Legislature(2007 - 2008)CAPITOL 106

03/23/2007 08:30 AM OIL & GAS


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08:32:35 AM Start
08:32:51 AM HB177
10:08:30 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time & Location Change --
+= HB 177 NATURAL GAS PIPELINE PROJECT TELECONFERENCED
Heard & Held
HB 177-NATURAL GAS PIPELINE PROJECT                                                                                           
                                                                                                                                
8:32:51 AM                                                                                                                    
                                                                                                                                
CHAIR KOHRING announced that the  only order of business would be                                                               
HOUSE  BILL NO.  177,  "An  Act relating  to  the Alaska  Gasline                                                               
Inducement Act;  establishing the  Alaska Gasline  Inducement Act                                                               
matching  contribution  fund;  providing for  an  Alaska  Gasline                                                               
Inducement  Act coordinator;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
8:33:06 AM                                                                                                                    
                                                                                                                                
MARTIN   MASSEY,   U.S.   Joint  Interest   Manager,   ExxonMobil                                                               
Corporation, explained  that his position has  responsibility for                                                               
the commercialization of gas resources  for ExxonMobil in Alaska.                                                               
He reminded the  committee that ExxonMobil has been  a key player                                                               
in the development  of Alaska's oil resources for  over 50 years,                                                               
and holds the  largest working interest in Prudhoe Bay.   He went                                                               
on to say  the gas pipeline project has the  potential to produce                                                               
billions  of dollars  in  revenue  and to  provide  a stable  and                                                               
secure source of gas for the  state and North America for decades                                                               
to come.   He  opined that  the project  could add  as much  as 1                                                               
billion cubic feet  a day to ExxonMobil's gas sales.   He relayed                                                               
that his  company is  interested in continuing  to work  with the                                                               
state  to move  the  Alaska  gas pipeline  project  forward.   He                                                               
offered  his  belief  that  this   project  is  a  "world  scale"                                                               
undertaking with  significant costs and  risks.  He  relayed that                                                               
due  to recent  increases in  construction costs,  the 2001  cost                                                               
estimates of $20  billion for pipeline construction  are too low.                                                               
Furthermore, natural  gas prices  remain highly volatile  and are                                                               
now slightly less than those in  2001.  Other key factors include                                                               
cost  overruns, regulatory  delays, construction  conditions, and                                                               
state  fiscal  uncertainties.   The  large  size of  the  project                                                               
effects costs  and increases the  complexity of the project.   He                                                               
cautioned  that  size also  amplifies  the  consequences of  poor                                                               
execution.                                                                                                                      
                                                                                                                                
8:36:30 AM                                                                                                                    
                                                                                                                                
MR. MASSEY explained  that large, commercially sound  oil and gas                                                               
pipeline  projects   have  traditionally  been  able   to  obtain                                                               
financing where there are strong  sponsors, proven track records,                                                               
and financial strength sufficient to  provide sponsor equity.  He                                                               
opined  that  the key  project  commitments  for the  Alaska  gas                                                               
pipeline   project  will   take   the  form   of  long-term   gas                                                               
transportation   commitments.       Firm    transportation   (FT)                                                               
commitments are binding  obligations made by shippers  to pay for                                                               
the cost  of reserving a  quantity of gas  for a pipeline  over a                                                               
specified period of  time.  In this case, the  producers would be                                                               
the shippers.   He relayed  that FT commitments are  usually made                                                               
during  open  season,  and  that   according  to  Federal  Energy                                                               
Regulatory  Commission  (FERC)  order  2005 for  the  Alaska  gas                                                               
pipeline, must  be for at least  90 days.  During  that time, any                                                               
or all gas  shippers can make binding commitments  for a specific                                                               
volume of transportation capacity, he  explained.  He stated that                                                               
FT commitments are  needed for financing and may  be for billions                                                               
of  dollars.   The  shipper  is required  to  pay its  commitment                                                               
regardless of whether the gas  is actually shipped and regardless                                                               
of the gas market price.  He  opined that due to this system, the                                                               
development  costs and  associated overrun  risks are  ultimately                                                               
borne by  the shipper.   He stated  it is ExxonMobil's  view that                                                               
the parties taking  the risk need to be able  to manage the risk.                                                               
He  offered his  opinion that  the producers  as shippers  cannot                                                               
make FT commitments during open  season unless they are confident                                                               
the  gas  pipeline project  can  be  built cost  effectively  and                                                               
operated on a  commercially viable basis.  He opined  that due to                                                               
the  large  size  of  the  project,  only  a  limited  number  of                                                               
companies can  demonstrate the capability and  financial strength                                                               
necessary to effectively  participate in and manage  a project of                                                               
this size.   He  offered that the  producers have  experience and                                                               
history in meeting  project objectives on a worldwide  basis.  He                                                               
noted that  ExxonMobil has project experience  worldwide and that                                                               
its development costs tend to  25 percent lower than the industry                                                               
average when  calculated on a dollar  per barrel basis.   He said                                                               
that ExxonMobil has a record  of completing large projects within                                                               
15  percent  of  the  costs  estimated at  the  time  of  project                                                               
funding.   He opined that combining  ExxonMobil's capability with                                                               
that of ConocoPhillips Alaska, Inc.,  and BP Exploration (Alaska)                                                               
Inc., will  provide the best  chance for delivering  a successful                                                               
project.                                                                                                                        
                                                                                                                                
