co-Chair  Mulder asked  if  the project  be  a "non  starter"                                                                   
without the federal provisions.                                                                                                 
Mr.   Marushack  explained   that  the   bill  is   extremely                                                                   
important.   There must  be federal  enabling legislation,  a                                                                   
federal tax  incentive, and State  fiscal certainty  in order                                                                   
for the producers to move forward.                                                                                              
Mr. Marushack  acknowledged that the federal  side would help                                                                   
the   downside  risks,   however,  that   does  not   address                                                                   
economics.   It  is important  that  Alaska demonstrate  that                                                                   
they want this project to happen.                                                                                               
Mr.  Shilab mentioned  that  Exxon Mobil  would  not seek  or                                                                 
support  government subsidy  on  the project.   He  commented                                                                   
that the  project would need to  "stand on its' own  feet" in                                                                   
order to move forward.                                                                                                          
Representative  Harris pointed out  that in regard  to Alaska                                                                   
fiscal  certainty, no  tax holiday  had been  indicated.   He                                                                   
asked if during  construction, a tax holiday  could determine                                                                   
the project's feasibility.                                                                                                      
Mr. Conrad replied  that there is no "one point"  which makes                                                                   
or  breaks  the project.    There  needs  to be  clarity  and                                                                   
predictability  on the  regulatory  and fiscal  portion.   He                                                                   
outlined the key  points.  Costs will need to  be reduced and                                                                   
that a  property tax holiday  would be  a way to  help reduce                                                                   
Representative Harris questioned  previous statements made by                                                                   
Mr. Shilab regarding the economics  of the project and how it                                                                   
must "stand on its' own merits".                                                                                                
Mr. Shilab  stated  that was correct.   He  noted that  Exxon                                                                   
does not seek or support incentives  or subsidies.  A project                                                                   
of this size must be able to stand alone on its' merit.                                                                         
Co-Chair Mulder asked if Exxon  believed that the project was                                                                   
economically viable.                                                                                                            
Mr. Shilab replied they did.                                                                                                    
Representative  Hudson  referenced  comments  made  regarding                                                                   
Alaska's fiscal certainty and asked if that was a concern.                                                                      
Mr. Conrad  agreed that it  was.  He  noted that  Alaska does                                                                   
have a history  of disputes and changes in  settlements.  The                                                                   
project  cannot economically  tolerate  such  scenarios.   He                                                                   
pointed out  that the "overall"  fiscal picture in  Alaska is                                                                   
"wobbly",  thus   there  needs  to   be  a  high   degree  of                                                                   
confidence.   Whatever "rule"  is decided, it  cannot change.                                                                   
He noted  that the  producers were  supportive of  reenacting                                                                   
the old Stranded Gas Act.                                                                                                       
Representative  Croft  commented that  a  tax  holiday was  a                                                                   
Mr.  Marushack pointed  out that  there  was a  philosophical                                                                   
difference between  the companies presenting at  the meeting.                                                                   
Phillips  position is  that  the project  is  one of  several                                                                   
building blocks which will help  make the project viable.  He                                                                   
added that  the legislation would  send the right  message to                                                                   
move the project along.                                                                                                         
Mr. Conrad  interjected that BP  should evaluate  the project                                                                   
with  the  rule in  place.   Fiscal  predictability  is  very                                                                   
important and taxes  by far would be the biggest  cost of the                                                                   
project.   He added that property  taxes are a  decision made                                                                   
by the  government, and  then the  industry can evaluate  the                                                                   
project against that information.                                                                                               
Representative Croft  noted Page 15, the southern  route.  He                                                                   
noted that  it would cost  $1.77 to get  the gas  to Alberta,                                                                   
creating a $3.25  minimum price.  He pointed  out that number                                                                   
would be  50% off,  not 20%,  which would  yield a  tariff to                                                                   
Alberta of $2.66 leaving a $.60 wellhead value for the gas.                                                                     
Mr. Marushack  advised that  the $1.36 would  get the  gas to                                                                   
Gordondale.  He  stressed that the project is  very risky and                                                                   
the industry  is concerned about  moving forward  and finding                                                                   
that it is  over the 20% mark.   The industry does  not agree                                                                   
that price could likely make the project happen.                                                                                
