Legislature(2013 - 2014)BARNES 124
03/19/2014 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
1:07:13 PM
CO-CHAIR FEIGE announced that the only order of business is CS
FOR SENATE BILL NO. 138(FIN) am, "An Act relating to the
purposes, powers, and duties of the Alaska Gasline Development
Corporation; relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated funds;
requiring state agencies and other entities to expedite reviews
and actions related to natural gas pipelines and projects;
relating to the authorities and duties of the commissioner of
natural resources relating to a North Slope natural gas project,
oil and gas and gas only leases, and royalty gas and other gas
received by the state including gas received as payment for the
production tax on gas; relating to the tax on oil and gas
production, on oil production, and on gas production; relating
to the duties of the commissioner of revenue relating to a North
Slope natural gas project and gas received as payment for tax;
relating to confidential information and public record status of
information provided to or in the custody of the Department of
Natural Resources and the Department of Revenue; relating to
apportionment factors of the Alaska Net Income Tax Act; amending
the definition of gross value at the 'point of production' for
gas for purposes of the oil and gas production tax; clarifying
that the exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit may not be
taken against the gas production tax paid in gas; relating to
the oil or gas producer education credit; requesting the
governor to establish an interim advisory board to advise the
governor on municipal involvement in a North Slope natural gas
project; relating to the development of a plan by the Alaska
Energy Authority for developing infrastructure to deliver
affordable energy to areas of the state that will not have
direct access to a North Slope natural gas pipeline and a
recommendation of a funding source for energy infrastructure
development; establishing the Alaska affordable energy fund;
requiring the commissioner of revenue to develop a plan and
suggest legislation for municipalities, regional corporations,
and residents of the state to acquire ownership interests in a
North Slope natural gas pipeline project; making conforming
amendments; and providing for an effective date."
1:07:23 PM
MICHAEL PAWLOWSKI, Deputy Commissioner, Office of the
Commissioner, Department of Revenue (DOR), on behalf of the
administration, began a section-by-section review of CSSB
138(FIN) am. To aid his review he began with a PowerPoint
presentation of four slides. Displaying slide 2, he pointed out
that the Alaska Liquefied Natural Gas (LNG) Project is really
three megaprojects in one: the gas treatment plant and
transmission lines, the pipeline, and the LNG plant and marine
terminal. While the infrastructure gets a lot of attention, the
$45-$65 billion-worth of infrastructure is really a mechanism to
take gas from the North Slope, provide opportunity for gas to
Alaskans, and convert that gas to LNG for export to markets. As
he reviews the bill, he said, he will be looking at places where
the legislation differentiates between the gas resource, the
management of that resource, and the management of the
infrastructure. The parties listed under the gas treatment
plant and pipeline are without the assumption that the state's
equity option in the Memorandum of Understanding (MOU) is
exercised. Thus, slide 2 depicts day one after SB 138 passes,
should it garner the support of this committee and this body.
The parties in the gas treatment plant and the pipeline would be
"ExxonMobil, BP, ConocoPhillips, and TransCanada." The parties
in the LNG plant would be "ExxonMobil, BP, ConocoPhillips, and
the Alaska Gasline Development Corporation [AGDC]." The gas
moves through this infrastructure and is then converted to LNG.
The parties in that gas are "ExxonMobil, BP, ConocoPhillips, and
then the Department of Natural Resources [DNR] and Department of
Revenue [DOR] on behalf of the state." The state's gas share is
the combination of the royalty gas plus the tax as gas.
1:10:50 PM
MR. PAWLOWSKI, moving to slide 3, stated CSSB 138(FIN) am poses
three general questions to the legislature: Will the state
participate in the Alaska LNG Project and, if so, how? What
will be the process for developing the project-enabling
contracts that will let the project progress through the phased,
stage-gated approach? What will be the percentage of the
state's participation?
MR. PAWLOWSKI, turning to slide 4, explained Sections 1-12 of
the bill describe the state's participation and relate to the
powers and authorities of the Alaska Gasline Development
Corporation. Sections 14-15 are the primary sections related to
the process the state will use to develop and negotiate the
project-enabling contracts that will be brought back for the
legislature to review and approve or reject. The reference seen
throughout the bill is AS 38.05.020(b) and it is referring back
to the DNR powers granted in Sections 14 and 15. Percentage is
the next major concept that the legislation is oriented around.
The statute for tax taken as gas, AS 43.55.014, is talked about
in Section 36 but is referenced throughout the bill.
1:12:56 PM
MR. PAWLOWSKI began his review of CSSB 138(FIN) am, turning to
Section 1, page 2, line 16, through page 3, line 29. He noted
AS 31.25.005 was passed last year in HB 4 and is the broad
purpose section that gives the Alaska Gasline Development
Corporation its overarching mission as a corporation. The
proposed bill would amend the purpose of the Alaska Gasline
Development Corporation to add in some larger overarching
directions - these amendments are foundational elements of this
legislation. Paragraph (1) would give the Alaska Gasline
Development Corporation the purpose to develop and have primary
responsibility for developing natural gas pipelines, an Alaska
liquefied natural gas project, and other mechanisms to deliver
gas in the state. Thus, AGDC would be charged not just with the
advancement of in-state natural gas pipelines but actual direct
participation in the Alaska LNG Project. Also key in this
language is "primary responsibility for developing" those
projects - AGDC would lead the state's effort in the commercial
relationship in the development of the infrastructure. He
reiterated the importance of separating the idea of the gas
moving through the project from the actual infrastructure itself
and said this provision gives AGDC the primary responsibility of
development of the infrastructure.
1:15:12 PM
REPRESENTATIVE SEATON said the language "other transportation
mechanisms" in paragraph (1) appears to be tied to just in-state
natural gas. He surmised there is no inclusion of ocean tankers
in the purpose here.
MR. PAWLOWSKI responded that could be a plain reading of the
statute, adding that the limitations of this section have not
been discussed in detail. Because it is for delivery of gas in-
state, he said he does not believe it would apply to ocean
tankers.
REPRESENTATIVE SEATON clarified he means ocean export tankers,
as there has been discussion of small coastal tankers delivering
to communities within the state.
MR. PAWLOWSKI said he understood.
1:16:08 PM
MR. PAWLOWSKI returned to review of the bill, saying addition of
[paragraph (2)], on page 2, lines 23-25, provides clarity and
direction to the Alaska Gasline Development Corporation, in that
its primary responsibility to develop this infrastructure is
done so as "to deliver natural gas in-state, provide economic
benefits in the state, and revenue to the state", which gives
AGDC a mission and a methodology to evaluate that mission.
MR. PAWLOWSKI said the addition of paragraph (3), page 2, line
26, through page 3, line 3, provides direction to the Alaska
Gasline Development Corporation in its purpose to assist the
Department of Natural Resources and Department of Revenue "to
maximize the value of the state's royalty, natural gas, and
natural gas delivered to the state as payment of tax, and other
gas received by the state". This builds that collaborative
relationship between AGDC and the departments, where AGDC is
advancing the infrastructure, carrying the commercial interest
of the state, and supporting the departments in their role as
the resource agencies and custodians of that resource on behalf
of Alaskans.