8:46:06 AM                                                                                                                    
                                                                                                                                
MR. MASSEY  went on to  explain that  the producers have  over 40                                                               
years  of worldwide  experience  in oil  and  gas exploration  in                                                               
northern  climates.     He  noted  that   many  innovations  were                                                               
developed by ExxonMobil  for use in cold  weather exploration and                                                               
production.   He attributed  his company's  success to  long term                                                               
research,  technical  development,  and   a  firm  commitment  to                                                               
improve  the  efficiency  and  safety  of  its  operations.    He                                                               
explained  that  technology  is   of  great  importance  in  this                                                               
industry,  and that  ExxonMobil invests  a significant  amount in                                                               
the development of new technologies.                                                                                            
                                                                                                                                
8:49:20 AM                                                                                                                    
                                                                                                                                
MR.  MASSEY stated  that it  is  important to  remember that  the                                                               
Alaska gas pipeline project is  a basin-opening project that will                                                               
benefit the state and the oil  and gas industry.  He offered that                                                               
worldwide, basin-opening projects are  most successful when there                                                               
is alignment between  the host government and  the lease holders.                                                               
He  offered  that for  this  project  that  means the  state  and                                                               
ExxonMobil, BP  Exploration, and ConocoPhillips.   He opined that                                                               
a  producer-state  gas pipeline  project  will  produce the  most                                                               
revenue  for  the  state  as   those  parties  have  the  maximum                                                               
incentive to  control costs,  which will  ultimately result  in a                                                               
higher  net-back price  for  gas.   The  state  will receive  the                                                               
majority of its revenue  from the value of the gas,  he said.  He                                                               
opined that third-party  owners do not share  the same incentives                                                               
because they can actually benefit from increased capital costs.                                                                 
                                                                                                                                
MR.  MASSEY  said that  due  to  the  numerous costs  and  risks,                                                               
ExxonMobil  requires  fiscal  terms   that  are  predictable  and                                                               
durable  to  proceed   with  this  project.     He  relayed  that                                                               
ExxonMobil is  willing to take  the geology, cost,  and commodity                                                               
price  risks.   However, ExxonMobil  cannot  take the  risk of  a                                                               
change in fiscal  terms, he said.  He explained  that his company                                                               
has  developed an  industry-leading  approach  for management  of                                                               
geology  and cost  risks.   He  also noted  that  market risk  is                                                               
inevitable  and within  his company's  management expertise.   In                                                               
contrast,  fiscal  risk  is "totally  outside  our  control,"  he                                                               
opined.    He emphasized  that  ExxonMobil  must have  agreements                                                               
which   will  allow   it  to   develop  this   "mega-project"  in                                                               
predictable and  durable terms  so that it  can make  an adequate                                                               
investment  decision.    He  offered that  if  fiscal  terms  are                                                               
subject to future changes, ExxonMobil  cannot make a well-founded                                                               
investment decision  on behalf of  its shareholders.  Due  to the                                                               
large amount of investment required  to develop the gas pipeline,                                                               
he  opined  that  increases  in  taxes on  oil  and  gas  related                                                               
activities  during the  life of  the project  could significantly                                                               
impact the commercial viability of the project.                                                                                 
                                                                                                                                