Mr. Conrad interjected that the  operating costs had not been                                                                   
shown and those costs would mitigate the oil losses.                                                                            
Representative  Croft questioned  if the  producers had  been                                                                   
involved in drafting the U.S. Energy authorization.                                                                             
Mr. Conrad  replied that they  had and that was  legislation,                                                                   
which the industry  proposed in order to regulate  the risks.                                                                   
He  noted  that the  industry  worked  closely to  create  an                                                                   
appropriate form.                                                                                                               
Representative Whitaker referenced  Page 20, and asked if the                                                                   
statement  "predictable  disposition  of State  royalty  gas,                                                                   
consistent   with   firm  transportation   commitments"   was                                                                   
sufficient for the industry.                                                                                                    
Mr. Conrad  explained that the  producers were  supportive of                                                                   
the State taking the gas in-kind  and thought that could be a                                                                   
form of fiscal stability.                                                                                                       
Representative  Whitaker  questioned  the  "clarity"  of  the                                                                   
existing regime.                                                                                                                
Mr.   Conrad  replied   that   it  is   important  that   the                                                                   
interpretation  is  clear.   Problems  need  to be  addressed                                                                   
before they occur.                                                                                                              
Representative  Whitaker inquired  if there were  impediments                                                                   
within the existing project because of the uncertainty.                                                                         
Mr. Conrad responded that it could  be determined by bringing                                                                   
simplicity and clarity to the scheme.                                                                                           
Representative Whitaker  asked if reducing the  rate had been                                                                   
Mr. Conrad stated  that what was being discussed  was "simple                                                                   
and predictable".                                                                                                               
Representative Whitaker asked about severance.                                                                                  
Mr. Conrad  reiterated that  "simple, clear and  predictable"                                                                   
are the  answer to  all the elements;  otherwise it  would be                                                                   
impossible to evaluate the project.                                                                                             
Representative Whitaker thought  that there was a "mechanism"                                                                   
inherent to  the proposed legislation.   He pointed  out that                                                                   
the Stranded Gas Act would provide the necessary clarity.                                                                       
Mr. Conrad advised that it would  not solve the problems, but                                                                   
would rather establish a process to address it.                                                                                 
Vice-Chair  Bunde asked  if Mr.  Shilab  had participated  in                                                                   
crafting the federal legislation.                                                                                               
Mr. Shilab  responded  that Exxon Mobil  had participated  in                                                                   
crafting the base language for the enabling legislation.                                                                        
Vice-Chair  Bunde inquired  if  they were  supportive of  the                                                                   
Mr. Shilab responded  that Exxon Mobil was supportive  of the                                                                   
July 2001  legislation,  however, that  they did not  support                                                                   
some of provisions  regarding access, expansion,  and royalty                                                                   
Vice-Chair Bunde inquired if Exxon  Mobil had been supportive                                                                   
of the subsidy and/or financial aspects.                                                                                        
Mr.  Shilab stated  that they  do not  support the  financial                                                                   
Mr. Shilab outlined  Page 21 - Predictable  New/First Nations                                                                   
Regulatory Process.  He outlined it:                                                                                            
     ·    Establishes clear regulatory processes between New                                                                    
          and First Nations;                                                                                                    
     ·    Details plans for cooperation among Canadian                                                                          
          Federal, Provincial, Territorial and First Nations                                                                    
          regulatory authorities; and                                                                                           
     ·    Predicts expedited process that fully complies                                                                        
          with all environmental and regulatory laws.                                                                           
He continued illustrating why it was essential:                                                                                 
     ·    Ensures timely completion or regulatory and                                                                           
          environmental assessment process;                                                                                     
     ·    Lacks clear New/First Nations permitting process                                                                      
          increases project risk; and                                                                                           
     ·    Avoids duplication of environmental assessments                                                                       
          and conflict among Canadian governmental agencies                                                                     
          and First Nations.                                                                                                    
Mr. Shilab  reviewed Page  23, Wrap-up.   He stated  that the                                                                   
intent was:                                                                                                                     
