Legislature(2003 - 2004)
02/06/2003 03:17 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS CHAIR KOHRING announced that the final order of business would be HOUSE BILL NO. 16, "An Act amending the standards applicable to determining whether, for purposes of the Alaska Stranded Gas Development Act, a proposed new investment constitutes a qualified project, and repealing the deadline for applications relating to the development of contracts for payments in lieu of taxes and for royalty adjustments that may be submitted for consideration under that Act; and providing for an effective date." Number 2728 REPRESENTATIVE McGUIRE moved to adopt Version 23-LS0101\H, Chenoweth, 2/6/03, as the work draft. There being no objection, Version H was before the committee. Number 2711 REPRESENTATIVE FATE, sponsor of HB 16, explained that the bill is a reauthorization of the Alaska Stranded Gas Development Act {"the Act") with amendments. The purpose of the Act is to allow negotiations between producers and the State of Alaska. The legislation proposes new language for what is a qualified project. It allows all forms of natural gas through the pipeline, including gas-to-liquids (GTLs), liquefied natural gas (LNG), and natural gas; the Act, by contrast, allowed just LNG, to his recollection. It isn't route-specific, he noted, since a lot of bills and resolutions from the previous legislature dealt with that subject. Most important, he said, it repeals the deadline for application. He told members that even though the previous version allowed for other investors, the bill specifies that Alaskan businesses or corporations can "go into this pipeline with equity up to 10 percent" [of the estimated cost of constructing a qualified project], and it allows generically for the market to be either domestic or foreign. Number 2580 REPRESENTATIVE ROKEBERG recalled working on the Alaska Stranded Gas Development Act several years ago in the House Special Committee on Oil and Gas, and that one bone of contention was what type of product it would cover and the prohibition of GTLs by the Act. Alluding to Section 2 of Version H, he asked Representative Fate about his intention on contract development with regard to Alaska-based businesses, as well as the rationale behind having equity not exceed 10 percent. REPRESENTATIVE FATE responded that the provision for Alaskan business interests is to encourage Alaskan businesses with the capability and which can become qualified to enter into this. Nothing would prevent a corporation that can qualify from participating, he said, whether it is a Native corporation, a combination of Native corporations, or a combination of Alaska- based banks. With regard to the 10 percent, he said it is not just a negotiating tool, but is simply because he surmises that the producers don't want to exclude anyone but don't want to dilute their ownership to the extent that it becomes unprofitable and inhibits construction of a pipeline. Number 2445 REPRESENTATIVE ROKEBERG acknowledged the need to hear from witnesses, but said he interpreted that [limit of 10 percent] as restricting the pipe size and companies' ability to participate. He offered his understanding that nothing in the [Act] restricts any Alaska-based company from participating; therefore, the [new] language is redundant and just says such a company couldn't have more than 10 percent of the equity. He asked whether that was Representative Fate's intention. REPRESENTATIVE FATE answered, "It was the intent to encourage, ... so that there's not too big of ... participation you might see by somebody of the Alaskan -- unless, of course, they can -- you're right: maybe they can come in with more than 10 percent. Maybe they can take all the risk." REPRESENTATIVE ROKEBERG asked whether, then, [BP Exploration (Alaska) Inc.], an Alaska-based company, could only invest 10 percent. REPRESENTATIVE FATE agreed with Representative Rokeberg's observation about redundancy, but said he wanted to make it clear that Alaskan businesses can invest in this if they qualify. Number 2355 CHAIR KOHRING pointed out that part of the Act, AS 43.82.110, stipulates the conditions under any group can be considered a candidate for potential ownership in the gas pipeline. He said he, too, wondered about adding that 10 percent provision. REPRESENTATIVE FATE again acknowledged the redundancy and said the provision is to encourage Alaskans to participate. Number 2299 CHAIR KOHRING referred to the fact that [the existing language of the Act set forth in Section 2 of Version H] says the commissioner may develop a contract that includes [various terms, including the new terms of paragraph (5) that discuss Alaska-based corporations or businesses and the 10 percent provision]. He expressed concern that it seems to give the commissioner authority to make those decisions when the owners of the pipeline may not concur with the commissioner's decision. REPRESENTATIVE FATE responded that at one time he'd planned to take it out, but had decided to leave it in, because it might be a stimulus to help propel the pipeline forward, and because it gives a clear point to start from for negotiating with regard to either an Alaska-based