MR. PAWLOWSKI explained [paragraph (5)], page 3, lines 12-19, is
the inclusion of direction for AGDC to advance an Alaska
liquefied natural gas project by developing the infrastructure
and providing related services. Those services include
transportation, liquefaction, a marine terminal, marketing, and
commercial support. This puts AGDC clearly front and center in
supporting the state's effort and providing services to the
state or other holders of gas that would be interacting with the
state in that infrastructure. Line 15 gives additional
direction that if AGDC provides a service to the state under
this paragraph it may not charge a fee for the service in an
amount greater than the amount necessary to reimburse AGDC for
the cost of the service. This provision ensures that, for the
state's gas, it is the lowest possible cost.
1:18:46 PM
MR. PAWLOWSKI addressed Section 2, page 3, line 30, through page
4, line 11, saying it is a conforming section. Page 4, lines 1-
2, add the language "acting in the best interest of the state
for the purposes required by AS 31.25.005," which is the statute
that gives those broader purposes to AGDC. Page 4, line 10,
adds the language "or an Alaska liquefied natural gas project."
The bill addresses the question of the state's participation by
giving that primary participation role to the Alaska Gasline
Development Corporation.
MR. PAWLOWSKI noted Section 3, page 4, lines 12-24, is new law
adding a new subsection that directs the AGDC board to maximize
the efficient use of state resources, establish appropriate
separation within the corporation, and appoint a program
director for an Alaska liquefied natural gas project. A bill
previously before the committee, HB 277, envisioned a distinct
separation with a complete statutory subsidiary with a separate
board. However, that is eliminated under CSSB 138(FIN) am, and
an LNG project is brought in under AGDC as a unified corporation
under the same board, in an effort to maximize the efficient use
of resources and the appropriate separation.
1:20:52 PM
MR. PAWLOWSKI pointed out Section 4, page 4, line 25, through
page 7, line 16, adds an Alaska liquefied natural gas project to
the powers and duties of the Alaska Gasline Development
Corporation that were granted last session in HB 4. A
conforming section, it simply adds an Alaska liquefied natural
gas project to the appropriate places within the statute.
However, a substantive change is made on page 7, lines 5-16.
New paragraph (23) provides the Alaska Gasline Development
Corporation with the power to acquire ownership or participating
interest in an Alaska liquefied natural gas project, thereby
providing AGDC with the power to be involved in liquefaction,
specifically when it is related to an Alaska LNG project. New
paragraph (24) is built on the collaborative relationship
between the departments and AGDC as the lead developer in the
infrastructure. It directs there be consultation with the
commissioners of revenue and natural resources when contracts on
an Alaska LNG project are entered into for the specific services
that AGDC is empowered to provide under AS 41.25.005.
MR. PAWLOWSKI explained Section 5, page 7, lines 17-29, is
clarifying language because there is no open season on a large-
scale LNG project. Section 5 clarifies that commitments for
firm transportation capacity, and the recording required around
that, are related for the in-state pipeline. The Alaska Gasline
Development Corporation is given two missions under one roof:
to advance the Alaska Stand Alone Pipeline (ASAP) and to
participate in and lead development of the Alaska LNG Project.
1:23:21 PM
MR. PAWLOWSKI said Section 6, page 7, lines 30-31, through page
8, line 2, is conforming language to the concept described in
[Section 4], paragraph (23). Section 6 provides that the power
to develop liquefaction is only related to advancing the Alaska
LNG Project.
MR. PAWLOWSKI stated Section 7, page 8, lines 3-7, adds a new
subsection directing the Alaska Gasline Development Corporation
to provide the commissioners of natural resources and revenue
access to information that is related to the development of
contracts under AS 38.05.020(b)(10) and (11). This statute is
the process that the commissioner of natural resources with the
commissioner of revenue will lead in the negotiation of the
project-enabling contracts that will allow the Alaska LNG
Project to move forward. Under Section 7, AGDC will provide
information, and access to information, to the commissioners
when it is under the confidentiality protections of (g) and (h)
of this [section]. In the Heads of Agreement (HOA) the state
has access to information in its proprietary capacity and under
relevant confidentiality protections. The intent is to capture
that concept, which is that the departments have naturally
separate functions as the partners, but when the departments are
wearing their "proprietary hats" managing the state's gas
interest and with the appropriate contracts, the state will have
access to the information.
1:25:43 PM
MR. PAWLOWSKI noted Section 8, page 8, lines 8-19, is a
clarifying amendment made necessary because of the addition of
Section 9. The language added to this section on lines 18 and
19 clarifies that the money in the in-state natural gas pipeline
fund established under HB 4 may be used to advance the in-state
natural gas project or the other projects in-state that AGDC is
empowered to pursue.
MR. PAWLOWSKI pointed out Section 9, page 8, line 20, through
page 9, line 3, creates a separate fund within AGDC specifically
directed to supporting the Alaska Liquefied Natural Gas Project.
Before, bright lines and statutory separation of corporations
were being looked at. Now, the intent is to retain a clear
separation of the financial resources to advancing the project
so that the public and members of the legislature can see that
separation within the structure of AGDC -- when resources are
committed to the Alaska LNG Project they are in the Alaska LNG
fund and committed. However, this retains the flexibility to
appropriately share information - nonmonetary resources - to
maximize the efficient use of state resources.
1:27:14 PM
CO-CHAIR FEIGE recalled [HB 277] separated out two subsidiary
corporations. He asked whether there was a question of tax
liability.
MR. PAWLOWSKI brought attention to Section 10, page 9, lines 17-
18, which deletes specific language included in HB 4 regarding
AGDC's powers to create subsidiaries. That language said a
subsidiary corporation may be incorporated under AS 10.20.146 -
10.20.166, he explained. Those statutes are the nonprofit code,
so there was concern that by implication it meant AGDC could
only use the nonprofit code to develop a subsidiary. If that
was the case, it potentially could have tax implications for the
state. Section 10 removes this reference so as to allow AGDC to
use any corporate mechanism that will maximize the efficient use
of state resources. It is a clarifying amendment because the
intent in the drafting of HB 4 was to provide that flexibility
with the word "may." However, it could be construed that that
was a limiting section. Continuing, Mr. Pawlowski turned
attention to the purpose section of AGDC, page 3, paragraph (5)
of Section 1. He noted lines 15-19 provide that when AGDC moves
gas for an instrumentality, public corporation, or political
subdivision, it may not charge a fee for the service in an
amount greater than the amount necessary. The issue of taxes
depends on the issue of profit or income and this section
attempts to minimize the income or the opportunity for income
when related directly to the state. Providing the corporate
flexibility for AGDC to develop a subsidiary using whatever
corporate mechanism it wants, as well as establishing a
relationship when supporting the state, addresses those problems
and enables both projects to come under one roof.
1:29:53 PM
REPRESENTATIVE P. WILSON drew attention to Section 8, lines 16-
17, which state "appropriated to the fund without further
appropriation for the cost of managing the fund ...." She
inquired whether there is money in the other fund now and, if
so, how much.
MR. PAWLOWSKI confirmed there is money in the in-state natural
gas pipeline fund, but deferred to AGDC to answer the question.
He added that there is no money in the new fund under Section 9.
1:30:48 PM
REPRESENTATIVE SEATON requested clarification of paragraphs (5)
and (6) on page 3. He offered his understanding that paragraph
(5) would be limited to providing only gas because it applies to
a political subdivision, whereas paragraph (6) does not restrict
it to just gas because it applies to municipalities and
industrial customers.
