Legislature(2013 - 2014)
03/31/2014 02:05 PM House RES
| 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-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
2:06:09 PM
CO-CHAIR FEIGE announced that the only order of business would
be 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."
CO-CHAIR FEIGE invited the committee to address questions to the
commissioners of the Department of Natural Resources (DNR) and
the Department of Revenue (DOR) in relation to CSSB 138(FIN) am.
2:06:53 PM
REPRESENTATIVE HAWKER recalled that previous testimony from
Commissioner Rodell on the state's debt capacity has been in the
context of general obligation (GO) debt, without any discussion
regarding revenue bonding debt. He asked if any bonding done by
the state would be done on a GO basis.
2:08:26 PM
ANGELA RODELL, Commissioner, Department of Revenue (DOR),
answered that it is not exclusive. She explained that GO bonds
have a clear nexus to the state's debt capacity, but even
issuing revenue bonds has a direct effect on the state's credit
because the state's credit supports the revenue bonds in the
form of sales contracts and commitments.
REPRESENTATIVE HAWKER understood that revenue bonding relies on
the underlying revenue commitment of a project, and asked
whether a scenario in which the state is both a sponsor of the
project and, by owning a portion of the gas, is underpinning the
financial resource, would disqualify a revenue bonding approach.
COMMISSIONER RODELL said no; however, it would be incumbent upon
the state as to how and who issues the revenue debt that is
supported by the state gas contracts. She said depending on how
the debt structures are generated and created - even if the
state itself issued the revenue bonds based on an appropriation
commitment of some type - a structure that would be "one step
below general obligation bonds" DOR believes could work, and the
state would be able to gain the benefit of the revenue, in spite
of dedicated funds strictures. The state should be able to
create a mechanism, either through a leasing mechanism or other,
which would allow the state to use the revenue to repay its
participation in the project.
REPRESENTATIVE HAWKER inquired as to why the concept of revenue
bonding has not been presented.
2:10:23 PM
COMMISSIONER RODELL responded that DOR has not examined GO
bonding versus revenue bonding because the state holds great
capacity. The further bonding is removed from the state's
credit standing, the less of an impact bonding has on the debt.
Thus, the most conservative approach is that the state will
fully support the project with GO bonds; bonds of a lesser
standing will increase capacity for the state. She advised that
her previous presentations have addressed what DOR can do
pledging the full faith and credit of the state, which is the
most conservative presentation possible.
CO-CHAIR FEIGE asked at what point the state must firmly commit
to one method of financing.
COMMISSIONER RODELL expressed her belief that as the state
enters the pre-Front-End Engineering and Design (pre-FEED)
stage, and considers entering contracts such as an equity option
agreement, a partnership agreement, or a firm transportation
[service] agreement (FTSA), and looks at costs, there will be
better information as to the amount of the state's
participation. However, the determination on financing is not
necessary until the final investment decision (FID). Although
some decisions will be made during the transition from pre-FEED
into FEED, the state will not be in a position to issue debt
because the state will not have a clear estimate of revenue to
pledge to the project.
REPRESENTATIVE SEATON asked whether the state has information as
to the "hurdle rate" the producers will use to determine the
viability of a gas pipeline project.
COMMISSIONER RODELL indicated she did not.
2:13:42 PM
REPRESENTATIVE SEATON stated his concern is based on a
presentation by Mr. Roger Marks [petroleum economist, contract
consultant to Legislative Budget and Audit Committee, at the
hearing on March 27, 2014] that at the low hurdle rate of 12
percent for a project costing $65 billion, there is a $17
breakeven point on gas. If so, the project is uneconomic, and
there is no point in progressing with the project unless there
is something to gain. He suggested that if the producers in the
future seek to export natural gas by sea, this project would
have to be proven uneconomic; therefore, the state may be
investing in a project that has a hurdle rate that will prevent
it from completion and that provides no future benefit for the
state, but that will provide a future benefit for the producers.
He strongly urged for the state's consultants to reveal the
information that is needed so that legislators are assured the
state is directing its resources to a realistic project.
2:16:01 PM
JOE BALASH, Commissioner, Department of Natural Resources,
acknowledged that some of information [requested by
Representative Seaton] can found in the royalty study that
examined liquefied natural gas (LNG) projects, such as what are
typical returns. He referred to previous testimony from the
producers that "LNG projects are small margin, but long-term
cash generators, and that they provide an element of stability
within the portfolio of their companies in the ways in which
they generate revenue." He agreed that DNR is accustomed to
"high teens and beyond for certain oil projects"; however, DNR
is unprepared to provide a specific [hurdle] number [for LNG].