business or even the financiers of the pipeline. "And we've labored long and hard with the staff and other people from the industry to discuss this," he remarked. He concluded, "We'll wait and see at the end of the day ... what we will do with that 10 percent." Number 2203 REPRESENTATIVE KERTTULA noted that the original Act was to encourage development of North Slope gas and to add a timeline for development. With Version H, however, it appears to be "all gas, anywhere at any time." She questioned whether that broadness is intended, with no expiration date and no sidebars on where [the gas] goes or where it's from. REPRESENTATIVE FATE agreed that it is broad and leaves the route and types of natural gas open-ended, which he said is intended to stimulate development of the gas pipeline in a more rapid fashion. Number 2028 REPRESENTATIVE KERTTULA questioned the incentive if there is no expiration date. She expressed concern about when this would have to occur and what the incentive really would be. She observed that the royalty [may be included in the contract in the Act, Section 2 of Version H] and suggested that may be the only incentive. Number 2008 REPRESENTATIVE ROKEBERG referred to subparagraph (C) on page 2 [Section 1 of Version H], noting that it mentions "any other technology", which Representative Fate had said may apply to GTLs. Representative Rokeberg recalled the argument in 1998 [when the Act was passed] that it should be restricted because it is a disincentive to build a gas line. He said the bill really opens up that debate, which may be the proper one to have again because of technological changes and other considerations. He requested testimony from witnesses about that. Number 1928 REPRESENTATIVE CRAWFORD referred to Representative Kerttula's question and said it seems [Version H] is worded so that it could apply to even a very small project, rather than relating to just a gas pipeline from the North Slope. He asked whether that is the intent. [Representative Fate responded by saying the intent is "to latitude 64 North." He later corrected his statement because the original version of HB 16, not Version H, referred to "the area of the state lying north of 64 degrees North latitude".] Number 1809 ROGER MARKS, Petroleum Economist, Economic Research Section, Tax Division, Department of Revenue, noted that he'd worked on the Act in 1998 and therefore had some familiarity with its history, intent, and mechanics. He pointed out that the department had provided a three-page overview [in addition to the analysis] as part of its fiscal note [for HB 16]. REPRESENTATIVE ROKEBERG observed that [the fiscal note] is about half a million dollars. Number 1693 REPRESENTATIVE KERTTULA asked Mr. Marks whether the department had looked at possible loss to the state in terms of royalties. She also asked that he discuss the original intent of the Act. MR. MARKS, who was participating via teleconference, said he hadn't heard the first question and so began addressing the history. He explained that in 1997 the legislature passed HB 250, which established a North Slope gas commercialization team in the administration to research and recommend changes to the state law to encourage commercialization of North Slope gas; under HB 250, the administration was supposed to issue a report to the governor by February of 1998. That team did the research and concluded that the North Slope gas commercialization project faced considerable risks. Because of the size of the project needed to make the gas commercial, there were big cost risks and gas-price risks to the sponsors. MR. MARKS told members that, in addition, "we" concluded that the state's fiscal system actually exacerbated those risks because of three general characteristics. The first was uncertainty: a very high-cost project with marginal economics could be feasible under a certain fiscal system and built under that system, but that system could be changed by statute, which would suddenly make the project not feasible after it was built. MR. MARKS explained the second risk, the so-called regressive tax system for production tax and royalties. When profits are high, [the state] gets a small share of the profits; when profits are low, it gets a large share. That exacerbates the low-price risk to sponsors, he said, because making large payments to the state when prices are low could increase the possibility of losing money or not recovering their investment. MR. MARKS discussed the third risk. The property tax is payable once construction starts, which could be years before revenue is generated. On a "time value of money" [basis], it lowers the sponsors' rate of return and increases the probability that they won't be able to recover their investment. Number 1452 MR. MARKS told members that after the team issued its report to the governor, it worked with the major Prudhoe Bay producers to develop legislation to deal with those risks. The result was HB 393, which ultimately became the Alaska Stranded Gas Development Act, AS 43.82. In general, the law provided a mechanism for converting the state's fiscal system from a statutory basis to a contractual basis, which provides for greater fiscal certainty. The