     ·    Project is currently not commercially viable.                                                                         
     ·    A viable government framework is essential.                                                                           
     ·    Joint team resources have been redeployed.                                                                            
     ·    Companies will collaborate as appropriate on                                                                          
          future work.                                                                                                          
Representative Harris  asked if there  had been any  on going                                                                   
talks with  the Canadian  government regarding incentives  or                                                                   
tax holidays.                                                                                                                   
Mr. Marushack  replied that there  have not been any  at this                                                                   
time.    The  industry  has  focused   only  on  the  federal                                                                   
guidelines.   The benefits  to the  Canadians, especially  on                                                                   
the southern route,  are significantly less than  they are to                                                                   
Alaska  and  the  federal  government.    Canadians  see  the                                                                   
project as an opportunity for jobs.                                                                                             
Mr. Conrad  interjected that there  has been some  discussion                                                                   
initiated  by the Canadian  government regarding  accelerated                                                                   
depreciation.    In  terms  of  property  tax,  most  of  the                                                                   
jurisdictions in  Canada already have  a system that  is less                                                                   
burdensome than it is in Alaska.                                                                                                
Representative  Davies  questioned  why  the  southern  route                                                                   
would be less valuable to the Canadians.                                                                                        
Mr.  Marushack  explained  that  scenario  assumed  that  the                                                                   
MacKenzie  Valley was  developed.   Part of  the $29  billion                                                                   
revenue dollars is associated  with separate MacKenzie lines.                                                                   
Representative  Davies asked if  the Mackenzie River  portion                                                                   
was built, would a tax holiday play a role.                                                                                     
Mr. Shilab advised that if the  southern pipeline were built,                                                                   
there  would  then  be  no  association  with  the  MacKenzie                                                                   
Co-Chair Mulder pointed  out that "tax holidays"  are not new                                                                   
concepts,  however, relatively  new to  Alaska.  He  inquired                                                                   
how often the tax holiday was used around the world.                                                                            
Mr.  Marushack   advised  that  on  several   large  projects                                                                   
throughout  the states,  municipalities  do  compete for  the                                                                   
projects  by offering  the tax  holiday.   That  is a  common                                                                   
practice.  On  the world scale, opportunities  are negotiated                                                                   
on a different base.  He noted  that the legislation does not                                                                   
allow the industry  to compete against  other municipalities.                                                                   
He indicated  that the  proposed project  is world  scale and                                                                   
has enormous risks involved.                                                                                                    
Co-Chair  Mulder  asked  if  Exxon Mobil  had  used  the  tax                                                                   
holiday anywhere else in the world.                                                                                             
Mr. Shilab was not aware of that.                                                                                               
SENATOR JOHN TORGERSON introduced  Dr. Doug Reynolds, Oil and                                                                   
Gas  Economist,   Legislative   Contract,  and  Mr.   Patrick                                                                   
Kaufflan, Senate Resource Staff.                                                                                                
Senator Torgerson  outlined items  that he felt  were missing                                                                   
from the proposed  report.  He indicated he  was disappointed                                                                   
with the  report.   The financial  summary consists  of eight                                                                   
numbers,  three subtotals,  and  one tariff  range.   He  was                                                                   
outraged  that the  State  was expected  to  respond to  only                                                                   
eight numbers being provided,  given the size of the project.                                                                   
Senator Torgerson listed missing items from the report:                                                                         
     ·    Does not show the liquid price                                                                                        
     ·    Evaluation criteria                                                                                                   
     ·    Rate of return                                                                                                        
     ·    Pipeline tariff model                                                                                                 
     ·    Benefit for the federal price                                                                                         
     ·    Federal loan guarantee                                                                                                
     ·    State tax exemption                                                                                                   
     ·    State property tax exemption                                                                                          
     ·    Other fiscal changes that could affect the                                                                            
          economics of the projects                                                                                             
     ·    Expect jurisdictions to reduce their take                                                                             
     ·    Information on when the pipeline would be expanded                                                                    
     ·    Cost benefit of any expansion                                                                                         