He offered to provide information from the royalty study to the
committee, but pointed out that the key question on whether the
project is economic will be answered by the terms of the sales
and purchase agreements (SPAs). For that reason, the
administration insisted on seeing commitment and progress in the
Heads of Agreement (HOA) directing that gas marketing efforts
will be initiated during the pre-FEED phase, because only
through the marketing process will the level of support for the
project become known.
REPRESENTATIVE SEATON restated that the consultants should be
able to gauge "within a reasonable parameter" what kind of
return the producers require around the world before projects
are sanctioned. He restated his concern and opined the state's
intention is for an in-state pipeline, and if this project is
determined to be uneconomic that could be a precursor to a
different project that has less value to the state. He
encouraged the administration and the oil and gas consultants to
work together to provide the legislature a hurdle rate and a
breakeven point for this project.
2:20:30 PM
COMMISSIONER BALASH agreed. He pointed out that determining a
hurdle rate begins with the cost of the project and DNR will use
the total cost estimate of $45 [billion]; in contrast, Mr. Marks
began with a project cost of $65 billion. In response to
Representative Seaton, he said that estimate includes the LNG
liquefaction plant.
CO-CHAIR FEIGE asked whether the state has determined its hurdle
rate.
COMMISSIONER BALASH said the administration has considered
analysis that led to the use of a common discounting rate of 10
percent; the state has also looked that the opportunity cost of
capital which indicates 6 percent, and both rates have been
factored in as the cost of capital to ensure that the state can
clear its cost of capital. He cautioned that he would not
characterize the given percentages as a hurdle analysis.
CO-CHAIR FEIGE agreed, adding that the state can also consider
the overall benefit to its finances and its economy by simply
going forward.
CO-CHAIR SADDLER asked Commissioner Rodell to comment on
previous testimony expressing the view that a firm
transportation commitment is tantamount to an obligation to the
state for equity debt.
2:23:53 PM
COMMISSIONER RODELL disagreed, and explained that there are many
contracts that create a long-term investment obligation to the
state, but that are not debt. For example, long-term employment
contracts related to the Public Employee Retirement System
(PERS) and the Alaska Teachers' Retirement System (TRS) are not
considered a liability of the state. In addition, the
expectation is that the transportation costs in the FTSAs would
be recovered in the sales contracts, thereby offsetting the
costs.
REPRESENTATIVE SEATON said his impression is that bond rating
agencies look at the PERS/TERS liability as part of the state's
debt.
COMMISSIONER RODELL recalled at one time the unfunded [PERS/TERS
liability] was not considered as debt at all; currently, it is
included [in debt] in terms of understanding the state's overall
financial position, but is not included in the debt capacity
calculations. This is a differentiation of types of obligations
- between debt capacity or the state's financial position - and
she asked for clarification of the question: If the question
relates to debt capacity, it is not included; if the question
relates to overall financial position and the state's
obligations, an FTSA would be considered, "in light of the
revenue that it also generates." Although an obligation, the
FTSAs will have matching revenue.
2:27:28 PM
REPRESENTATIVE SEATON clarified that his question is focused on
whether FTSAs change the financial position of the state and its
bonding capability. The committee has been told by legislative
consultants that the state's financial ability to borrow is
impacted.
COMMISSIONER RODELL affirmed that the state will have the
ability to borrow although its ability is impacted. One's
financial position can be excellent and not be penalized for a
tremendous amount of debt on a per-capita basis; one can also
issue a lot of debt, have a weak financial position, and be
penalized in one's credit rating. The state has worked hard to
avoid debt and that - along with its resources and reserves -
gives it management flexibility to "work over a volatile revenue
system" and there is recognition that the state has taken
financial measures to successfully manage its volatile
circumstances.
REPRESENTATIVE TARR observed that all parties have opportunities
to disengage from the project, and that the state has financial
obligations should it withdraw. She asked if the state is
financially obligated to TransCanada (TC) if one of the other
three partners withdraws from the partnership.
2:30:53 PM
COMMISSIONER BALASH responded that the terms of the memorandum
of understanding (MOU) [between TransCanada Alaska Company LLC,
Foothills Pipe Lines LTD., TransCanada Alaska Development Inc.,
and the State of Alaska, dated 12/12/13] spell out the following
circumstances: during pre-FEED, termination can be for any
reason; during FEED phase, if one of the other parties
terminates, so can the state, but with the obligation to repay
TC's development costs and allowance for funds used during
construction (AFUDC).
REPRESENTATIVE TARR posed a scenario where one of the producers
terminates, but the state chooses to find another partner.
COMMISSIONER BALASH advised that the fundamental question is why
one party withdraws: The reason may be based on an issue
specific to the business condition of that party, or based on
activities in the marketplace or the industry. At the risk of
speculation, he suggested that if one party has a specific
problem, the other parties would work to solve the problem;
however, if there is a withdrawal "there's probably going to be
a sorting-out period. How long that will be, is it going to be
terminal? [It is] impossible to say at this point." Under that
circumstance, the state would have the choice to maintain or
terminate its shipping arrangement with TC, pay TC's development
costs, and claim all of TC's equity rights in the project.