fiscal system would be negotiated between the administration and the project sponsors; possibly as part of the terms of the negotiation, a less regressive fiscal system could be put in place. Mr. Marks noted another problem with a regressive system: at high prices, the state probably gets less money than it could. Number 1362 MR. MARKS discussed the general mechanics of the process. A sponsor would submit a project plan and application to the administration; if acceptable under the terms of the Act, the administration would then begin negotiating the fiscal terms with the sponsor. Noting that under the Act all tax provisions in the current statutes would be on the table, Mr. Marks explained that because the royalty represents the state's ownership interests, it was the judgment of the administration that the state should keep the one-eighth - which is 12.5 percent - royalty rate for Prudhoe Bay gas, but that some royalty provisions could be negotiated, namely, the timing for taking royalty-in-kind (RIK) or royalty-in-value (RIV)] gas and the provisions for establishing the valuation method for the royalty. MR. MARKS explained that once a contract was negotiated, preliminary findings would be submitted to the governor; if the governor chose to proceed, those findings would be given to the legislature and the public for a 30-day review period. After that, the commissioner of revenue would modify the contractual terms as appropriate, and if acceptable to the sponsor; a final contract would be submitted to the governor; the governor would transmit the contract to the legislature with the request for authorization to execute the contract; and the legislature would vote on it. MR. MARKS addressed other provisions. Calling the property tax the bread and butter for municipalities, he explained that municipalities were concerned about their interests' not being represented in a negotiation. As part of the Act, therefore, a municipal advisory group was set up to participate in developing the contract terms. In addition, there are provisions in the Act for making gas available to communities; for local hire; and for dealing with confidential information provided by the sponsors. Number 1208 MR. MARKS also pointed out that there was a question of the constitutionality of the Act as a whole, and whether this switching to a contract [basis] by one legislature is binding a future legislature. Noting that Article IX [Section 1] of the state constitution says that the power of taxation shall never be surrendered, suspended, or contracted away, Mr. Marks reported that it was the Department of Law's judgment that [the Act] was constitutional because it was simply putting fiscal terms into a contractual form. Certainly, he said, a future legislature would be able to add tax terms after the contract was in place, but the contract itself would be "a solemn pledge or a moral commitment by the state that once it agrees to this contract, it would not change it." Likening it to "a message to the future from one legislature to another," Mr. Marks said it was the administration's position that it wasn't airtight but was "a strong moral message." Number 1101 MR. MARKS informed the committee that the Department of Revenue generally supports HB 16. He added that possibly the administration would submit some amendments, although he wasn't aware of what they would be. Number 1070 MR. MARKS, in response to a question from Representative Rokeberg, said he'd only had [Version H] for about one-half hour and hadn't had time to study it. REPRESENTATIVE ROKEBERG referred to [Section 1], the proposed amendments to AS 43.82.100 under the heading "Qualified project." He asked whether the new language in subparagraphs (A), (B), and (C) would affect the department's fiscal note. MR. MARKS said he didn't believe so. Number 1023 REPRESENTATIVE KERTTULA offered her understanding that part of the intent with the Act was to "try to get the gas going." She asked Mr. Marks whether the lack of an expiration date [in the bill] could actually result in some discouragement, and whether he'd ever looked at the economic picture in terms of whether having an expiration date would provide motivation. MR. MARKS said [the department] hadn't looked at that question. Number 0955 REPRESENTATIVE KERTTULA referred to the regressive nature of the tax. She asked Mr. Marks whether [the department] has looked at shifting that tax so that when the return is high, the tax is high, and when the return is low, the state would "shift around." MR. MARKS said that is exactly what was envisioned to be shifted to. He added, "That's what we call a progressive system, ... which, again, reduces the risk of low prices to the sponsors and gives the state the opportunity to make more money when prices are high." Number 0917 REPRESENTATIVE KERTTULA asked whether that is what it is envisioned that the commissioner would negotiate for in the contract. MR. MARKS noted that eight principles to strive for in the Act are listed in existing AS 43.82.210(b). Calling it a blend, he said some of those "sort of counter each other," but that one principle - which is one direction negotiation would take - is that all things being equal, a