     ·    Oil loss models                                                                                                       
Senator Torgerson claimed that  the $50 billion dollar figure                                                                   
was a  new number  with no appropriate  indication of  how it                                                                   
was determined.   He noted that using the  producer's numbers                                                                   
would provide  them a  much higher value  than 15%.   Senator                                                                   
Torgerson noted that the preliminary  analysis indicates that                                                                   
the property tax exemption during  the four-year construction                                                                   
period would provide a greater return.                                                                                          
Representative  Davies asked  Senator Torgerson  how long  he                                                                   
had been chair of the Joint Committee on Oil and Gas.                                                                           
Senator Torgerson replied for one year.                                                                                         
Representative  J. Davies asked  during that time,  how often                                                                   
had the industry requested a tax holiday.                                                                                       
Senator Torgerson  informed members that there  had been many                                                                   
requests.   He noted  that in March  2002, he requested  that                                                                   
the  proposal be  submitted in  writing.   Senator  Torgerson                                                                   
acknowledged   that  working   with  that   group  had   been                                                                   
frustrating.   The  industry continually  has requested  that                                                                   
the State provide fiscal certainty.                                                                                             
Representative Croft  requested that the industry  to provide                                                                   
feedback regarding the background of the project.                                                                               
Mr.  Conrad   did  not  know   what  Senator   Torgerson  was                                                                   
attempting  to determine  but offered  to negotiate any  used                                                                   
TAPE HFC 02 - 97, Side A                                                                                                      
Mr. Conrad acknowledged  that the State had  used a different                                                                   
number evaluation.                                                                                                              
Representative  Croft suggested that  there should  have been                                                                   
substantial work done to determine the $2.39 tariff.                                                                            
Mr. Konrad  explained that  there is  "not a specific  tariff                                                                   
but rather  a range".   He  noted that  there is  uncertainty                                                                   
around that number.                                                                                                             
Representative  Croft requested  to see  reports on  whatever                                                                   
work  had been  done to  date.   He commented  that for  $100                                                                   
million dollars,  there should be more information  than that                                                                   
contained in the presentation.                                                                                                  
Mr. Conrad replied  that most of the money had  been spent on                                                                   
engineering  and  time in  the  field.    He added  that  the                                                                   
industry  "would  be  happy to  have  any  conversation  with                                                                   
Senator Torgerson".                                                                                                             
Vice-Chair Bunde thought  that it would be more  in the State                                                                   
of Alaska's interest to have a  gas pipeline than it would be                                                                   
in the producer's interest.                                                                                                     
Senator  Torgerson pointed  out  that the  estimated rate  of                                                                   
return, including  the floor, would be around  18.8% percent.                                                                   
He emphasized that  the industry does not need  any incentive                                                                   
with a predicted  rate of return  that high.  He  warned that                                                                   
incentives should not be provided until they are needed.                                                                        
Vice-Chair Bunde  questioned why producers would  not begin a                                                                   
project if they were assured a 15%-18% percent profit.                                                                          
Senator Torgerson  commented that  the producers need  to get                                                                   
federal  legislation   to  pass   before  they  began.     He                                                                   
reiterated that the  industry only had eight  numbers at this                                                                   
time and asked  how a decision this large could  be made with                                                                   
only eight  numbers.  He  encouraged that the  numbers "prove                                                                   
out mathematically"  when  undertaking such  a huge  risk for                                                                   
the State.                                                                                                                      
Co-Chair  Mulder pointed  out that Exxon  had indicated  that                                                                   
the project  "could be  non-economic".   He asked if  Senator                                                                   
Torgerson believed that the project was economic.                                                                               
Senator Torgerson  reiterated that at this time,  the numbers                                                                   
indicate  that the  project  would produce  over  15%.   Each                                                                   
company has their  own internal hurdle rate.   Exxon Mobil is                                                                   
a large  corporation  and could  have two  or three  projects                                                                   
this size  happening in  any given year.   Each company  must                                                                   
determine both their internal  and external rates in order to                                                                   
approach the hurdle.                                                                                                            