MR. PAWLOWSKI noted paragraphs (6) and (7) are language in HB 4
that was renumbered as new [paragraphs] were added. Concern
about the additional level for the Alaska LNG Project comes from
the issue that providing gas in-state is clearly a public
purpose that benefits Alaskans, but supporting gas for export to
foreign markets runs into a different level of corporate law.
The relationship between the two must be looked at under the
corporation's broader purpose for the benefit of Alaskans. How
AGDC would structure that is, in his opinion, open to
interpretation in the way this language is drafted.
1:32:40 PM
REPRESENTATIVE SEATON said he is pointing out issues that the
committee might look at and resolve. Paragraph (5) relates to
pipeline gas that must be delivered at the cost of providing the
service. Paragraph (6) relates to propane and other
hydrocarbons associated with natural gas other than oil, and
these products can be delivered to communities at commercially
reasonable rates, meaning above the cost of providing the
service. He said he wants to ensure that natural gas and
propane are dealt with on the same terms for people in coastal
villages and along the rivers as for people in Fairbanks, Homer,
or elsewhere.
MR. PAWLOWSKI urged caution. Noting that he wears another hat
as DOR's representative on the Alaska Industrial Development and
Export Authority (AIDEA) board, he said AIDEA is always
conscious of creating competition with the private sector. He
said [AIDEA] was comfortable with the language in paragraph (5)
because it specifically relates to activity within the Alaska
LNG Project by the private sector that is directly part of the
project. For the next step of moving beyond the Alaska LNG
Project, there will be an amendment to provide opportunities to
deliver low-cost energy to Alaskans when it is the state that is
doing it. However, he advised, members will want to pay
attention to how that might impact competition with the private
sector to move with AGDC. The aforementioned is the reason
paragraph (5) was done the way it is, and, he believed, the
reason why previous paragraphs (3) and (4) were structured in
AGDC's original purpose.
1:35:31 PM
REPRESENTATIVE KAWASAKI, regarding the topic of nonprofit versus
commercially reasonable rates, requested there be discussion at
some point on how the language would be interpreted on page 3,
line 11, which states "at the lowest rates possible."
CO-CHAIR SADDLER pointed out the language on page 3, line 15,
says "the corporation provides a service" to the state, not that
the corporation is providing gas to the state.
MR. PAWLOWSKI confirmed Co-Chair Saddler is correct, explaining
that that is for AGDC as a part owner in a project in which 75
percent, as the bill is currently written, is owned by the three
producers. The intent of this section is setting up AGDC's
relationship to the state as a shipper on the main project in
relationship to the state's gas.
1:37:02 PM
MR. PAWLOWSKI resumed his review of CSSB 138(FIN) am, moving to
Section 10, page 9, lines 4-24, which relates to AGDC's power to
create subsidiaries, which, he said, is now a broad power.
Drawing attention to lines 9-10, which delete the words "the
state's royalty share of natural gas," he noted AGDC has the
power to acquire natural gas from the North Slope. As part of
the structure of bringing the Alaska LNG Project and making AGDC
the primary developer of the project, the intent is to provide
separation between AGDC as the developer of the infrastructure
and the agencies as the custodians of the gas resource. This
provides separation between the commercial activity and the
management of the gas resource on behalf of the people. Lines
14-17 direct that when the subsidiaries are created there is
still protection of the money between one fund or the other to
retain that bright line of the resources appropriated by the
legislature to either the in-state ASAP project or the larger
Alaska LNG Project.
MR. PAWLOWSKI said Section 11, page 9, line 25, through page 10,
line 16, requires AGDC to provide annual reviews of the
corporation's assets to the legislature. Creation of the Alaska
liquefied natural gas project fund adds another fund on which
AGDC must report to the legislature, so the changes made in this
section are conforming changes.
MR. PAWLOWSKI addressed Section 12, page 10, lines 17, through
page 11, line 19, which is the last of the AGDC sections. This
section defines an Alaska liquefied natural gas project as it
has been used through the previous sections, he said. It is a
very detailed definition of the project-specific components that
are discussed in the Heads of Agreement and the Memorandum of
Understanding. While things are quite different than what was
introduced at the outset in HB 277, he continued, on balance
they bring together a rational level of separation while at the
same time maximizing efficiency and bringing to bear the full
expertise of the Alaska Gasline Development Corporation in
developing the infrastructure in the LNG components of the
project on behalf of the state.
1:40:36 PM
CO-CHAIR SADDLER said reading Sections 1-12 reminded him of the
significant powers that were granted to AGDC, including the
issuance of bonds, and that he had thought the role for the
subsidiary was going to be taking management of all of those
powers. He asked what other kinds of need there might be for
subsidiaries that would have the powers laid out in the
legislation that was passed last year. He further asked whether
other subsidiaries will be proposed.
MR. PAWLOWSKI responded he does not see the state directing
creation of subsidiaries unless there is a compelling reason for
policy implications. Current structure of the bill puts the
impetus on the AGDC board and executive team to use the tool of
subsidiaries to manage what may become multiple projects and
multiple efforts under AGDC. Giving AGDC the purpose of
advancing the in-state line has moved the state forward. Now
the state has an opportunity to participate in a large project
and AGDC would do that as well. The broad powers in HB 4 allow
AGDC to step beyond the core infrastructure and really work on
delivering gas to Alaskans. Subsidiaries are typically created
to protect assets and provide separation, and CSSB 138(FIN) am
contemplates that this will be done by the AGDC board rather
than being directed by the state. That is consistent with the
Heads of Agreement, which envisions that AGDC may or may not
create a subsidiary to carry the interest, and the board and the
executive team are the best equipped to manage that.
1:42:44 PM
REPRESENTATIVE SEATON inquired what the definition is of "off-
loading" liquefied natural gas as used in the language on page
11, line 8. He surmised the definition is not foreign ports.
MR. PAWLOWSKI responded he will get back with the definition,
but offered his belief that it is in reference to moving from
storage and from the plant on to the ships that would then carry
it to market.
1:43:22 PM
REPRESENTATIVE TARR asked about the language that would change
the nonprofit status.
MR. PAWLOWSKI replied the language is on page 9, lines 17-18.
He said it is not really a change in the status, but rather a
clarification. Deleting that language removes the ambiguity
that by specifically calling out a type of corporate structure
it is implied that that may be the only corporate structure that
can be used. He offered his belief that the original intent was
for AGDC to have the maximum flexibility to use whatever
corporate structure is available under any law to benefit the
people and be efficient in the use of state resources.
REPRESENTATIVE TARR said she is trying to understand the
relationship between AGDC as a nonprofit corporation that then
would have a subsidiary with some other corporate structure.
She asked how the relationship would work between AGDC and the
subsidiary and how the relationship of those two entities to the
state would work as it pertains to tax payments.
MR. PAWLOWSKI answered he will find someone to bring in to talk
about corporate structure. However, he explained, AGDC is a
public corporation, an instrumentality of the state, not a
nonprofit. The reference here is the nonprofit code, which is
separate from being a public instrumentality that was created by
and empowered by the legislature. The relationship between AGDC
and a subsidiary would depend on the corporate structure, and
AGDC has a direct relationship to the state through the board
and as a statutorily created entity.
1:45:47 PM
CO-CHAIR SADDLER understood the project definition goes from the
outlet of Point Thomsen and Prudhoe Bay gas treatment down to
the terminal in Nikiski and stops there. He inquired whether
consideration was ever given to expanding the project definition
to include the tanker ships that would deliver the product to
Asian markets or to small tankers that could re-gasify LNG for
delivery to rural Alaska.