2:34:02 PM
REPRESENTATIVE HAWKER asked whether the administration still
maintains its intent to incorporate firmer language in the MOU
related to the exit from the Alaska Gasline Inducement Act
(AGIA) [passed in the 25th Alaska State Legislature]. Also,
during previous testimony before the committee on 3/28/14, Mr.
Tony Palmer, Vice President, TC, stated that - regarding the
exit from AGIA and entering a relationship with TC - the five-
year tag obligation to allow TC to participate in a similarly
situated project does not begin until the state has signed an
FTSA. Representative Hawker said, "By passing the enabling
legislation here, are you able to secure an exit from AGIA prior
to signing that FTSA?"
COMMISSIONER BALASH said yes. He explained that upon passage of
the enabling legislation and execution of the precedent
agreement (PA), Commissioner Rodell and he would declare the
AGIA project uneconomic in order to start a process - that is
delineated in statute - whereby TC must respond with one of two
alternatives: agree or contest. If TC contests the
declaration, an arbitration process will follow. If TC agrees,
the parties will finalize accounting and complete
reimbursements. Thus, following the passage of the proposed
bill in April, 2014, the state will complete and execute the PA
and initiate the termination of the AGIA license. He concluded
that this is "an action that Commissioner Rodell and I control."
Commissioner Balash acknowledged there have been some questions
raised about whether TC has fully committed to agreeing with the
state that the project is uneconomic, considering the
definitions for the "trigger event," and the execution of all of
the required agreements. The concerns about TC's willingness to
agree with the state are understandable, but he pointed out that
if the state executes the PA and declares the project to be
uneconomic, in order to contest, TC would have to argue that a
project overland to Alberta, Canada - that the other three
producers are not a party to - is economic.
2:39:13 PM
REPRESENTATIVE HAWKER directed attention to the MOU, Recital 11,
which read [original punctuation provided]:
The Commissioners have committed that after Enabling
Legislation becomes effective and execution of the
commercial agreements committing the ANS Producers to
initiate the pre-FEED phase of the Alaska LNG Project,
the Commissioners will initiate the process of making
a determination for purposes of AS 43.90.240(a).
Because it is not economically feasible that two
large-scale pipeline projects will be developed
concurrently to transport Alaska North Slope natural
gas to market, the Commissioners have committed to
consider the commercial agreements executed by and
between the State, TADI and the ANS Producers for
development of the Alaska LNG Project as material
evidence that the Licensee's AGIA licensed project is
uneconomic as provided in AS 43.90.240(a).
REPRESENTATIVE HAWKER stated after the enabling legislation
becomes effective, the commissioners will initiate the process
of exiting AGIA. He said the enabling legislation is limited to
receiving authorization to negotiate and enter the transition
agreements, authorization to negotiate and enter the termination
agreements, and legislation that funds the state's contingent
and direct obligations. Thus there is no obligation to complete
anything, but simply to have received the authority. He then
directed attention to the MOU, Recital 12 which read [original
punctuation provided]:
The Licensee has committed that upon the occurrence of
the Trigger Event and the execution of the Transition
Agreements, the Licensee will agree that the project
licensed under the AGIA License is uneconomic within
the meaning of AS 43.90.240(a).
REPRESENTATIVE HAWKER said that the aforementioned recital sets
out when TC agrees the project is uneconomic and adds the
occurrence of a trigger event - which is the enabling
legislation - and the execution of the transition agreements.
The transition agreements are the Alaska LNG Project Equity
Option Agreement and the Alaska LNG Midstream Services
Agreement, and he asked which one of these is the PA.
2:40:41 PM
COMMISSIONER BALASH answered that the PA is the Alaska LNG
Midstream Services Agreement, which will be developed pursuant
to Exhibit C to the MOU, and which is targeted for execution in
the second quarter of 2014.
REPRESENTATIVE HAWKER, noting the discussion with Mr. Palmer
related to this issue, said it is not clear that the state has
the opportunity to terminate a relationship with TC and not
incur the tag obligation until the FTSA is signed.
COMMISSIONER BALASH observed that the agreements are based on
the law of general application, thus it is awkward to try and
micromanage any further agreement. He opined the committee
might seek to achieve clarification through intent language or
an uncodified section; however, statements on record by Mr.
Palmer, and the administration's understanding of the agreement
and the process, alleviate the need for further clarification.
2:43:32 PM
CO-CHAIR FEIGE read Recital 12 [text found above]. He then
directed attention to Article 1.1 Defined Terms of the MOU,
paragraph (s) which read [original punctuation provided]:
"Transition Agreements" mean the Alaska LNG Project
Equity Option Agreement and the Alaska LNG Midstream
Services Agreement.
