Legislature(2003 - 2004)

02/06/2003 03:17 PM O&G

Audio Topic
* first hearing in first committee of referral
+ 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.]                                                                         

Document Name Date/Time Subjects