progressive system is better than a regressive one. Number 0793 JOE MARUSHACK, Vice President, Alaska North Slope Gas Commercialization, ConocoPhillips Alaska, testified that his company is working hard to commercialize Alaska North Slope (ANS) gas through development of a gas pipeline from Alaska through Canada to the Lower 48. Urging passage of HB 16, he said it is needed so that ConocoPhillips Alaska and others may initiate formal discussions with the state, leading to a fiscal agreement on commercialization for ANS gas. MR. MARUSHACK reported that ConocoPhillips Alaska has pursued a clear strategy to commercialize ANS gas for more than a year and a half, including federal enabling legislation to provide a more timely and certain U.S. permitting and regulatory framework; federal fiscal legislation that would mitigate the risk of unexpectedly low gas prices; and state fiscal legislation like HB 16 that provides a mechanism for his company, the state, and others to address issues regarding how the gas will be valued, how it will be taxed, how local impacts will be addressed, and how development costs will be treated. MR. MARUSHACK said that since at least 1973, Alaskans and companies they work for have labored to overcome significant challenges in bringing Alaskan gas to the market. He cited challenges of the natural environment such as terrain, climate, elevation changes, and seasonal construction limits; technical challenges that have required use of new materials and equipment specifically constructed for this project; and the nature of this commodity, with price uncertainty and volatility being at odds with the huge investment and long-term fiscal commitments required. On the other hand, he said, Alaskans have a huge opportunity for additional jobs in construction and operation of the pipeline, and the state treasury has the prospect of a significant new revenue stream, funds for additional services. Suggesting the state's communities have an opportunity to share in the creation of new wealth, he told members: The project can become a reality, and the time to move forward together is now. Passage of HB 16 is the first step that the Alaskan government could take towards addressing necessary legislation to move the gas pipeline project forward. However, I ask caution regarding any new amendments or modifications that may have unintended consequences and cause further delays. We need a clean bill that opens up the stranded gas Act process, not one that adds challenges. In closing, ConocoPhillips asks that you pass this legislation. MR. MARUSHACK requested clarification as to whether the committee was addressing HB 16 or [Version H], but said he was prepared to discuss either. CHAIR KOHRING clarified that before the committee was Version H. Number 0531 REPRESENTATIVE CHENAULT asked Mr. Marushack for his thoughts on Version H and whether it helps or hinders the project. MR. MARUSHACK answered that he hadn't studied it in great detail, having received it a few minutes before the hearing, but that it appears to generally work - and provide what his company needs it for - by removing the [application deadline] date and opening up the Act so it addresses a natural gas pipeline. However, he expressed concern that Section 2 may be somewhat contrary to commercial negotiations. He said it seems the state shouldn't dictate who the parties holding an equity interest in a commercial contract would be. The (indisc.) and the Act already contemplate that any company can participate if it brings value to the table. He added: Any party that brings value to the table is a party that the companies can probably work with and negotiate with. I also wouldn't see that it makes sense ... for anybody who can create value to be limited to 1 percent, 10 percent, 50 percent. But those are commercial negotiations. ... We've had some discussions with certain individuals like this, and we always give the same message: If there's true value there, we'll probably going to be able to ... bring that to the table. If there's really not true value there, we hate to see activities that would make the negotiations - and have unintended consequences - delay this project ... even further. Number 0381 REPRESENTATIVE McGUIRE asked whether there is any harm in keeping [Section 2] in there, though. MR. MARUSHACK acknowledged that his interpretation may be wrong, but said it appears that individuals may be looking for a commercial advantage through the legislative process. "And we don't think that's helpful at all," he remarked. He indicated, however, that if it lowers the cost and creates a more viable project, then it creates incremental value and is "a negotiation that generally leads to success." Number 0325 REPRESENTATIVE ROKEBERG asked whether ConocoPhillips is an Alaska-based company. MR. MARUSHACK answered that Phillips Petroleum Company [which merged with Conoco Inc. in 2002] was a Delaware corporation with "branches, if you will," in various areas including Alaska. "Whether that constitutes an Alaskan company per se, I don't know for sure," he added. "I consider myself to be an Alaskan, but hopefully ... I would not have my ownership interest limited one way or another