8:53:38 AM                                                                                                                    
                                                                                                                                
MR. MASSEY opined  that AGIA does not offer  the fiscal stability                                                               
necessary for the  project because it allows  for modification of                                                               
fiscal terms.   He  suggested that  development of  a predictable                                                               
and durable  fiscal framework means  that the terms to  be agreed                                                               
on between  the state and  the producers recognize  the magnitude                                                               
and  risks  associated  with  the   project;  balance  state  and                                                               
producer needs, and  provide for calculation of  the "total state                                                               
take" in a  transparent and predictable manner.   He offered that                                                               
AGIA must bring together upstream  and midstream concerns because                                                               
"the  upstream pays  for  the midstream."    Upstream means  "the                                                               
revenue generated from  the sale of the gas and  liquids from the                                                               
pipeline  project," he  explained.   In  order  to calculate  the                                                               
revenue from the  upstream, his company must have  clarity on the                                                               
taxes and  royalties, which must  be set at  a level to  make the                                                               
project viable.  He said that  this must be done at the beginning                                                               
of the  project to insure  a viable project.   He went on  to say                                                               
that any proposal  must demonstrate how a  successful open season                                                               
will be achieved.                                                                                                               
                                                                                                                                
MR. MASSEY  opined that  AGIA should  allow applicants  to define                                                               
how  they  could  achieve the  state's  objectives,  rather  than                                                               
prescribing  specific   requirements  that  must  be   met.    He                                                               
suggested  that AGIA  offer broad  key objectives  and allow  the                                                               
applicants  flexibility   in  meeting  those  objectives.     For                                                               
example, he said that ExxonMobil  would prefer that the applicant                                                               
determine  whether it  wants any  capital  contribution from  the                                                               
state.                                                                                                                          
                                                                                                                                
8:57:07 AM                                                                                                                    
                                                                                                                                
MR. MASSEY warned that shippers may  be unwilling to commit to FT                                                               
commitments  if  there is  a  substantial  likelihood that  their                                                               
initial rates  will be significantly  increased in the  future to                                                               
accommodate pipeline expansion.   He offered his  belief that the                                                               
terms of the federal Alaska  Natural Gas Pipeline Act strikes the                                                               
proper  balance   between  encouraging  initial   investment  and                                                               
encouraging exploration  by providing  an opportunity  for future                                                               
access  to  the  pipeline.    He opined  that  FERC  approved  of                                                               
"unprecedented policies"  to enable a FERC-mandated  expansion to                                                               
benefit  explorers.   He  opined  that  issues of  how  potential                                                               
future  shippers  may access  the  pipeline  and future  pipeline                                                               
capacity  should  be  administered  by   FERC.    He  noted  that                                                               
expansion costs can be very high,  up to $500 to $800 million per                                                               
year.                                                                                                                           
                                                                                                                                
8:58:29 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  about  the  calculation of  roll-in                                                               
rates in determining additional expansion costs.                                                                                
                                                                                                                                
MR. MASSEY explained  that the increased costs  are calculated by                                                               
rolling  the increased  costs  into the  tariff  rate to  market,                                                               
multiplied by the volume of gas shipped.                                                                                        
                                                                                                                                
REPRESENTATIVE RAMRAS asked  about the aforementioned calculation                                                               
in the  situation where ExxonMobil  discovers additional  gas for                                                               
inclusion  in the  pipeline;  specifically,  whether the  company                                                               
would benefit from an increased roll-in rate in that situation.                                                                 
                                                                                                                                
MR.  MASSEY agreed  with the  aforementioned  point, but  offered                                                               
that  situation  should  not  be  mandated,  but  left  open  for                                                               
agreement by the stakeholders, or  for negotiation with FERC.  He                                                               
offered  that FERC  is capable  determining what  is in  the best                                                               
interest of all parties.                                                                                                        
                                                                                                                                
MR.  MASSEY  explained  in  response  to  a  question  that  this                                                               
decision is not  for the state or legislature.   He said FERC has                                                               
the authority to make the  decisions regarding pipeline expansion                                                               
regardless of "what we write in our contract ...."                                                                              
                                                                                                                                