MR. PAWLOWSKI responded the broader AGDC retains powers to
develop transportation mechanisms to deliver gas in-state. So,
small LNG barges used today in countries such as Norway are in a
separate part. The aforementioned is the definition of the
Alaska LNG Project specifically and it is consistent with the
Heads of Agreement (HOA) and Memorandum of Understanding (MOU).
The state is extremely hesitant to step into transnational
shipping arrangements directly.
1:47:11 PM
REPRESENTATIVE P. WILSON understood that, at this point in time,
AGDC's responsibility is to the state to find an in-state
gasline. She further understood [CSSB 138(FIN) am] would
provide AGDC the power to create subsidiaries and a subsidiary's
authority would be directed by the AGDC board. She asked
whether AGDC would still be under the legislature's authority.
MR. PAWLOWSKI replied a subsidiary is a tool in AGDC's toolbox
that can be used to advance the different projects that AGDC is
charged with. The board and executives will figure out whether
a subsidiary offers opportunities or inefficiencies. Currently,
AGDC is charged with delivering gas in-state through ASAP. Once
that gasline is developed, AGDC is charged with looking at the
opportunity to move gas around the state. Under [CSSB 138(FIN)
am], AGDC would also be given the task of taking the lead for
the state in developing the Alaska LNG Project at the project
level. How to do that will be up to the AGDC board. The bill
directs for a separate program director, but would leave it up
to AGDC to set the appropriate separation needed to do these
things, which, commercially, have a tendency to get more and
more complex as they move forward. [The administration]
believes it is important to leave the maximum flexibility in the
board to be able to manage those issues as they come up.
REPRESENTATIVE P. WILSON surmised that, in the process, AGDC may
decide to join everything into one line.
MR. PAWLOWSKI answered the time at which the broader state would
make a decision to advance either the ASAP Project or the Alaska
LNG Project is in the future and will happen as more is known
about both projects. That is not a blanket decision given to
AGDC; AGDC has powers to advance projects. In the future there
are agreements and additional steps that will be coming back to
the legislature, but today it is to continue advancing the two
projects to maximize the opportunity for Alaskans.
REPRESENTATIVE P. WILSON asked whether joining the two projects
could happen.
MR. PAWLOWSKI responded [the administration] does not believe
that two projects would be advanced for very long.
1:51:12 PM
REPRESENTATIVE TARR, in regard to public corporations, requested
someone be made available to answer questions about tax
liability to the state, how those financial relationships would
work, and what the state's financial outlook would look like in
a stress-case scenario.
MR. PAWLOWSKI agreed to do so. He added [the administration]
had been finalizing answers to questions from committee members,
but is now revising those answers to be appropriate to this
bill, CSSB 138(FIN) am, rather than HB 277.
1:52:23 PM
MR. PAWLOWSKI returned to his review of CSSB 138(FIN) am, noting
Section 13, page 11, line 20, through page 12, line 8, would add
a new section to law that creates the Alaska affordable energy
fund. The purpose of the fund, page 11, lines 24-25, is "to
provide a source from which the legislature may appropriate
money to develop infrastructure to deliver energy to areas of
the state that are not expected to have or do not have direct
access to a North Slope natural gas pipeline." It would be the
source of funding for opportunities that are not directly
related or expected to have direct access to the main trunk
line, such as those described by Representative Seaton. The
amount of money to be deposited into this fund, page 11, lines
28-31, is 10 percent of the revenue received from the state's
royalty gas after payment to the Alaska permanent fund. While
money is deposited in this fund, page 12, lines 1-2, direct that
it is the legislature that makes appropriations from the fund.
1:54:06 PM
CO-CHAIR SADDLER requested elaboration on how the calculations
would be done to arrive at the 10 percent.
MR. PAWLOWSKI replied it is known a certain percentage of the
gas moved through the Alaska LNG Project will be royalty gas. A
certain amount of the LNG will be sold on behalf of the state
either directly or through an arrangement for joint marketing
with an individual producer. To demonstrate the calculation he
worked backwards, starting with an LNG price of $15, a price
that he picked solely for the convenience of showing how the
math would work. If the cost of shipping the LNG in a tanker
is, say, $1; and AGDC's charge to move the gas through the LNG
plant is, say, $4; and the cost of moving the gas through the
pipe and gas treatment plant is, say, $6 - then a balance of $4,
would be left, which, in essence, is the wellhead value. Of
that $4 remaining, 25 percent, or $1, would go into the
permanent fund, leaving a balance of $3. Under the proposal, 10
percent of that $3, or 30 cents, would be deposited [into the
Alaska affordable energy fund]. The remaining $2.70 would go
into the general fund, although, he believed, a small portion of
that $2.70 would go into the public school trust fund since it
is the sale of royalty.
1:56:37 PM
REPRESENTATIVE SEATON surmised the amount of LNG being sold
would be royalty gas plus tax gas.
MR. PAWLOWSKI answered correct.
REPRESENTATIVE SEATON inquired whether in his calculation Mr.
Pawlowski was backing both the royalty gas and the tax gas
through the formula, such that 25 percent of the wellhead value
of all of the gas sold is being considered as royalty gas.
MR. PAWLOWSKI responded no, the deposits to the permanent fund
are based on the sale of the royalty gas. The tax gas would be
sold separately and the Department of Revenue would direct that
back to the general fund, which he will explain later.
1:57:33 PM
CO-CHAIR FEIGE, regarding use of the affordable energy fund to
develop infrastructure, asked what would happen when all
infrastructure is in place.
MR. PAWLOWSKI replied he does not believe that is contemplated.
However, he pointed out, the fund is a repository of money and
the legislature retains the power of appropriation and it is not
a dedicated fund.
REPRESENTATIVE TARR said the language reads to her as if the
affordable energy fund is a dedicated fund. She requested an
explanation for why it is not considered a dedicated fund.
MR. PAWLOWSKI deferred to the Department of Law for a legal
interpretation of why it is not a dedicated fund. He offered
his belief that it is similar to other funds where it is
designated that revenues go into the fund but the state
maintains the power to appropriate from the fund.
CO-CHAIR FEIGE pointed out that page 12, line 3, states it is
not a dedicated fund.
1:59:25 PM
CO-CHAIR SADDLER observed there are no provisions for how the
proceeds of the affordable energy fund are to be invested or
reinvested, as is often the case for other state funds. He
inquired whether this is something that needs to be considered.
MR. PAWLOWSKI concurred the state has other funds similar to
this. He explained that in its fiscal note for CSSB 138(FIN)
am, DOR recognizes the affordable energy fund would be a fund
within the general fund and would therefore be managed on a
blended basis with the other funds, so there would be no
management cost to DOR.
REPRESENTATIVE TARR surmised the idea is that these funds would
be a supplement to existing state funds that would continue on
in the future.
MR. PAWLOWSKI answered he thinks that is true, but commented
that without the large project there is no revenue going into
this fund. The fund is created but the funding source does not
happen until royalty gas is produced, which is expected to be in
the mid-2020s for the Alaska LNG Project. What other programs
remain in place in the mid-2020s is hard to presume.