CO-CHAIR FEIGE then directed attention to Article 1.1 Defined
Terms of the MOU, paragraph (e) which read [original punctuation
provided]:
"Alaska LNG Midstream Services Agreement" means a
Precedent Agreement (or similar agreement), and a Firm
Transportation Services Agreement entered into between
TADI and the State containing the terms set out in
Exhibit "C".
and paragraph (g) which read [original punctuation provided]:
"Alaska LNG Project Equity Option Agreement" means an
agreement to be entered into between TADI and the
State containing the terms set out in Exhibit "B".
CO-CHAIR FEIGE concluded that the bulk of the agreements need to
be signed before TC will declare AGIA uneconomic.
2:45:20 PM
COMMISSIONER BALASH understood the connection between the
definitions, but advised that is not how the process will
unfold, and there is a misunderstanding that the state needs to
execute the FTSA right away. He assured the committee that the
direction of the articles, timelines, and the terms in Exhibit C
of the MOU make clear that the PA will be the instrument to
govern pre-FEED. The FTSA is connected to FEED, and will be
executed after the legislature has reviewed and approved it as
part of the overall package of project-enabling contracts in
late 2015 or 2016.
CO-CHAIR FEIGE surmised that the state is not out from AGIA
until after that.
COMMISSIONER BALASH said he expected that the process for the
release of the license will occur in June, 2014; the PA will be
executed, the state will declare the project uneconomic, and TC
will agree.
2:47:01 PM
CO-CHAIR SADDLER presented a scenario in which after the project
is completed, there is an increase in in-state demand for gas.
He asked how the additional demand would be met and how the
regulatory process would ensure that the new customers would get
a fair price.
COMMISSIONER BALASH explained that the process would depend on
whether the gas comes from the north or the south. For example,
additional gas to power a mine north of Fairbanks may or may not
require additional compression if the gas is coming from the
North Slope, but if more compression is needed, Appendix A, Pro-
Expansion Principles of the HOA allows the state and/or TC to
initiate an expansion and bear the resulting costs of
construction. The transportation cost would be charged by TC.
The price of the gas to consumers will depend on the terms of
the sellers of the gas, and if it is legacy gas or newly-
discovered gas. He noted that the cause for concern is whether
the cost of transportation is fair because "commodities are
commodities." If North Slope gas becomes too expensive, Cook
Inlet gas can be made available for consumers in the north
through an arrangement of backhaul service, and a swap. Gas
from the north will be taken off the pipeline for the mine at
Fairbanks, and gas from Cook Inlet will be substituted at the
southern end of the pipeline for delivery to the LNG plant.
This would alleviate the need for compression or additional
infrastructure although some allowances would be made. The
agreement with TC is that TC would provide backhaul service,
which will cost very little. The questions remaining are the
costs of the transportation service and the cost of the
commodity. If North Slope gas plus the transportation service
costs more than the gas in Cook Inlet, Cook Inlet gas will be
the means by which gas is priced and provided at points along
the pipeline. However, if North Slope gas plus transportation
is cheaper than Cook Inlet gas, the source of the supply will
likely be the North Slope. He cautioned that the projected life
of the project is 25 years; over time, the state will have
contracted most of its proven resource from Prudhoe Bay and
Point Thomson, and there may not be extra gas in the reservoirs,
but with the infrastructure in place, and the expansion
principles, DNR expects more gas to be found. For companies who
discover a small amount of gas, likely markets will be in-state
along the pipeline route. Only a large volume of gas will
warrant a new LNG train at Nikiski.
2:52:44 PM
CO-CHAIR SADDLER restated his question:
I'm not sure how, in the absence of regulation ... you
can guarantee or assure, assure the public that they
won't be expected to pay extraordinarily high prices
for gas should the demand exceed the initial capacity,
initial commitments.
COMMISSIONER BALASH responded:
The question of where the gas comes from: Is it going
to come from the state, or the other project sponsors,
or will it come from third parties? It's not knowable
today. As far as the state's ability to supply that
need from the state's share of the gas, is going to
depend upon a number of things.
COMMISSIONER BALASH continued to explain that the state's
ability to supply gas will depend on the obligations the state
has undertaken through a commitment to capacity in the
infrastructure, and sales to customers. If the state needs to
divert gas from customers, it may incur penalties depending on
the terms of the SPA, which are unknown at this time.
CO-CHAIR SADDLER pointed out that there are provisions in Cook
Inlet regulations that set out allowances for rates during
situations of extraordinary demand. He asked whether an element
to the agreement could be negotiated that the producers would be
required to supply the needed gas, if the state could not.
2:55:30 PM
COMMISSIONER BALASH advised that the referenced regulations in
Cook Inlet relate to the regulatory authorization to export gas.