9:02:07 AM                                                                                                                    
                                                                                                                                
MR. MASSEY  suggested that the  proposed upstream  inducements in                                                               
AGIA   require  significant   modification  to   ensure  that   a                                                               
commercially viable project is obtained.   He offered it would be                                                               
preferable to  leave that  issue open and  allow an  applicant to                                                               
make  a proposal  to address  those necessary  terms.   He opined                                                               
that the  timelines set forth in  AGIA are not conducive  to good                                                               
project  management  and  indicated that  a  commercially  viable                                                               
project  will  proceed  at an  appropriate  pace  under  producer                                                               
management.                                                                                                                     
                                                                                                                                
9:02:59 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS questioned  how to  assure that  the work                                                               
will commence without some type of timeline.                                                                                    
                                                                                                                                
MR. MASSEY  opined that asking  for something that  "doesn't make                                                               
sense" will never  work, particularly on a project  of this size.                                                               
He offered that  the appropriate standard is to  be diligent, and                                                               
that failure to be diligent could  result in loss of the contract                                                               
or other remedy.                                                                                                                
                                                                                                                                
MR. MASSEY continued by stating  that AGIA lacks specifics on key                                                               
fiscal  terms  and  other  requirements.    He  opined  that  the                                                               
discretion  given  the  commissioners  of  DOR  and  DNR  creates                                                               
significant uncertainty.   He further opined  that AGIA's failure                                                               
to provide specific criteria for  selecting the successful bidder                                                               
may lead to  litigation from project proponents  not selected for                                                               
inducements.    He  said  that the  project  should  provide  for                                                               
binding   neutral  arbitration   as  a   mechanism  for   dispute                                                               
resolution    He  characterized arbitration  as a  successful and                                                               
recognized method of dispute resolution.                                                                                        
                                                                                                                                
9:07:13 AM                                                                                                                    
                                                                                                                                
MR.  MASSEY  concluded  by paraphrasing  from  written  testimony                                                               
[original punctuation provided]:                                                                                                
                                                                                                                                
     In closing,  I would like to  reiterate that ExxonMobil                                                                    
     is committed  to moving the  gas project forward.   Our                                                                    
     company  possesses the  financial strength  and project                                                                    
     experience  required to  make this  project a  success.                                                                    
     We are  ready to work  with the Administration  and the                                                                    
     Legislature  to establish  a framework  that recognizes                                                                    
     the integrated nature of the  project and mitigates the                                                                    
     risks  I  have  discussed   to  allow  the  project  to                                                                    
     progress.  We would suggest  AGIA be amended to include                                                                    
     the  broad objectives  the State  wants to  achieve and                                                                    
     allow each applicant  to decide how best  to meet those                                                                    
     objectives and  to identify what  is required  from the                                                                    
     State  to advance  the  project.   The  State can  then                                                                    
     accept the proposal  that delivers the most  value.  We                                                                    
     are  ready   to  participate  in  a   competitive  open                                                                    
     transparent   process  under   the   approach  I   have                                                                    
     outlined.                                                                                                                  
                                                                                                                                
                                                                                                                                
9:08:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS  expressed his  desire  to  move AGIA  and                                                               
offered that he  appreciates the efforts of  ExxonMobil and other                                                               
producers to work towards development of a gas pipeline.                                                                        
                                                                                                                                
9:13:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DAHLSTROM  asked  how much  ExxonMobil  spent  in                                                               
Alaska in 1992.                                                                                                                 
                                                                                                                                
MR. MASSEY estimated  capital investment in Alaska  at about $150                                                               
to $200  million per  year.   He noted  that his  prior statement                                                               
regarding investment of  $3 billion was related  to investment in                                                               
technology.                                                                                                                     
                                                                                                                                
REPRESENTATIVE DAHLSTROM asked whether  any technology related to                                                               
the thermal model upon which  Trans-Alaska Pipeline System (TAPS)                                                               
was based on is still under patent protection.                                                                                  
                                                                                                                                
MR. MASSEY  noted that  since TAPS  was built  quite a  few years                                                               
ago, the  technology used then  is out-dated.  He  commented that                                                               
ExxonMobil judges bids as a part  of its business and stated that                                                               
his company  first determines  whether the bidder  is able  to do                                                               
the  work.     To  make   that  determination,  it   reviews  the                                                               
applicant's financial  strength, project experience,  safety, and                                                               
environmental  compliance  records.    He  opined  that  in  this                                                               
instance, the ability to deliver  a successful open season is the                                                               
key  to project  success.   He  opined that  the second  criteria                                                               
would be to determine the  proposed project's value to the state.                                                               
The third issue  would be to consider how  the applicant proposes                                                               
to meet objectives of providing  gas for in-state use, local hire                                                               
and other factors.                                                                                                              
                                                                                                                                