2:01:38 PM
MR. PAWLOWSKI resumed his review of the bill, bringing attention
to Section 14, page 12, line 9, through page 15, line 30. The
changes on page 13 are the core for how the project-enabling
contracts will be developed, he explained. Section 14 revises
AS 38.05.020(b), the reference used in the AGDC statutes about
the sharing of information. The substantive provisions start on
page 13, line 12, [paragraph (10)], which states that power is
granted to the commissioner of natural resources to "enter into
commercial agreements with a duration of not more than two years
for project services related to a North Slope natural gas
project." Page 20, lines 9-11, define "project services" as
"services provided by a gas treatment plant, pipeline,
liquefaction facility, or marine terminal, marine transportation
services, or other services necessary to transport natural gas
to market." These services are related to a "North Slope
natural gas project" which is defined on page 20, lines 6-11, as
"a project to produce natural gas from state oil and gas and gas
only leases that include land north of 68 degrees North latitude
for transport in a gaseous state from the North Slope." This
language, he said, means that the commissioner of natural
resources will be able to negotiate with a provider of a
service, such as in the gas treatment plant. Under the concept
put forth by the MOU that would be TransCanada; so, the state
would enter into an interim agreement with TransCanada to
provide treatment services for gas moving through on behalf of
the state. Similarly, AGDC in the liquefaction plant would
provide services in the liquefaction plant for state gas. Those
interim agreements would have duration of not more than two
years. Moving back to page 13, line 14, he read from [paragraph
(11)] which states, "in consultation with the commissioner of
revenue, participate in the negotiation of agreements that
include balancing, marketing, disposition of natural gas, and
offtake and contracts associated with a North Slope natural gas
project." He reminded members that when the word including is
used in statute it means including but not limited to. This is
the large project-enabling contracts which, as seen on lines 18-
19, are not effective unless the legislature authorizes the
governor to execute the agreement or contract. In the MOU the
state would enter into a Firm Transportation Services Agreement
with TransCanada to provide transportation services to the state
for a tariff. That Firm Transportation Services Agreement would
be developed under AS 38.05.020(b)(11) and brought back to the
legislature to authorize the governor to execute that contract.
Similarly, in the Heads of Agreement, an offer is made by the
producers to enter into individual marketing arrangements with
the state to dispose of the state's share of LNG. That
disposition agreement would be negotiated under AS 38.05.020(b)
and returned to the legislature for approval.
2:06:29 PM
REPRESENTATIVE SEATON requested an explanation of the context of
a project services contract of not more than two years when
talking about a liquefaction facility, pipeline, or marine
terminal. He presumed that going forward there is going to be a
longer term secure contract that is not renewed every two years.
MR. PAWLOWSKI concurred, saying the long term commercial
arrangements will be done under long-term contracts, both in the
project itself and throughout the daisy chain of relationships
that get developed. Often a Precedent Agreement or some interim
agreement is there prior to the firm agreement that comes back
[to the legislature]. The timesheet in the MOU will need to get
turned into a Precedent Agreement that can be a foundation for
the more detailed agreement that comes back to the legislature.
REPRESENTATIVE SEATON surmised these agreements are in place but
not really operating a liquefaction plant or anything else; they
are just for going through the process while getting everything
aligned.
MR. PAWLOWSKI agreed, saying it is a process of taking what are
very short documents and making them bigger and then making them
much bigger to come back to the legislature and the public.
2:08:08 PM
CO-CHAIR SADDLER understood that effective with passage of the
bill the commissioner can make commercial agreements of not more
than two years, so therefore not for services that would
continue through the duration of the entire project. He inquired
what those services might be.
MR. PAWLOWSKI replied it might be for two years because the
parties are coming back with the contracts that are needed for
operating over the long term. The timeline for the Pre-Front-
End Engineering and Design (Pre-FEED) stage is 18-24 months.
The state needs flexibility to enter into these interim
agreements, but those are not binding in the way the long-term
contracts are. In further response, he said it is Precedent
Agreements for those services that are envisioned for those two
years, not that those services are actually there yet. The
Precedent Agreement phase occurs before the Firm Transportation
Services Agreement, which would govern the full operation.
2:09:36 PM
MR. PAWLOWSKI recommenced his presentation of CSSB 138(FIN) am,
noting the next addition made in Section 14 is paragraph (12),
page 13, lines 21-31. This provision, he said, empowers the
commissioner to enter into confidentiality agreements to
maintain the confidentiality of information related to these
contract negotiations.
2:09:57 PM
REPRESENTATIVE SEATON asked how binding the two-year contracts
would be, given that the long-term contracts coming back to the
legislature for approval may include elements the legislature
does not agree to.
MR. PAWLOWSKI responded the interim agreements are not binding
in the way the full contracts are binding. The full contracts
will be binding with the legislature's authorization. For
example, under a Precedent Agreement the state will be entering
into a relationship per the MOU with TransCanada to have
offerings, and with those offerings associated development cost.
Those agreements are binding in that the state is committing to
something within those two years, but they are not the long-term
agreements that then are precursors for the legislature's up-or-
down approval.
REPRESENTATIVE SEATON inquired whether the two-year commercial
contracts made by AGDC will have provisions that allow things to
be cancelled without obligations if the legislature does not go
with a longer term contract.
MR. PAWLOWSKI replied this section relates to the Department of
Natural Resources and the commissioner of natural resources, not
AGDC, entering into the resource agreements. It would piggyback
on the royalty process the department goes through.
REPRESENTATIVE SEATON rephrased his question, asking whether the
two-year commercial agreements that the Department of Natural
Resources would be allowed to enter into could have provisions
that bind the legislature or that commit to reparations if the
legislature disapproves of the long-term contract. He presumed
that agreements and contracts are viewed as the same thing.
MR. PAWLOWSKI answered he will look at the various possibilities
and get back to the committee. He said the way the language is
crafted, agreements are viewed as slightly different from
contracts; it provides flexibility to enter into interim
agreements and move things off the list prior to the large
contracts that will come back [to the legislature].
2:14:33 PM
MR. PAWLOWSKI returned to his review of Section 14, paragraph
(12), drawing attention to lines 29-31, which state "the
commissioner may share confidential information obtained under
this paragraph with the legislature only in committees held in
executive session or under confidentiality agreements." The
goal, he said, is to work with the legislative body over the
period the contracts are developed so that a suite of agreements
is created that will meet with success, rather than something
the public and the legislature cannot support. Just as parties
were brought together in the Heads of Agreement to move the
project in Alaska forward, the idea is to now expand the circle
to include the legislature to keep moving this project forward.
2:16:09 PM
REPRESENTATIVE TARR inquired whether the commissioner "shall"
share confidential information would be stronger than "may"
share. She said "may" might leave it open to the commissioner's
discretion as to whether that information is shared with the
legislature. If the intent is for the legislature to have
access to that information, the language needs to be clear that
that is the case.
MR. PAWLOWSKI offered his belief that this was a change made in
the other body at the direction of Legislative Legal and
Research Services. He said the committee and the administration
can look back through the record to get an answer.
2:16:55 PM
CO-CHAIR FEIGE said the intent is clearly there that the
legislature should participate with the department. Although
not necessarily participating in the negotiations, the
legislature would be aware of the process and would perhaps
provide advice to the administration. If somebody starts down a
path that legislators know is not going to fly, it is better for
the administration to know that up front and not waste time
going down what the legislature would know to be a dead end. He
said his reading of this language is that legislative members
would have to sign confidentiality agreements and anyone
uncomfortable with signing a confidentiality agreement would not
be allowed to participate in those sessions.