if I wanted to do this project." REPRESENTATIVE ROKEBERG remarked that one corporate predecessor of ConocoPhillips was ARCO Alaska, Inc., which at least should have had an Alaskan business license. Deeming Mr. Marushack to be an expert on it, Representative Rokeberg then asked whether he believes it would be helpful or necessary for the bill to include a provision "allowed by special Act of Congress allowing the Alaska railroad to issue IDB [Industrial Development Bonds]," which he suggested may be applicable to this project. MR. MARUSHACK answered that for the bonding potential which he believed Representative Rokeberg was talking about, if it went through an Internal Revenue Service (IRS) test and truly passed all the requirements so that people lending money to the project could see that it actually would have a tax-exempt-bond basis, then it absolutely would provide incremental value. To the extent that the strength of the federal government is behind the financing - which he said he understands that the bonds may be able to do - the interest rate could be reduced; that would reduce the tariff, raise the wellhead value, and increase royalties. Mr. Marushack pointed out that he couldn't say whether that particular mechanism would pass an IRS test, and emphasized the need to get an IRS ruling that would allow the people lending money to this [project] to have enough assurance that they would lend under those sorts of terms. Number 0050 REPRESENTATIVE ROKEBERG indicated there possibly could be 200 basis points as a reduced interest rate. He suggested that a IRS ruling may provide further protection, particularly if related specifically to the project by including it in the Act. TAPE 03-4, SIDE A Number 0001 MR. MARUSHACK related [his company's] analysis that it would be perhaps more like 100 basis points. Regardless, he said, if the interest rate really were reduced, it would create incremental value. He also offered the belief that financing doesn't make a bad project good; rather, it is used to make a good project better and actually get it off the ground. "So we would look at this ... on an unfinanced basis to begin with, assuming you had full equity interest in this, and then, if that passed all the tests, so you ... thought you could actually sell that to the financial community, then you'd do that and hopefully make a more economic project at that point in time," he concluded. REPRESENTATIVE ROKEBERG suggested that this is known to be a good project, but just needs to pencil out. Number 0121 REPRESENTATIVE FATE asked, if there were a "mix and match" of financial ratings on this project, how the investment bankers would look at it. MR. MARUSHACK replied: This happens all the time, and it depends on ... how you want to structure this - whether it's project financed, whether it's financed by the absolute balance sheet of the companies. I don't think we're at a point yet where we know the answer to that, ... and we don't even know who would own this pipeline yet. Currently, ... or at least last year, we were working with BP and ExxonMobil Corporation, ConocoPhillips; those companies have very strong balance sheets and could get relatively good financing rates. But how that would all blend together, I think, is one of the things that needs to be worked out, which is actually something that I think needs to happen in HB 16. I believe that one of the real advantages to ... your bill is that it's going to allow people from the state and people from the producers to sit around ... the table for a long period of time and talk about issues just like this: What does financing do to this project? Can you get financing? What if the state needs something that is in conflict with what the financial people think they need to see? There's a myriad of issues, which is why I think this bill is important to get passed right now, because I don't actually see us getting through this real quickly. I hope we do, but I think it's going to be very complicated and take a lot of work from the state and the producers, and a lot of sharing of information, probably bringing in experts. It's just a very complicated project. There's nothing like it on earth. Number 0276 REPRESENTATIVE CRAWFORD asked, since this bill apparently opens it up to any project at any time, whether Mr. Marushack sees that as keeping it a clean bill or whether it adds hurdles. MR. MARUSHACK replied: Clearly, ConocoPhillips is focused on a Lower 48 pipeline. We've put a lot of time and effort into that. And if this bill passes, we are going to come forward and ask to qualify, and want to negotiate on a Lower 48 pipeline using ANS gas ... as the product for that. But I have no problem with opening this up to other opportunities .... For instance, ... I'm not sure this works for Evergreen [Resources], but I hope Evergreen is tremendously successful, and if there's other opportunities out there, I think that's a good thing. I don't know if this is where you're heading or not: there's clearly a problem we face in Washington [D.C.] with the concept of competing projects - a lot of confusion about ... what does Alaska really want, do they really want a Lower 48 pipeline, do they want something