9:18:26 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   DAHLSTROM   asked  for   further   clarification                                                               
regarding the issue of fiscal uncertainty.                                                                                      
                                                                                                                                
MR. MASSEY  replied that  AGIA does  not provide  the predictable                                                               
and durable  terms to make  the project commercially viable.   Of                                                               
particular  concern are  the taxation  factors  that will  affect                                                               
upstream values, he explained.   He said that applicable property                                                               
and state income taxes are not  "well defined."  He said that the                                                               
goal is  to define how to  allocate revenues for the  life of the                                                               
project.   He reiterated that  ExxonMobil will take on  the risks                                                               
of price,  geology, and cost,  but not  the risk that  the fiscal                                                               
terms will change.                                                                                                              
                                                                                                                                
9:20:30 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DAHLSTROM  asked what would give  the assurance of                                                               
predictability.                                                                                                                 
                                                                                                                                
MR. MASSEY reiterated that the  applicants be allowed to describe                                                               
their  project  approach, which  the  state  can then  review  to                                                               
determine which project is best.                                                                                                
                                                                                                                                
REPRESENTATIVE DOOGAN  asked whether the witness  is suggesting a                                                               
process  whereby  license  applicants  will  propose  a  tax  and                                                               
royalty structure for the project.                                                                                              
                                                                                                                                
MR. MASSEY agreed  with the aforementioned summation.   He opined                                                               
that the petroleum profits tax (PPT)  as currently in AGIA is too                                                               
high  for  a  successful  project  and  suggested  applicants  be                                                               
allowed  to submit  proposed  rates for  the  project, which  the                                                               
state can evaluate to determine  which proposal is most favorable                                                               
to the state.                                                                                                                   
                                                                                                                                
9:23:35 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DOOGAN  asked how a non-producer  could advise the                                                               
state as to what the producers' tax and royalty rates should be.                                                                
                                                                                                                                
MR. MASSEY  stated that  pipeline companies  understand economics                                                               
and project viability and could  approach ExxonMobil to determine                                                               
a rate to make  their project viable.  He went on  to say that if                                                               
a pipeline company did not feel  like a producer was dealing with                                                               
them fairly, the pipeline company  could suggest its own proposal                                                               
for a successful open season.                                                                                                   
                                                                                                                                
REPRESENTATIVE   DOOGAN  expressed   some  skepticism   with  the                                                               
aforementioned scenario since the  competitors will be asking for                                                               
a key piece of information from ExxonMobil.                                                                                     
                                                                                                                                
MR. MASSEY  stated that  it is obvious  what ExxonMobil  needs to                                                               
progress  the project.   He  reiterated that  companies can  make                                                               
their own proposal.  He agreed  that the party with the lease has                                                               
a competitive  advantage, and  that there  need to  be assurances                                                               
the advantage is not mis-used.                                                                                                  
                                                                                                                                
9:26:25 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   DOOGAN  clarified   that   under  the   proposal                                                               
suggested, the  commissioners would review the  proposals, pick a                                                               
licensee, and  then come before  the legislature to  finalize the                                                               
tax and royalty regime as spelled out in the proposal.                                                                          
                                                                                                                                
MR. MASSEY  agreed with  that characterization.   He  opined that                                                               
there should  be enabling legislation  to allow this  approach to                                                               
proceed.                                                                                                                        
                                                                                                                                
REPRESENTATIVE DOOGAN  asked about  other entities that  may help                                                               
provide fiscal certainty for tax and royalty payments.                                                                          
                                                                                                                                
MR.  MASSEY  stated that  ExxonMobil's  business  practice is  to                                                               
discuss and  resolve the project  terms with the  resource owner,                                                               
in  this  case  the  State.   He  agreed  that  there  are  other                                                               
interested governmental  units, but  the state  of Alaska  is the                                                               
resource owner and  it is imperative that the  resource owner and                                                               
the lease holder come to terms to make the project viable.                                                                      
                                                                                                                                