MR. PAWLOWSKI concurred. Stating that this is a really
important topic, he brought attention to the Heads of Agreement,
page 14, Article 8.3.3. During the Pre-FEED stage, he said,
individually the companies and the state are talking about
initiating the process of assessing the LNG market to see if
there really are opportunities for Alaska gas to compete. At the
same time, the state will be working disposition agreements
potentially, or preliminary disposition agreements, with each of
the three producers individually or other parties that might be
interested in managing LNG on behalf of the state. The state
could be negotiating with, say, ExxonMobil, while at the same
time negotiating a separate agreement with BP for the
disposition of LNG, and one with ConocoPhillips. Under no
circumstances would [the administration] want to put the
legislature in a position of telegraphing the different terms in
those agreements to the detriment of the state or allowing the
parties to see what is going on between them. The
confidentiality provisions are critical to protecting the
state's interest as it steps into these commercial
relationships. This can be seen today with the Department of
Natural Resources and the disposition of royalty-in-kind oil.
This is a key piece of the legislation that the administration
looks forward to discussing with the committee.
2:20:39 PM
REPRESENTATIVE JOHNSON said he is unsure whether under the
legislature's uniform rules a legislator could be kept out of
executive committee, plus it is possible for a legislator to
come in who is not a member of the committee. He therefore
suggested that "or" may need to be changed to "and" on page 13,
line 31. He requested that Legislative Legal and Research
Services explore this as well as whether a legislator who does
not sign a confidentiality agreement could be kept out of
executive committee even if "or" is changed to "and" on line 31.
REPRESENTATIVE SEATON recalled that when doing this before,
people individually signed confidentiality agreements and went
to meetings, although meetings were not necessarily established
legislative meetings.
REPRESENTATIVE JOHNSON said that is his point about "any
committee or" and if a committee is convened, he does not think
it has the right to restrict. While there may be a way around
that he is unsure that this is the right answer.
2:22:29 PM
MR. PAWLOWSKI resumed his review of CSSB 138(FIN) am, noting
Section 15, page 14, line 3, through page 15, line 30, is a
repeat of Section 14. Throughout the legislation, he explained,
a section is amended that was just amended. The bill has
different effective dates for different provisions. Several
years ago it was learned that having tax provisions take effect
halfway through a tax year causes disaster for the Department of
Revenue because taxes are paid on an annual basis, not a fiscal
year basis. Thus, annualizing the tax laws is looked for. The
tax provisions in the bill take effect 1/1/15 and the other
provisions take effect immediately. The purpose of a section
that is amending the section just amended is to incorporate the
change in tax law that is happening later in the legislation.
This is seen on page 15, where all of the language from the
previous section is repeated, but a new paragraph (13) is added
to reference AS 43.55.014, which is the concept of tax as gas.
Tax as gas does not become an opportunity until the provision
that enables tax as gas happens, which is 1/1/15. There are two
sections because the commissioner of natural resources cannot be
given direction to consult with the commissioner of revenue in a
provision that does not exist yet. Paragraph (13) sets up in
the powers of the commissioner of natural resources the
direction to manage tax gas but in consultation with the
Department of Revenue. Currently, the Department of Natural
Resources (DNR) manages royalty-in-kind. A royalty board
composed of commercial analysts and knowledgeable staff uses
process, statute, and precedent to enter into disposition
agreements and to manage oil and gas. However, the Department
of Revenue (DOR) does not have this. When considering tax as
gas, the administration looked at having DNR leverage its
expertise to manage that on a day-in-day-out basis on behalf of
DOR so that the tax gas would be disposed of in the same way as
for royalty gas. This allows the state to be efficient and not
bulk up two organizations when DNR can be relied upon to do it
and to do it in consultation with DOR since it is DOR that takes
proceeds from the sale of tax gas and designates it to the
general fund or wherever else the legislature has directed.
2:27:02 PM
MR. PAWLOWSKI said Section 16, page 15, line 13, through page
16, line 15, is a conforming amendment to an exploration credit
already on DNR's books. The amendment, which is on page 16,
line 12, changes the statute from AS 43.55 to AS 43.55.011,
which is the state's production tax. This change happens
throughout the bill and relates to credits and the application
of tax credits and this is the first instance of that change.
Under this bill, a taxpayer, under specific circumstances, can
pay tax obligations with molecules, just like what is done when
the state takes royalty-in-kind. However, tax credit cannot be
applied against a payment in molecules, so, wherever AS 43.55 is
referenced, a conforming amendment must be made by changing it
to AS 43.55.011, which is the regular payment in cash that the
state receives from the taxpayer.
2:29:03 PM
REPRESENTATIVE JOHNSON inquired whether it is being said that
the state would be able to take gas in lieu of taxes.
MR. PAWLOWSKI replied yes. Instead of a tax payment, the state
under CSSB 138(FIN) am has an opportunity to take a larger share
of the gas from certain leases and under certain circumstances.
REPRESENTATIVE JOHNSON posed a future scenario of the pipeline
at 100 percent capacity and the three producers saying they want
to pay their tax in gas. He posited that what the producers pay
the state they would take up by selling their own, and therefore
the state would have no way to transport that tax payment.
MR. PAWLOWSKI responded Section 17 is a precursor for the option
to do tax as gas. The opportunity for a taxpayer to do tax as
gas depends upon the Department of Natural Resources modifying
the lease. If the lease is not modified, the option will not
exist. State control is built in this way because, per the
Heads of Agreement, the state sees a real opportunity in taking
the molecules and maximizing that resource on behalf of the
people of Alaska. At the same time, the opportunity for tax as
gas is subject to certain agreements being struck to the
satisfaction of the state. This provides a process and the
mechanism to set that up because it is correct to be concerned
about what happens to the state in a situation where it receives
molecules but has no capacity to place them. The state must be
careful and set up mechanisms that prevent that, which is why
the state is being put into the driver's seat for enabling the
option to begin with.
2:31:03 PM
REPRESENTATIVE SEATON observed Section 16 deals with exploration
incentive tax credit credits that may not exceed 50 percent [of
the payment toward which it is being applied]. He asked whether
these credits are being applied against oil taxes or gas taxes.
MR. PAWLOWSKI answered this is a legacy credit which has only
been used a few times. It is a credit against royalty payments
or production tax payments, and is production tax on gas,
royalty on gas, royalty on oil. This is a legacy power that the
commissioner of natural resources has in statute and this is a
conforming amendment to how that credit could be applied.
REPRESENTATIVE SEATON understood a new credit is not being
created here. He said his question comes down to the problem
that the state changed its tax system last year, especially in
relationship to high amounts of credits that the state would be
liable for, particularly at low prices. He expressed his
concern that going forward the state does not have a system that
relates to expenses in gas that then get applied to further
reduce the state's oil revenue at low prices. If this is being
revamped, he said, members need to understand how these credits
are going to implicate the state's future liabilities if things
do not go the way the state wants them to go.
CO-CHAIR FEIGE stated it would be useful, to that end, to know
what the historical utilization of those credits is.
MR. PAWLOWSKI offered his belief that as this bill has moved
through the process, the administration has answered and done a
history on this particular credit, which he will provide to the
committee. He added he knows that there has been other
discussion of credits.
REPRESENTATIVE SEATON said his concern is that now the state is
entering a phase not of history of where the credit was used,
but of trying to make gas production accentuated. Therefore, he
is worried more about the possibility of what the credit could
do if left in place in the future than whether it was used in
the past.