Co-Chair Mulder  noted that  he was not  willing to  risk $22                                                                   
billion  dollars.    He  believed  that the  margin band  was                                                                   
narrow  and  that   it  would  be  unreasonable   to  have  a                                                                   
guaranteed good rate of return for such a risk.                                                                                 
Senator  Torgerson reiterated  that his  concern was  not the                                                                   
rate of  return but  the fact  that he  does not have  enough                                                                   
numbers to make an informed decision.                                                                                           
Co-Chair Mulder  stated that the  actual dollar  return would                                                                   
lessen  the cost  of construction,  would  lower the  tariff,                                                                   
increase  the  wellhead  price  and at  the  same  time,  the                                                                   
exemption would be marginal.                                                                                                    
Senator Torgerson  acknowledged that there was  truth to that                                                                   
assumption,   however,  needed   further  consideration   and                                                                   
numbers being provided.                                                                                                         
Co-Chair Mulder understood that  the State could recoup their                                                                   
costs over time with the high wellhead price.                                                                                   
Senator Torgerson  acknowledged that  it was fair  to presume                                                                   
that  the  State would  receive  the  return over  a  50-year                                                                   
period.  He asked what the projected length was.                                                                                
Co-Chair  Mulder   thought  that   now  is  the   "window  of                                                                   
opportunity" for the project to enter the market.                                                                               
Senator Torgerson  pointed out  that Cambridge had  indicated                                                                   
that there  could be  a new window  of opportunity  coming in                                                                   
2015.  He  reiterated that there are many  issues surrounding                                                                   
the proposed project.                                                                                                           
Co-Chair Mulder  observed that there  is more gas now  in the                                                                   
lower 48 than there was a couple years ago.                                                                                     
Senator Torgerson advised that  usually there is a seven-year                                                                   
supply ratio,  which now has increased  to eleven.   He noted                                                                   
the price  of gas had increased,  indicating that  the amount                                                                   
of product had declined.                                                                                                        
Co-Chair Mulder stated  that in order to get  into the market                                                                   
place, the  State needs  to be aggressive  or they  will lose                                                                   
their opportunity.   If this  window of opportunity  is lost,                                                                   
it might never happen.                                                                                                          
Senator Torgerson disagreed.                                                                                                    
Representative Whitaker referred to the Alliance pipeline.                                                                      
Senator Torgerson  replied that  pipeline had come  online in                                                                   
Representative  Whitaker  remarked  that  at that  time,  the                                                                   
price of gas had  gone through the ceiling.    The demand was                                                                   
significant and growing.  The  point being that the window of                                                                   
opportunity is  a moving target  and the market  could absorb                                                                   
the gas.                                                                                                                        
DR.  DOUG REYNOLDS,  CONSULTANT  FOR THE  JOINT  OIL AND  GAS                                                                   
COMMITTEE, ECONOMIST,  JUNEAU, noted that in  addition to the                                                                   
federal  legislation, the  industry has  indicated that  they                                                                   
need a 15% cost of return.  If  costs were higher, they could                                                                   
get a  lower rate of  return.  If  the revenue side  risk was                                                                   
taken care of and  the cost side addressed, from  12 years of                                                                   
past data,  Exxon Mobile has received  a 12% rate  of return.                                                                   
Risks  have been  taken into  account.   If  cost risks  were                                                                   
added back, a 13% rate of return would result.                                                                                  
Co-Chair Mulder inquired what  type of cost risk Dr. Reynolds                                                                   
was referring to.                                                                                                               
Dr. Reynolds replied  that a +/-20% cost risk,  noting that a                                                                   
100%  cost risk  was not  possible.   From  costs of  similar                                                                   
projects around the world, most costs are lower.                                                                                
Co-Chair  Mulder asked  if  any other  pipelines  had to  run                                                                   
through the Alaskan-type terrain.                                                                                               
Dr. Reynolds  advised that in  Russia, there was  mountainous                                                                   
and permafrost  terrains.  There  have been studies  done and                                                                   
they have  a "good feel"  for their numbers.   He  added that                                                                   
everything should be on the table during the negotiations.                                                                      
Representative Whitaker referenced  the Trans Alaska Pipeline                                                                   
System  (TAPS) and  asked  if there  was  sufficient data  to                                                                   