                                                                                                                                
REPRESENTATIVE DOOGAN asked if ExxonMobil  is asking other taxing                                                               
authorities to freeze their tax rates for this project.                                                                         
                                                                                                                                
MR. MASSEY replied  that Alaska is the only entity  because it is                                                               
the resource owner.                                                                                                             
                                                                                                                                
9:31:01 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS asked  whether there  are concerns  about                                                               
the  possibility that  Canada will  increase its  property taxes.                                                               
He also  asked about  the tax situation  that applies  to federal                                                               
property.                                                                                                                       
                                                                                                                                
MR.  MASSEY   replied  that  while  ExxonMobil   would  like  the                                                               
Canadians to put  a reasonable tax on the project,  he noted that                                                               
the Canadian piece  is relatively small, so a  tax increase would                                                               
not have the  same negative impact on the  project.  Furthermore,                                                               
since  the  federal  government  is not  the  resource  owner  at                                                               
Prudhoe Bay and Point Thompson,  his company does not consider it                                                               
appropriate  to  request  some sort  of  long-term  fiscal  terms                                                               
related to the project.                                                                                                         
                                                                                                                                
9:33:00 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS  asked whether  ExxonMobil could  ship gas                                                               
to market  if the company's  partners do not  want to bid  gas to                                                               
ExxonMobil's pipeline.                                                                                                          
                                                                                                                                
MR.  MASSEY  stated   that  his  company  believes   that  to  be                                                               
successful,   this  project   requires   the  participation   and                                                               
alignment  of   the  state,   ExxonMobil,  BP   Exploration,  and                                                               
ConocoPhillips.  He  stated there is the ability for  an owner in                                                               
Prudhoe Bay to  take its own gas, although it  is complicated and                                                               
requires agreement of other owners.                                                                                             
                                                                                                                                
9:35:45 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS asked  why Alaska was being  asked to make                                                               
concessions that are not being  requested from taxing authorities                                                               
in other areas where ExxonMobil has operations.                                                                                 
                                                                                                                                
MR. MASSEY  reiterated that the  gas pipeline is  a basin-opening                                                               
project and  said that worldwide, basin  opening projects require                                                               
alignment  of the  resource  owner  and the  lease  holders.   He                                                               
emphasized  that  the   upstream  pays  for  the   costs  of  the                                                               
infrastructure  investment  required in  basin-opening  projects.                                                               
He further  reiterated that these projects  require the developer                                                               
to take on great  deal of risk and cost and  that given the risks                                                               
involved, the risk-takers need to be able to manage that risk.                                                                  
                                                                                                                                
REPRESENTATIVE  OLSON   asked  what  the  current   project  cost                                                               
estimate is for the gas pipeline.                                                                                               
                                                                                                                                
MR. MASSEY  stated it  is difficult to  estimate project  cost at                                                               
present,  but opined  that costs  to  Chicago would  be over  $30                                                               
billion.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  OLSON  asked  the  witness to  address  the  $500                                                               
million incentive  provided in  AGIA and  whether there  has been                                                               
any contact with First Nations peoples.                                                                                         
                                                                                                                                
MR. MASSEY opined that the $500  million incentive is not much of                                                               
a leverage incentive in a project  of this magnitude.  He went on                                                               
to  suggest  that  the  applicant  propose  what  incentives  are                                                               
necessary  to make  the project  viable.   As  to First  Nations'                                                               
peoples, he  noted that ExxonMobil  has primarily focused  on the                                                               
federal government  in considering  Canadian issues.   He offered                                                               
that it is  not appropriate to begin discussion until  there is a                                                               
project.                                                                                                                        
                                                                                                                                
9:41:24 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS   asked  about  the   criteria  ExxonMobil                                                               
suggests  be considered  in determining  the  gas pipeline  lease                                                               
award.                                                                                                                          
                                                                                                                                
MR. MASSEY reiterated his opinion  that the first criteria should                                                               
be to consider  whether the applicant has  the financial strength                                                               
to  complete  the  project.     The  state  should  consider  the                                                               
applicant's past project  experience and results, as  well as the                                                               
applicant's safety  and environmental performance.   Furthermore,                                                               
the  state  should  examine  how that  applicant  will  ensure  a                                                               
successful  open season.   Secondly,  the  state should  consider                                                               
overall  value to  the state.   Last,  the state  should consider                                                               
other  objective,  such  as  in-state access  to  gas  and  local                                                               
employment.                                                                                                                     
                                                                                                                                