He suggested that this type of regulation would be a useful
topic for the state and the other parties to discuss as part of
the upcoming contracts.
REPRESENTATIVE SEATON turned to the question of why one of the
parties would withdraw from the project. He asked whether DNR
and DOR have considered the gas usage needed at the Kuparuk
River Unit to fully recover the oil from the Kuparuk reservoir,
and that a large amount of gas is required to recover viscous
oil from deeper formations. He noted that ConocoPhillips
Alaska, Inc. (ConocoPhillips) may not have enough gas to
participate in the project and surmised the gas from the
pipeline would be at a higher price to ConocoPhillips - which
would be a situation similar to the impact of manufacturing
costs on gas exports - and which may lead to the withdrawal of
one of the partners.
COMMISSIONER BALASH opined this topic is laden with assumptions
about a hypothetical situation. He said:
I think ultimately the question that you are hitting
on is: At what point are the commercial needs of one
going to be used to leverage the commercial options
for everybody else? And that's something that is a
concern to everybody in this agreement. We are, we
are going to be engaged in a Mexican standoff for the
next six years. But it's in everybody's interest to
move this project forward and realize the benefits.
... I'm comfortable that all parties are motivated and
aligned to see this resource commercialized in this
way. ... Do this project in a large way, efficiently,
is going to maximize the value, not only for us, but
also for the other parties.
COMMISSIONER BALASH continued, observing that geologically, as
one moves west into the National Petroleum Reserve-Alaska
(NPRA), the rocks are more gassy, thus the above referenced
company will "have plenty of access to plenty of gas ...."
3:00:43 PM
REPRESENTATIVE SEATON recalled a legislative consultant
suggested that the state should explore investing at project
sanction because the state will not benefit from a project that
does not go forward, but the preliminary work would lay a base
for future development by the producers. As a matter of fact,
investment by a sovereign at project sanction has been utilized
around the world, and would reduce the risk of the state's
investment benefitting other parties. He asked for comments.
COMMISSIONER BALASH acknowledged the aforementioned process is
known as carrying the crown, because the [sovereign] is carried
to the point of sanction and suffers no risk. In Alaska, the
state's policies such as the Exploration Incentive Credit
[corporate tax] program has exposed the state to certain risks,
thus when considering the timing of the state's participation,
the administration sought early participation during pre-FEED in
order to ensure influence on the offtake point locations, and on
a project design to accommodate expansions of the pipeline and
of the liquefaction plant. These decisions are made largely
during the pre-FEED phase. Although waiting until FID lessens
risk on the development side, opportunities would be lost.
REPRESENTATIVE SEATON observed that all of the pipeline projects
previously discussed have offtake points and are designed for
future expansion if economically sound; he surmised the cost and
risk reward ratio is not in the state's favor and requested
additional written information for the purpose of making a
decision.
3:06:02 PM
COMMISSIONER BALASH agreed to provide the requested information.
He cautioned against "trust[ing] the companies to do everything
that's right and best for us, or if we're supposed to be an
owner-state and actually look out for our own interests ...."
The administration values being involved and having access when
decisions are being made.
CO-CHAIR FEIGE added that if the state does not participate
early with an investment commensurate with its equity position,
the [producers] may not trust the state to invest at a later
date, and the project may not go forward.
REPRESENTATIVE OLSON recalled the companies operating in Cook
Inlet were successful during the winter because they worked on a
consensual basis; when ENSTAR Natural Gas Company needed gas
from Marathon and ConocoPhillips, approvals were granted by a
phone call due to their long-term relationship. He advised that
putting too much information in contracts is similar to
overregulation by the Regulatory Commission of Alaska (RCA). He
expressed his hope that there is "a little leeway between the
willing sellers and willing buyers on how they can handle a
stress situation like that."
3:09:08 PM
COMMISSIONER BALASH said he concurred with the claim that
overregulation almost killed Cook Inlet.
REPRESENTATIVE HAWKER restated his concern about ambiguities
between the MOU and testimony heard by the committee. He
returned attention to the MOU Article 1.1 Defined Terms,
paragraph (s) [text found above], and paragraph (r) which read
[original punctuation provided]:
"Precedent Agreement" means the precedent agreement
referred to in Alaska LNG Midstream Services Agreement
Term Sheet attached hereto as Exhibit "C".
REPRESENTATIVE HAWKER stated that Exhibit C is a term sheet for
negotiating and entering into a PA. In his experience, when
doing project work, a term sheet is signed first. The way this
is defined is that withdrawing from AGIA requires the execution
of the transition agreements, which are the "term sheet and the
Project Equity Option Agreement," and he remarked:
That's when the licensee is supposed to agree that the
project license under AGIA is uneconomic. There is a
big difference between signing the term sheet,
executing the midstream options agreement and
executing the precedent agreement that is referred to
in that term sheet.