determine a reasonable cost estimate.                                                                                           
Dr. Reynolds  explained that the  problem regarding  TAPS was                                                                   
that the situation was changing  and that there was work that                                                                   
needed  to   be  done  to  appease  environmental   concerns.                                                                   
Additionally, it had  to be above ground.   The TAPS pipeline                                                                   
is  significantly  different  than  any  other  oil  pipeline                                                                   
system.   The  proposed  pipeline would  be  more similar  to                                                                   
other types of constructed pipelines.                                                                                           
Representative   Whitaker   commented  about   the   problems                                                                   
associated with thawing Arctic concerns.                                                                                        
Dr. Reynolds agreed.                                                                                                            
Co-Chair Mulder questioned Dr. Reynolds's credentials.                                                                          
Dr. Reynolds advised  that he had studied oil  energy economy                                                                   
and was  a mechanical  engineer.   He noted  that he  had not                                                                   
built a pipeline.   He noted that he spoke  "purely" from the                                                                   
studies he had  read on pipeline construction.    He stressed                                                                   
that he had  not been involved and that neither  had Co-Chair                                                                   
Mulder  and  that   the  State  was  currently   involved  in                                                                   
expensive negotiations with the industry.                                                                                       
Representative  Hudson summarized  that before the  Committee                                                                   
was  two initiatives  for  the natural  gas  industry to  put                                                                   
together a portfolio in the interest  of the industry and the                                                                   
State.   He added  that one would  use the Alaska  Railroad's                                                                   
tax-free bonding capabilities.                                                                                                  
Dr. Reynolds noted  that they had looked at that  and that it                                                                   
would depend  on how  the project would  be financed.   There                                                                   
would be  some savings.  He  added how that affects  the rate                                                                   
of return would be difficult to measure.                                                                                        
Representative  Hudson asked  if there  had been any  project                                                                   
within the last  ten years where governments  negotiated with                                                                   
producers and provided an advance incentive.                                                                                    
Dr.  Reynolds  replied  that  there were  a  number  of  huge                                                                   
projects in which the government  did provide incentives.  He                                                                   
did  not   know  the  exact   incentive.    In   response  to                                                                   
Representative  Hudson, Dr.  Reynolds explained  that he  had                                                                   
only studied the finances of this  particular project and not                                                                   
the negotiation process.                                                                                                        
PAT  KAUFFLAN,  SENATE  RESOURCES   COMMITTEE,  SENATOR  JOHN                                                                   
TORGERSON,  advised that the  North Star  unit was  a similar                                                                   
process  of  negotiation  as   the  present  one  facing  the                                                                   
Legislature.  Through that process,  a negotiation transpired                                                                   
between  the producers  and the Administration.   During  the                                                                   
process,  the  State received  a  great deal  of  information                                                                   
regarding  financial  and  engineering  information  and  the                                                                   
volume of reserves.   The State then went to  outside experts                                                                   
to  verify  what  was  a fair  arrangement.    The  deal  was                                                                   
negotiated using  the net profit  share and presented  to the                                                                   
Legislature for approval.                                                                                                       
Representative  Whitaker questioned if  it would be  an issue                                                                   
if a tax holiday were not given.                                                                                                
Mr. Kaufflan replied that was logical.                                                                                          
Representative  Whitaker   referenced  the   EIA  projections                                                                   
through  2020, which  was  the base  from  which the  numbers                                                                   
came.  He  did not understand  if the floor could  provide an                                                                   
economic advantage.                                                                                                             
Mr.  Kaufflan   replied   that  the  floor   price  was   not                                                                   
established in  the current federal legislation  based on the                                                                   
lower  48 prices.    That  number was  based  on  a price  in                                                                   
Alberta.   Historically, that price  has been lower  than the                                                                   
one in the lower 48 states.                                                                                                     
Representative  Whitaker  thought   that  it  would  be  more                                                                   
advantageous given that floor price.                                                                                            
Mr. Kaufflan replied  that would be so if the  starting price                                                                   
were calculated as the price in the lower 48 states.                                                                            
Representative  Whitaker asked if  that would be  an economic                                                                   
advantage and would affect the rate of return.                                                                                  