2:34:32 PM
MR. PAWLOWSKI, returning to his review of CSSB 138(FIN) am,
explained Section 17, page 16, line 16, through page 17, line
23, amends the power of the commissioner of natural resources to
modify leases. Amendment of AS 38.05.180(hh) is a key section
of the bill, he said, and is a precursor to the availability of
the option for a taxpayer to pay its tax with gas. The
commissioner has an opportunity after making a written
determination to modify leases; leases are contractual
relationships between the state and the lessor that may be
modified. A key change that must be done to move a gas project
forward is on page 16, lines 25-29. Under the current leases,
the state has the right to switch from taking in-value to taking
in-kind. This creates significant problems in a gas project
because a gas project depends on capacity being subscribed for
long periods of time and fully utilized. For example, say a
producer enters into a long-term contract to sell a certain
amount of LNG to a buyer for the next 25 years and the producer
has made that decision with the state taking in-value. If six
months later the state says it wants to take its gas molecules
as molecules, that producer is now short molecules to turn into
LNG to meet its contract. Under oil, this power to switch the
state's lease terms makes a lot of sense; however, in long-term
gas commitments it creates real instability for both the
producer and the state. Likewise, if the state makes a
commitment to provide LNG and there is the ability to move back
and forth between in-value and in-kind, the state could be short
the gas it has committed to those contracts. This would allow
the commissioner to modify the leases to put limitations on the
right to switch between in-value and in-kind so that they do not
unreasonably interfere with the long-term marketing of natural
gas by the lessee of the state or another person. It supports
the long-term marketing of that natural gas and fulfillment of
the contract.
2:37:50 PM
CO-CHAIR FEIGE agreed the term is important and inquired whether
it is worth putting into statute here limitations on the terms
or a minimum term period.
MR. PAWLOWSKI replied page 16, lines 21-23, state that "the
modification shall be in effect during the initial project term
that has acquired the major permits required for the work plan
and budget ...." So, it is contemplated to be limited to that
period of the initial contract.
CO-CHAIR FEIGE surmised the first 25 years.
MR. PAWLOWSKI agreed that would be about right.
2:38:30 PM
REPRESENTATIVE SEATON understood the modification being made is
just switching an in-kind and is not a percentage of the bid
amount.
MR. PAWLOWSKI replied correct, adding that he will be discussing
the number in a few minutes.
2:38:55 PM
REPRESENTATIVE TARR drew attention to page 16, lines 28-29,
which say, "the state's actions do not unreasonably interfere
with long-term marketing of natural gas by the lessee, the
state, or another person" and inquired how "unreasonably"
interferes would be determined.
MR. PAWLOWSKI answered he will have to see whether there is a
distinct legal standard around unreasonably and will get back to
the committee in this regard.
2:39:45 PM
REPRESENTATIVE OLSON noted that historically LNG exported from
Alaska has been sold on a British Thermal Unit (BTU) basis. He
asked what unit was used for a tax base.
MR. PAWLOWSKI responded he cannot remember whether it is a BTU
or a volumetric thousand cubic feet (MCF). He said he will get
back to the committee with an answer, but added he knows that
DOR takes a number and back calculates for the purpose of
calculating a tax.
REPRESENTATIVE OLSON added that historically the state adjusted
the BTU content due to the fluctuations and supply during the
middle of winter. He said he is therefore confused on whether
the state was doing it on volume for taxes and doing it on BTUs
when there might not be correlation because the BTU content
would change per load. He believed it was measured in Nikiski
and again at "Tokyo Electric" when the delivery arrived.
MR. PAWLOWSKI replied he will get back to the committee
regarding the way that that gets levied by DOR as well as how
DNR does the royalty calculations. The predominant value in
that exchange comes through the royalty, he added, which often
uses a different number than the tax number. He believed the
production tax under the carve-out for Cook Inlet is based on a
volumetric.
2:41:48 PM
CO-CHAIR SADDLER brought attention to page 16, lines 21-22,
which state that the modification shall be in effect "during the
initial project term" and inquired whether the language should
instead read "during the initial term of a project."
MR. PAWLOWSKI agreed to look at the suggestion, but advised that
"initial project term" is a defined term.
CO-CHAIR SADDLER pointed out that the "term" does not require
permits; the "project" requires permits.
MR. PAWLOWSKI agreed.
2:42:44 PM
MR. PAWLOWSKI returned to his review of Section 17, noting page
17, lines 5-8, address setting an appropriate fixed royalty
share. A dilemma in places like Point Thomson, he said, is that
there are many royalties with a fixed share and some that are
net profit share or sliding scale. This provision allows the
Department of Natural Resources to move to a fixed value for
that lease. After much discussion, this provision has evolved
to require that the fixed royalty rate must "yield a value to
the state that the commissioner determines to be not less than
the value the state would have received under the terms of the
lease before a modification under this subsection."
2:44:05 PM
CO-CHAIR FEIGE asked whether it is a general intent to make all
gas leases across the North Slope the same, or fairly close to
the same, royalty share.
MR. PAWLOWSKI answered it is not the intent to do that on leases
across the North Slope, but rather to rationalize numbers within
a unit. A unit will be made up of a suite of leases with
different terms, he explained, and a blended number is needed to
calculate the state's gas share for royalty purposes that, in
conjunction with the production tax, creates the volume of gas
that the state has to support its share in the project.
2:44:48 PM
CO-CHAIR SADDLER, regarding page 17, line 7, understood that the
lease modification would not take place without both parties -
the state and the producer - agreeing. He observed the proposed
language of "not less than the value" does not include a cap.
He inquired whether this means there is no prohibition against
it being adjusted such that it is a higher value to the state.
MR. PAWLOWSKI replied he will discuss this with DNR and get back
to the committee with an answer, but said that that is
absolutely not the intent here. The intent is to arrive at a
fixed percentage for variable leases that does not transfer
value between the parties but sets a fixed percentage for the
state to be able to move forward.
2:45:46 PM
REPRESENTATIVE SEATON, regarding page 17, line 5, asked why oil
is included in the provision for modifying net profit shares
rather than only gas.
MR. PAWLOWSKI understood it is because those are oil and gas
leases; the leases may not be gas only leases.
REPRESENTATIVE SEATON said he wants to make sure apples and
oranges are not being mixed when talking about royalty shares on
gas and royalty shares on oil, and he wants to ensure that oil
is segregated from gas.
MR. PAWLOWSKI responded that, given the length of the bill, he
may not be able to get to this today, but he will come back to
discuss it in a future conversation because there very much is a
connection between oil and gas. Under the Heads of Agreement,
he continued, Point Thomson is one of the anchor fields for this
project and the production of oil is actually production of
associated liquids that comes directly from the gas production.
The relationship of lease expenditures being applied against the
regular production tax will be discussed later. The ability to
separate is a very difficult one, he said.
2:48:08 PM
MR. PAWLOWSKI resumed his review of CSSB 138(FIN) am, pointing
out Section 18, page 17, line 24, through page 18, line 17, is
another section that is being amended immediately after
previously being amended, so it is a repeat of Section 17. The
change on page 18, line 5, says that this also can include gas
delivered to the state under AS 43.55.014, which is the
reference to tax as gas; thus, it is a conforming change to
account for establishment of the tax-as-gas option.
MR. PAWLOWSKI explained Sections 19-22, page 18, line 18,
through page 19, line 30, are conforming changes for tax as gas.