3:11:21 PM
COMMISSIONER BALASH responded that the MOU is the term sheet
that has already been executed; however, the PA that will be
drafted and executed, consistent with the term sheet and the
enabling legislation, is scheduled to be completed in June,
2014.
REPRESENTATIVE HAWKER surmised there is a requirement for the PA
to be executed. He asked whether Mr. Balash's earlier reference
to "uneconomic" was to the "Canadian line ... or are we talking
about the line, the AGIA project as the project plan amendments
have been executed that is no longer contemplating a Canadian
option."
COMMISSIONER BALASH advised that a review of the correspondence
between the licensee and the commissioners would reveal that
both parties sought not to change the project for the purpose of
the license. In fact, the project remains the project to
Alberta, and that would be the project determined to be economic
or uneconomic in the termination event. He offered to prepare a
clarifying side letter.
CO-CHAIR SADDLER referred to [an unidentified document] and
read, "The State of Alaska can exercise its equity option
buyback at the earlier of December 31st, 2015 or the execution
of the contracts, sign the contracts." He asked if the
aforementioned timeline provides sufficient information to
decide whether or not to buy 40 percent.
3:14:37 PM
COMMISSIONER BALASH responded that the timing is expected to
place the state in a better position to evaluate that question.
The pre-FEED process will be largely complete, and marketing
discussions will have taken place in 2014 and 2015. In
addition, information on interest rates will be available, and
the project-enabling contract process will be back before the
legislature in late 2015.
CO-CHAIR SADDLER then asked whether there should be a mechanism
in the agreement to delay the deadline for executing the buyback
position.
COMMISSIONER BALASH cautioned that the additional amount of time
would be gained for a cost in negotiations.
3:16:40 PM
REPRESENTATIVE HAWKER directed attention to CSSB 138(FIN) am,
Sec. 31.25.120. Creation of subsidiaries which read:
Sec. 31.25.120. Creation of subsidiaries. The
corporation may create subsidiary corporations for the
purpose of developing, constructing, operating, and
financing in-state natural gas pipeline projects or
other transportation mechanisms; for the purpose of
aiding in the development, construction, operation,
and financing of in-state natural gas pipeline
projects; or for the purpose of acquiring [THE STATE'S
ROYALTY SHARE OF NATURAL GAS,] natural gas from the
North Slope, and natural gas from other regions of the
state, including the state's outer continental shelf,
and making that natural gas available to markets in
the state, including the delivery of natural gas,
including propane and other hydrocarbons associated
with natural gas other than oil, to coastal
communities in the state, or for export. Subject to
the limitations for the use of money appropriated to
the in-state natural gas pipeline fund (AS 31.25.100)
and the Alaska liquefied natural gas project fund (AS
31.25.110), the [A SUBSIDIARY CORPORATION CREATED
UNDER THIS SECTION MAY BE INCORPORATED UNDER AS
10.20.146 - 10.20.166. THE] corporation may transfer
assets of the corporation to a subsidiary created
under this section. A subsidiary created under this
section may borrow money and issue bonds as evidence
of that borrowing and has all the powers of the
corporation that the corporation grants to it. Unless
otherwise provided by the corporation, the debts,
liabilities, and obligations of a subsidiary
corporation created under this section are not the
debts, liabilities, or obligations of the corporation.
REPRESENTATIVE HAWKER stated that following House Bill 4 [passed
in the 28th Alaska State Legislature] differences arose between
DOL, counsel for the Alaska Gasline Development Corporation
(AGDC), and legislative counsel. The original intent was to
authorize AGDC to create subsidiaries as needed, but DOL
interpreted the law that AGDC could only incorporate
subsidiaries under the Alaska Nonprofit Corporation Act. The
bill attempts to establish clarity that AGDC's authority is not
restricted, and he stressed the intent of the language in the
bill is to grant AGDC the widest possible latitude in creating
subsidiaries as they are needed, and that the subsidiaries may
be either for-profit, or nonprofit.
3:18:54 PM
COMMISSIONER RODELL agreed that the intent of the language is to
grant AGDC the authority to create a subsidiary for the state's
purpose.
CO-CHAIR SADDLER asked how the administration weighed the
potential cost benefits of accepting the "breakup" with TC
versus taking the time and money to renegotiate for better
terms.
COMMISSIONER RODELL explained that she looked at financing
opportunities, relevant information, and the state's past
efforts so far to commercialize North Slope gas. In addition,
she explored whether the state has the human resources to
proceed to the project, and the value of the financial
relationship with which TC was willing to commit. In theory,
the state could bring in an independent pipeline company, but
then would lose the value of TC's knowledge, experience, and
human capital resource that cannot be underestimated. In
further response to Co-Chair Saddler, she pointed out that the
AFUDC portion of the project during pre-FEED is estimated at $6
million, and the state does not have the capability to build
equal infrastructure for an equal appropriation, thus this value
is not overestimated.