Dr. Reynolds  advised that to  take the legislation  at $3.25                                                                   
cost in  2010 in Alberta, would  translate to $2.56  cents in                                                                   
2002 dollars.   He reiterated  that the $3.25 price  shown in                                                                   
the Alberta scenario  would amount to roughly  $2.55 dollars.                                                                   
In 2002 dollars, it would amount to little advantage.                                                                           
Representative  Croft noted  that the  advantage would  lower                                                                   
the construction costs  and the tariff and it  would make the                                                                   
well head value  higher.  At $.125 cents for  each, the State                                                                   
would only be getting a ¼ of their money back.                                                                                  
Co-Chair Mulder agreed  that was correct if it was  done on a                                                                   
continuum  basis, however, he  thought that  the one  time up                                                                   
front would eventually be made up.                                                                                              
Representative  Croft did not  agreed that the  numbers would                                                                   
balance out.                                                                                                                    
Co-Chair Mulder stated that the  producers had indicated that                                                                   
the difference in  the end would be negligible  over the life                                                                   
of  the project.    He  admitted that  he  did not  know  the                                                                   
modeling and how long it would take to pay.                                                                                     
Mr.  Kaufflan explained  that  there were  two concerns,  the                                                                   
first being the time-value-money  issue and that when running                                                                   
the models, the answers are not always obvious.                                                                                 
Representative   Croft   asked   what   information   Senator                                                                   
Torgerson  would like to  see from  the producers to  confirm                                                                   
the numbers.                                                                                                                    
Co-Chair  Mulder MOVED  to RESCIND action  taken in  adopting                                                                   
Amendment #4.                                                                                                                   
Representative Croft OBJECTED.                                                                                                  
Recess:        4:05 P.M.                                                                                                        
Reconvened:    4:15 P.M.                                                                                                        
Co-Chair Mulder restated the MOTION to RESCIND.                                                                                 
Representative Whitaker OBJECTED.                                                                                               
Representative  Whitaker explained  that Amendment  #4 agrees                                                                   
that a deferral  would be a reasonable course to  follow.  He                                                                   
stated that the  holiday was a more reasonable  approach.  He                                                                   
pointed  out that  Senator  Torgerson  had spent  $1  million                                                                   
State dollars  to determine what a "reasonable"  course would                                                                   
be.  He remarked  that there has not been  enough information                                                                   
provided to make  this decision.  He warned that  15 years of                                                                   
free  money  might  never  be   paid  back.    Representative                                                                   
Whitaker  emphasized that  the  House Finance  Committee  had                                                                   
made a decision that there should  only be a deferral for the                                                                   
State's best interest.                                                                                                          
Representative  Croft spoke against  the motion.   He pointed                                                                   
out that  that all the  tariff rates  indicate a profit.   He                                                                   
commented that the industry wrote  the federal legislation to                                                                   
produce a result that made a profit  at the low end.  If that                                                                   
legislation passes,  the industry will have  taken the market                                                                   
risk  out of  their court.   He  surmised  that any  business                                                                   
would like  that deal.   Rescinding  action on the  amendment                                                                   
gives  away  the  people  of  Alaska's  money  and  that  the                                                                   
Legislature  would  not be  a  good  trustee in  doing  that.                                                                   
Representative Croft emphasized  that such an action would be                                                                   
bordering on "insulting" to force  the municipalities to give                                                                   
it  away without  having sufficient  data to  indicate it  is                                                                   
Representative  Davies commented that  it would be  a problem                                                                   
to change  the legislation to a  tax holiday.  He  noted that                                                                   
at each  meeting, each  producer had been  asked about  a tax                                                                   
holiday and the question was "stone-walled".   He pointed out                                                                   
that  Senator Torgerson's  letters had  never been  responded                                                                   
Representative  J. Davies  pointed  out that  a gas  pipeline                                                                   
would significantly impact Fairbanks.   When giving away that                                                                   
amount of  money, there should  be at least a  spreadsheet to                                                                   
show how the money would be given  away.  The industry should                                                                   
not be  faulted for  asking for a  tax holiday; however,  the                                                                   
State should  be equally aggressive  asking for  the industry                                                                   