else. And ... my message is always, "I think this is about the only project that works right now, and we should absolutely focus on that." But ... I'm not recommending that we limit utilization of this to a Lower 48 pipeline right now. I don't think that's necessary. Number 0452 KEN KONRAD, Senior Vice President, BP Exploration (Alaska) Inc., noting that he is the company's vice president for gas, offered the following testimony: Significant time, effort, and money has been dedicated to develop a viable gas pipeline project to commercialize Alaska's enormous gas resource. Through 2002 and continuing into this year, BP has undertaken further technology-and-design optimization work on the project in an effort to reduce the cost of this $20- billion project. We're working closely with state, federal, and Canadian agency staff around advanced materials and design, and are inviting them to witness key tests BP will be undertaking this year to validate much of the work we've done. Results to date are very encouraging. However, technical work alone will not be sufficient to make an Alaska gas pipeline a reality. Before a project can advance to the next stage, three key government actions are needed: a clear and predictable regulatory process with the Canadian government and First Nations, a clear and predictable state fiscal framework around gas in Alaska, and the passage of important U.S. federal legislation. While success is needed on all three fronts, the one thing Alaska itself can do to advance an Alaska gas pipeline is to sit down and work with industry to develop a fiscal framework for gas that provides confidence that the rules of the game won't change later. Achieving this mutually agreed framework will also send a powerful signal to Washington, D.C., that Alaska is indeed ready to see ... a gas pipeline project advance. Number 0602 MR. KONRAD continued: We're very encouraged that our new governor has already spoken to his desire to advance the development of a predictable fiscal framework for gas, and are similarly encouraged that the new legislature appears ready to support advancing this important agenda. ... Reauthorizing the stranded gas Act via House Bill 16 is a good idea. We supported the original stranded gas Act when it was debated and continue to do so. House Bill 16 can provide a framework that supports negotiation toward a clear and predictable fiscal regime in Alaska, and as such, will help support forward progress on gas commercialization. But we don't necessarily need to wait on passage of this bill to begin engaging on the topic. Dialog with a small, experienced, informed, and empowered negotiating team made up of representatives of the state and the producers can commence anytime. Under any circumstance, any agreements worked with the state will require legislative review and approval. We do believe that if HB 16 advances, it's important that the bill retains its focus and simplicity as it moves through the legislative process. Otherwise, there's potential failure in the event the bill becomes overburdened with extraneous provisions. Number 0717 MR. KONRAD informed members that he'd just received Version H one-half hour earlier and hadn't had a chance to review it. He said it appears to be "reasonably clean," although he said he'd want to look at the ownership provision more closely to make sure it doesn't inadvertently restrict his company's ability to retain an interest in the project. MR. KONRAD reiterated that the one thing the state can do to help move a gas line forward is to take tangible steps towards achieving fiscal certainty. "That, combined with U.S. federal legislation and continued regulatory progress in Canada, will allow Alaska to realize the extraordinary opportunities for jobs, revenue, and economic stability, as the gas pipeline can offer for decades and decades to come," he told members. He concluded by saying that "BP stands ready to work productively with the state towards a clear and predictable fiscal regime." Number 0809 REPRESENTATIVE ROKEBERG inquired about the political situation with regard to "the First Nations issue" in Canada as well as the current position in Ottawa on granting permits and going forward on this project. MR. KONRAD replied that [his company] continues to have a number of "fairly productive" conversations with both the First Nations people and the Canadian regulators, who "have tabled a concept that we believe can work ... to come up with ... a simple, single regulatory process." He said there is still a little ways to go in terms of actually formalizing that. Mr. Konrad told members that he believes things are encouraging, although clearly the big focus right now in Canada is ensuring tangible progress on the Mackenzie Valley project. He expressed support for that, offering his belief that the two projects are complementary and will sequence naturally, and said the North American market can "certainly use all the gas it can get." He added, "Every indication is that they will be supportive of our project once we get some of these other key government actions in place." Number 0931 REPRESENTATIVE ROKEBERG asked whether the [Canadian] federal government is actually "in the