3:22:25 PM
COMMISSIONER BALASH agreed, adding that TC is more than a bank
in this context. When the administration first looked at the
benefits of state participation it assumed TC would invest a
small percentage; however, ultimately TC's percentage was
increased to provide human capital and expertise. In addition,
TC was prepared to deliver sufficient value to the state and its
commitment to a capital structure of 75 percent debt/25 percent
equity for the ratemaking purposes of the tariff is not seen
often, and was a key factor. Typically, when pipeline companies
charge a lower "equity number" it is related to existing
pipelines or those under expansion. He recalled that the
Federal Energy Regulatory Commission (FERC) certificated terms
on new construction were provided to the committee, revealing
the best ratio was 60 percent debt/40 percent equity. There are
also examples of higher than 12 percent return on equity (ROE).
Although these examples are not the best comparison, the
administration's consultants provided additional information
specific to LNG projects that showed a broad spectrum of terms,
without an international norm or standard to follow. Finally,
when considering the size, scale, capital structure, and ROE of
the project, the state is in a good position. Conversely, if
the state uses a competitive process, only three or four
pipeline companies in North America have the technical
experience and financial capability to bid, and he asked, "If
you tweak one little term, how much do you improve the state's
bottom line?" He concluded that this is a fair deal for the
state, and the opportunity to improve the terms is somewhat
limited.
3:29:51 PM
CO-CHAIR FEIGE observed that as the project proceeds through
pre-FEED, the negotiated contracts will return to the
legislature for approval. He asked whether they will be
submitted all at once, and how much time the legislature will
have to consider the contracts.
COMMISSIONER BALASH expected that the DNR [evaluation of
proposals for the disposition of royalty oil] will come before
the legislature, together with the contracts, in a comprehensive
way. During the royalty oil disposition process there will be a
public notice and comment period, followed by a review and a
recommendation by the Alaska Royalty Oil and Gas Development
Advisory Board, a final finding from the commissioner, and the
introduction of legislation to approve the disposition
agreement. Although some longer timelines will be needed the
[legislative] committees will be briefed in executive sessions.
REPRESENTATIVE HAWKER directed attention to section 61 of the
bill which read:
* Sec. 61. The uncodified law of the State of Alaska
is amended by adding a new section to read:
TRANSITION: REGULATIONS. The Department of
Revenue and the Department of Natural Resources may
adopt regulations to implement this Act. The
regulations take effect under AS 44.62 (Administrative
Procedure Act), but not before the effective date of
the provisions of this Act being implemented.
REPRESENTATIVE HAWKER clarified that AGDC would be adopting the
regulations and DOR and DNR would not adopt regulations on
behalf of AGDC.
COMMISSIONER RODELL deferred to the Department of Lqw.
3:34:17 PM
SUSAN POLLARD, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division (Juneau), Department of Law (DOL),
explained that the section contains typical transitional
language to allow agencies to begin the regulations process
prior to the effective date of the statute because regulations
cannot become effective until after the enabling statute becomes
effective. There is no intent that DOR or DNR would adopt
regulations for AGDC; in fact, AGDC has its own regulations
outside of the Alaska Administrative Procedure Act.
REPRESENTATIVE HAWKER recalled suggestions from outside legal
counsel related to tax and antitrust statutes, that the state
clarify that AGDC is a political subdivision and to obtain a
private letter ruling [from the Internal Revenue Service (IRS)].
Also, House Bill 4 included language that the debts of AGDC are
not the debts of the state, which could be used to imply that
AGDC is not a political subdivision of the state. He asked if
the administration was in agreement with the aforementioned
suggestions and whether an amendment was needed for
clarification of AGDC's tax exempt status.
COMMISSIONER RODELL deferred to DOL. Clearly, the
administration does not intend that AGDC removes the sovereign
authority of the state to tax.
REPRESENTATIVE HAWKER restated his question.
3:39:01 PM
CHRIS POAG, Assistant Attorney General, Labor and State Affairs
Section, Civil Division (Juneau), Department of Law (DOL),
pointed out that the subject is future income that may be earned
by a public corporation, and he opined that the tax issue would
arise when the state decides if the investor is the state. If
that is the case, it has been long established by IRS that the
state would not be taxed. However, if the income is earned by
another entity such as AGDC, the legislature would want to
engage with tax counsel on the various tax-exemption options.