These sections are statutes governing the Department of Natural
Resources' disposition of royalty-in-kind. It is existing law,
existing practice, for how DNR does the sale, exchange, or other
disposal that comes as a royalty; it adds the tax as gas to
these sections to give consistent treatment. It would go
through the same process, leveraging the royalty board,
providing the same side bars, just in the management of
Department of Revenue's tax gas because these would already
apply to the Department of Natural Resources' management of
royalty oil. [The administration] wants the same custom and
practice to apply to Department of Revenue tax gas.
MR. PAWLOWSKI addressed Section 23, page 19, line 31, through
page 20, line 11, reminding members that these are the
definitions reviewed earlier for the initial project term, the
North Slope natural gas project, and project services.
2:51:08 PM
MR. PAWLOWSKI said Sections 24-26, page 20, line 12, through
page 21, line 1, are an amendment that attempts to conform.
Provisions in HB 4 directed the Department of Natural Resources
to give priority to the in-state natural gas pipeline project
when doing permitting. These sections delete the reference to
the in-state natural gas pipeline project and insert a project
under AS 31.25, the Alaska Gasline Development Corporation. So,
rather than a narrow prioritization for AGDC in the permitting
project process, it is given an expansive definition so the
projects that AGDC is pursuing on behalf of the state get the
same benefit whether it is an in-state project, the Alaska LNG
Project, or a project to deliver gas to Alaskans under any
circumstance.
MR. PAWLOWSKI noted Section 27 is the beginning of the bill's
tax sections. He ended his review of the legislation, saying he
would continue his review at the committee's next meeting [on
3/21/14].
2:53:12 PM
REPRESENTATIVE JOHNSON inquired where the tax is assessed on the
gas.
MR. PAWLOWSKI responded the point of production for tax is
modified in this legislation to provide clarity of where that
happens. For the Alaska LNG Project, the point of production is
the inlet of the transmission lines. For Point Thomson, it is
the pipeline that takes the gas from Point Thomson to the
treatment plant. For Prudhoe Bay it is the transmission line
that takes the gas from Prudhoe Bay to the treatment plant even
though the treatment plant is actually likely to be within the
Prudhoe Bay unit.
REPRESENTATIVE JOHNSON understood the point of production is
basically where the gas enters the treatment plant, or where it
enters the pipeline to the treatment plant.
MR. PAWLOWSKI replied correct.
REPRESENTATIVE JOHNSON commented that that is almost wellhead.
MR. PAWLOWSKI answered it is very close to wellhead.
REPRESENTATIVE JOHNSON surmised if the state takes gas in taxes
it will be on the hook for transportation.
MR. PAWLOWSKI responded correct.
REPRESENTATIVE JOHNSON asked whether the state is figuring that
in. For example, the state is owed $1, it takes the state 2
cents to [transport it], and so the state gives the producer 98
cents in credit; or, the state gives full value and eats the
transportation. While the state gets to market the gas, he
continued, it is also taking the risk of anything that might
happen downstream from that opening.
MR. PAWLOWSKI concurred, saying the agreements in the Heads of
Agreement to enable that are twofold. The upstream agreements
guarantee delivery, the offtake for the state, and balancing
between the two fields to provide the gas for the project. The
disposition agreements allow the state to cover that cost in
between, so it is correct that, in-kind, the state is taking
that transportation responsibility. Whether that is shifted in
the future is open for debate, but in today's circumstances that
is what would be happening.
2:55:56 PM
REPRESENTATIVE JOHNSON inquired whether it is a one-way street
in that only the producers can come to the state or whether it
is a two-way street in that the state can go to the producers
saying it wants gas in lieu of taxes.
MR. PAWLOWSKI replied that under the provision for modification
of leases, the producers and the state will have to sit down and
modify leases, particularly around the question of switching,
and make a decision of in-kind or in-value. Once those leases
are modified, a producer will have the right to choose to pay
[indisc.--microphone bumped]. "So, it is the state election,
collaboratively with the producers in the modification of the
leases that enables the opportunity for tax as gas," he said.
REPRESENTATIVE JOHNSON remarked he still does not know that he
has an answer to his one-quarter of the pipeline. He posed a
scenario in which there is agreement to modify the leases and
the state has 27 percent of the gas, but the producers still
want their 25 percent, resulting in the state stranding its tax
payment. It is taxed before it goes in the pipe, he said, so
the state is stranding that payment.
MR. PAWLOWSKI responded that is why the state ownership of
capacity must match up with the state opportunity for the gas
payment. It is why those offtake agreements are so important
and it is why the balancing agreements are so important. Those
agreements clarify how the gas is delivered, how much the state
has so it can match it up with the capacity and can manage that
question. If one of those does not work, the opportunity itself
will not work. So, all of those are negotiated in tandem and
moved forward through this process as the project moves through
the Pre-FEED stage and into the FEED stage.
2:58:24 PM
REPRESENTATIVE JOHNSON said he needs more clarity and still has
questions because he can already see a way to game the system.
The state is taking responsibility for that payment of the
state's 25 percent; the state is taking the gas in-kind. He
asked whether the state would be sacrificing some of its revenue
to its partner if the gas is taken in-kind. The state is paying
to have that gas moved, he continued, so the state would not get
full benefit for that if it is taken as gas because the state
must share it with somebody.
MR. PAWLOWSKI confirmed there is an obligation, a cost to the
state, of that fixed tariff from having a partner in any element
of the midstream. However, that comes at the benefit of the
investment up front.
REPRESENTATIVE JOHNSON, qualifying that for purposes of his
question it be ignored that the state has an investment and a
partner, inquired why the state, knowing it must share that
portion of the revenue it is taking in taxes, would ever take it
in gas. He further inquired under what scenario would it make
sense for the state to take any gas when the state must share
it, be responsible, and market it. He said he cannot see why
this is needed because he cannot see a situation where the state
would ever want to take revenue for gas.
MR. PAWLOWSKI answered the opportunity [the administration] sees
in taking tax as gas is the same opportunity the state sees with
royalty-in-kind. The combination of the two, plus the state
investment, allows the state to move the Alaska LNG Project
forward with the partners in a way that allows the state to
maximize value. [The administration] does not see the
alternatives of reducing tax rates and royalty rates to enable
the project as being in the long-term interest of the state or
one that would move a project forward with the partners. [The
administration] believes the state's co-investment and the state
taking a larger share of the gas provides the maximum
opportunity for making a project actually happen.
3:01:08 PM
REPRESENTATIVE JOHNSON opined that legislators are wasting their
time if the profitability of a $40-$80 billion project is
dependent upon the state taking gas instead of taxes; that is
such a small number in the overall. He said he questions this
incentive and does not know why it is needed, although he
understands why the producers would want it. "If we are
depending on that, this project is in trouble," he said.
MR. PAWLOWSKI responded he will bring the committee the
economics for why it benefits the project. It is important to
remember, he said, that in a traditional tax role the deduction
for transportation, whether for royalty or for tax, is to get to
the wellhead. The state is paying for transportation costs and
the state does not have control over those costs and that is
part of the litigation and valuation disputes that the state has
had over the last 30-40 years regarding the Trans-Alaska
Pipeline System (TAPS) tariffs. They come out in the in-value
equation in the same way they would if the state was paying the
in-kind equation. He offered his belief that the state
typically achieves a higher value in the in-kind scenario than
it does in the in-value scenario.
REPRESENTATIVE JOHNSON said the difference between TAPS and what
was just stated is that there is no partner with whom the state
must share profits.