way" and whether his company is actually able to negotiate with them now. MR. KONRAD answered that he doesn't think they're standing in the way at all. He said a number of ideas have been tabled, but in general there is concurrence. He added, "However, like everyone else, they have finite resources; they're focused right now on the Mackenzie Valley project. But we certainly have expectations ... that during this year we'll have had tangible ... and complete progress in the regulatory arena." REPRESENTATIVE ROKEBERG offered his understanding that many sellers of gas in the [Lower 48] fear that when this "bubble of gas" from the Mackenzie River area and Alaska hits the market it will cause the market to be depressed, and that therefore those sellers are lobbying in Washington [D.C.] against incentives to build a line. He asked whether that is one of the biggest problems [the producers] are dealing with. MR. KONRAD responded that, clearly, a number of parties are saying a number of things, and that it is far from simple. He said that in Canada, however, "things feel ... pretty good," and that the group there is almost ready to file permits; that project simply is ahead of the Alaskan project. He indicated his company continues to tell people in Canada, Washington [D.C.], and Alaska that clearly in the 2010-plus timeframe the market will be able to easily accommodate these volumes of gas. A question on a national policy issue is whether the preference is to have gas from Alaska, import LNG, or burn oil in power- generation plants. He said it isn't a matter of too much gas coming into the market. Number 1127 REPRESENTATIVE KERTTULA asked Mr. Myers to describe what Version H possibly could apply to, particularly with regard to any other technology or area. Number 1170 MARK MYERS, Director, Division of Oil & Gas, Department of Natural Resources, answered: I believe it would qualify for, certainly, any gas-to- liquids projects, basically any statewide project that could produce the volume qualifications of 500 bcf over the 20-year period. It could potentially apply, ... I believe, to natural gas liquids shipped down, say, ... a conventional oil pipeline like we do now on the Slope. So, basically, it would be slopewide and certainly would apply to LNG as well as conventional gas. It is conceivable in some basins, like the Nenana basin, there may be sufficiency of gas, assuming there was a way to export it beyond the Fairbanks market, to apply - and possibly for coal bed methane, [although] that would be a large quantity of coal bed methane gas to produce ... over a 20-year period. So, certainly, it's broad and flexible. Number 1232 REPRESENTATIVE KERTTULA asked if there is a real need for incentives for all possible projects, no matter when or where. MR. MARKS offered the judgment that given the size of all these projects, they are risky. Fiscal uncertainty adds to the other financial risks, he said, and these projects are marginal or "on the line" now, so any risk reduction is good and will help these projects. REPRESENTATIVE KERTTULA asked, "How far down would you reduce that risk?" MR. MARKS answered that he believes fiscal [uncertainty] is a risk that can be reduced, and that he wouldn't characterize it as "going down" because the state wouldn't necessarily come out behind as a result of simply nailing down its fiscal system. He continued: In addition, this Act provides the opportunities to improve the fiscal system so that, indeed, under certain conditions, especially those of high prices, the state can ... come out much, much better than what it would do ... under the current fiscal system. So I don't believe the state ... is giving up anything by going into this process and, indeed, could ... come out far, far better than what it is now. Number 1373 REPRESENTATIVE KERTTULA expressed a "lawyer's comment or concern" about opening this up. She asked how difficult it would be to rewrite the statute so that instead of relying on a contract, the provision Mr. Marks was talking about - in terms of making it a progressive rather than regressive tax scheme - would be put in statute; that way, all parties would know what they are getting. MR. MARKS answered that the statutes could certainly be changed to make a more progressive system, which would reduce the risks associated with a regressive or "front-end-loaded" tax system. However, the issue of fiscal uncertainty would remain. In further response, he explained that the state could establish a statutory fiscal regime and yet a sponsor would question whether to spend $20 billion without knowing what the tax rate would be, which may make the project uneconomical. Once the project is built, one can't "unbuild it," he pointed out, and so just having it be subject to changes in the [state's] fiscal system adds to the uncertainty and fiscal risk. Number 1483 CHAIR KOHRING announced that HB 16 would be held over at the request of the sponsor, as well as to deal with questions about Section 2 of Version H and to have discussions with other groups. He expressed support for the concept of the bill and an intent to move it forward soon. [HB 16 was held over.]
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