9:46:54 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DOOGAN   asked  whether  the   applicants  should                                                               
propose   tax  and   royalty  rates   for  both   oil  and   gas.                                                               
Furthermore, he  asked about the  company's prior  known position                                                               
on this issue in the Stranded Gas Development Act (SGDA).                                                                       
                                                                                                                                
MR.  MASSEY  agreed  that  ExxonMobil's   position  is  that  the                                                               
applicants propose the  tax rates.  He agreed  that the company's                                                               
position on the  SGDA is one example of what  would be needed for                                                               
project success, although he offered it is not the only example.                                                                
                                                                                                                                
9:50:09 AM                                                                                                                    
                                                                                                                                
PATRICK GALVIN, Commissioner, Department  of Revenue, stated that                                                               
ExxonMobil  Corporation  is a  very  successful  company and  has                                                               
presented a consistent  position to the state on  various oil and                                                               
gas resource  matters throughout the  years.  He opined  that the                                                               
suggestions  made   regarding  AGIA   are  consistent   with  the                                                               
company's prior  approach, and more  like the model of  the SGDA.                                                               
He  opined  that  the  state  has  proposed  evaluation  criteria                                                               
consistent with  that suggested by  ExxonMobil.  He  offered that                                                               
any  requirement  that  an applicant  ensure  a  successful  open                                                               
season  limits the  award of  the gas  pipeline project  to those                                                               
"with  the  gas."    He  stated that  DOR  is  not  expecting  an                                                               
applicant to be able  to come in and insure that  there will be a                                                               
successful open season.  However, he  opined that the state has a                                                               
choice to go  the route as suggested by ExxonMobil,  or to take a                                                               
different path "which  puts us in a different place  in a year or                                                               
two from where we are today."                                                                                                   
                                                                                                                                
9:56:20 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS  referenced  concerns  about  whether  the                                                               
volume  of gas  available is  sufficient  for a  gas pipeline  to                                                               
Canada.                                                                                                                         
                                                                                                                                
TOM IRWIN,  Commissioner, Department of Natural  Resources (DNR),                                                               
noted that prior negotiations had been somewhat closed.                                                                         
                                                                                                                                
COMMISSIONER  GALVIN replied  that the  state does  not know  how                                                               
much gas is available at present  and there is no current request                                                               
before the Alaska Oil and  Gas Conservation Commission to examine                                                               
the effect  of different  off-take volumes.   However,  he opined                                                               
that  between the  Point Thompson  and Prudhoe  Bay units,  there                                                               
will be  the opportunity to  take off  gas, but stated  that this                                                               
does need to be examined more closely.                                                                                          
                                                                                                                                
MR.  IRWIN responded  to a  question  by explaining  that DNR  is                                                               
working with  committee on the  issue of appropriate  criteria to                                                               
be used in evaluating proposals.                                                                                                
                                                                                                                                
10:01:05 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SAMUELS  noted that there are  some concerns about                                                               
how to  evaluate bids, especially  if they meet all  criteria but                                                               
one, yet that applicant has access to the gas.                                                                                  
                                                                                                                                
MR. IRWIN  responded that many  issues have been  considered, and                                                               
noted  that the  companies have  significant business  experience                                                               
that  will help  them  design  an approach  to  move the  project                                                               
forward.                                                                                                                        
                                                                                                                                
10:04:49 AM                                                                                                                   
                                                                                                                                
COMMISSIONER GALVIN  offered that as  a public entity,  the state                                                               
has  some limitations  on its  approach  because it  must make  a                                                               
collective decision on  how to move forward.  He  said that it is                                                               
incumbent  on   the  state   to  make   sure  the   requests  are                                                               
commercially  reasonable  and   that  they  solicit  commercially                                                               
reasonable responses.   He recognized  there are many  factors to                                                               
consider in  project planning, therefore the  state has attempted                                                               
to  establish  a general  framework  for  what is  necessary  for                                                               
project participation.                                                                                                          
                                                                                                                                
[HB 177 was held in committee.]                                                                                                 
                                                                                                                                

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