to step forward and help build  the pipeline under terms that                                                                   
are  profitable to  the State  of Alaska  and its'  citizens.                                                                   
The idea of rescinding action  taken on Amendment #4 would be                                                                   
irresponsible.   He stressed that  there has not yet  been an                                                                   
appropriate analysis and that the idea is premature.                                                                            
Representative   Lancaster  shared   concerns  with   Senator                                                                   
Torgerson regarding  the amendment.  He thought  that the oil                                                                   
industry was not willing to share  information to help make a                                                                   
better determination  for the State.  He reiterated  that the                                                                   
tax holiday should be negotiated.                                                                                               
Representative Hudson  referenced Amendment #4,  stating that                                                                   
it was in the  State's best interest.  After  the numbers are                                                                   
determined,  then  the forgiveness  consideration  should  be                                                                   
Co-Chair  Mulder acknowledged  that the  Legislature was  the                                                                   
trustee for the State of Alaska  to keep it.  He claimed that                                                                   
the Legislature  is attempting to stimulate the  wavering gas                                                                   
pipeline.   If there were  federal support for  the pipeline,                                                                   
the removal  of the amendment  would provide an  incentive to                                                                   
get the  enterprise over  the "hurdle".   He asked  why wait.                                                                   
He commented that "not that much  money was being left on the                                                                   
TAPE HFC 02 - 97, Side B                                                                                                      
Co-Chair  Mulder  continued,  that  the proposal  is  a  non-                                                                   
economic deal  even with  the incentives.   He stressed  that                                                                   
the Legislature needs to get the  producers on "our" side and                                                                   
that the State might need to sacrifice  to achieve that goal.                                                                   
The  deferral will  not work  and  would accomplish  nothing.                                                                   
The deferral is a loan with unspecified repayment terms.                                                                        
Vice-Chair Bunde  interjected that  the bill as  amended does                                                                   
nothing.  Gas would be "money  in the bank".  He claimed that                                                                   
the producers would have no reason  to go forward without the                                                                   
proposed tax holiday.                                                                                                           
Co-Chair  Williams   acknowledged  that  the   "tax  holiday"                                                                   
concern was an important issue.   The State of Alaska and the                                                                   
Governor  are negotiating  and  the State  is seeking  middle                                                                   
ground.   Co-Chair  Williams  noted  that the  House  Finance                                                                   
Committee  would not  be the  last place  that the  amendment                                                                   
could  be  addressed.    The  amendment  indicates  that  the                                                                   
Finance Committee  supports the bill.   He commented  that he                                                                   
did  support  the bill  with  or  without the  amendment  and                                                                   
concluded  that when  negotiating,  there must  be "give  and                                                                   
Representative Whitaker  acknowledged that the  Committee was                                                                   
beginning  negotiations with  the  industry.   He noted  that                                                                   
without the  amendment, there  would be a significant  amount                                                                   
"taken  off the  table".   He  pointed  out  that giving  the                                                                   
industry a tax  holiday would not be a good way  to begin the                                                                   
negotiation process.  He strongly  recommended not to rescind                                                                   
previous  action   taken  on  adopting  Amendment   #4.    He                                                                   
emphasized  that Amendment #4  sends a  clear message  to the                                                                   
A roll call vote was taken on the motion.                                                                                       
IN FAVOR:      Bunde, Foster, Harris, Moses, Williams,                                                                          
OPPOSED:       Whitaker, Croft, Davies, Hudson, Lancaster                                                                       
The MOTION PASSED (6-5).                                                                                                        
Co-Chair  Mulder MOVED  to  report  CS HB  519  (FIN) out  of                                                                   
Committee  with  individual  recommendations   and  with  the                                                                   
accompanying fiscal notes.                                                                                                      
Representative Whitaker OBJECTED.                                                                                               
A roll call vote was taken on the motion.                                                                                       
IN FAVOR:      Moses, Bunde, Davies, Foster, Harris, Hudson,                                                                    
               Lancaster, Mulder, Williams                                                                                      
OPPOSED:       Whitaker, Croft                                                                                                  
The MOTION PASSED (9-2).                                                                                                        
CS HB  519 (FIN)  was reported  out of  Committee with  a "do                                                                   
pass"  recommendation  and  with  new  fiscal  notes  by  the                                                                   
Department of  Revenue, Department  of Natural Resources  and                                                                   
the Department of Community & Economic Development.                                                                             

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