For example, if state earns the income - or if the entity is
considered to be an integral part of the state - there is no tax
issue. Furthermore, IRS has ruled that a political subdivision
is also given the statutorily-applied immunity. Sovereignty
has three attributes: taxation, eminent domain, and police
power, thus these attributes would have to be established in
AGDC as well as that it is an integral part of the state. If
that failed, Sections 115 or 501(c)(3) of the Internal Revenue
Code would be utilized. Although "a little bit premature at
this point in terms of the enabling legislation," tax issues are
important and if AGDC becomes the investor, a private letter
ruling may be sought. Regarding the need for a specific
amendment, he advised that IRS is not concerned with labels;
more importantly, the Alaska Supreme Court has ruled that public
corporations must be in a department within the executive branch
of government, and because Alaska does not have political
subdivisions in state agencies, "It would be a little odd, I
think, to suggest that AGCD is a political subdivision under
state law." Mr. Poag agreed that language to clarify that debt
issued by AGDC cannot be considered debt of the state may be
warranted, but cautioned against declaring AGDC to be a
political subdivision of the state. In further response to
Representative Hawker, he confirmed that changes are not
necessary.
3:44:33 PM
REPRESENTATIVE TARR asked whether there is an established
process related to how profits earned by AGDC or a subsidiary
flow back to the state.
MR. POAG said the income would be considered a source of state
revenue to the general fund absent an implied exemption.
3:45:52 PM
COMMISSIONER RODELL added that this issue is clarified in
section 1, paragraph (5) of the bill which read:
(5) advance an Alaska liquefied natural gas project by
developing infrastructure and providing related
services, including services related to
transportation, liquefaction, a marine terminal,
marketing, and commercial support; if the corporation
provides a service under this paragraph to the state,
a public corporation or instrumentality of the state,
a political subdivision of the state, or another
entity of the state, the corporation may not charge a
fee for the service in an amount greater than the
amount necessary to reimburse the corporation for the
cost of the service;
COMMISSIONER RODELL explained the language makes clear that the
intent of AGDC is to provide certain services to the state and
that its income flows to the state.
3:46:35 PM
REPRESENTATIVE TARR surmised that the bill was changed to allow
a subsidiary under a limited liability company (LLC) become a
taxing entity. Under this circumstance, she asked how the
financial relationship between the state, AGDC, and a subsidiary
that is not tax-free, would work.
MR. POAG responded that if AGDC created an LLC, that is a pass-
through entity, thus the income would still be earned by AGDC.
He urged for AGDC to ensure that if its subsidiary were an
income-earning entity, it would be a pass-through entity so that
AGDC would qualify for the tax exemption, or that the entity
does not have income consequences. On the other hand, a
subsidiary for the purpose of issuing debt would be set up
differently than one for holding an investment. He concluded
that each business entity would have to be considered in the
light of its potential uses and risks.
REPRESENTATIVE TARR returned attention to section 1, paragraph
(5) and asked whether it is necessary to consider adding
language to the bill, "that makes those relationships more clear
or, ... under other scenarios where those subsidiaries might
have a different corporate structure, ... are there unforeseen
things that could happen that we would want to be aware of right
now?"
3:49:13 PM
MR. POAG said Representative Tarr raised a policy, business-
judgment question, more than a legal question. He remarked:
Certainly, if the legislature wanted to provide
clarity and say now the types of structures that can
be utilized, that would provide that direction. Of
course it comes at the expense of allowing the entity
to choose the structure that's most appropriate for
the particular project. ... This construct clearly
gives that discretion to AGDC to discern what is the
best structure to utilize.
CO-CHAIR SADDLER referred to the antitrust tax concerns raised
in a letter from consultants Baker & Miller to the Legislative
Budget and Audit Committee, dated 3/23/14. He asked whether it
is necessary for the state to protect itself by including
language in the bill that the state declares that the passage of
this bill, and the implementation of the MOU, represent the
state's intent to displace the role of competition in the
development and marketing of North Slope gas.
MR. POAG deferred to Mr. Minesinger.
3:50:56 PM
KENNETH MINESINGER, Attorney, Global Energy & Infrastructure
Practice, Greenberg Traurig LLP, provided a brief background of
his work on this project dating back to 2005, and other oil and
gas consulting. Regarding the memo from Baker & Miller, he
opined Baker & Miller are in favor of the general structure
established by the HOA related to expansions and from an
antitrust perspective. Baker & Miller recommended clarification
on the state's intent to displace competition and qualify AGDC,
or the project, for state action immunity under the antitrust
laws. Mr. Minesinger agreed with the recommendation in general,
but he said he would need to review specific changes to the
legislation.
REPRESENTATIVE SEATON observed that as the AGIA licensee, TC was
responsible for securing the FERC license and all of the other
functions; however, under the proposed system, TC is not
employed as the pipeline developer, but as the representative of
the state's equity stake in the pipeline. He remarked:
I guess I want to make sure that the contribution[s]
that the other parties are making to the pipeline
development are to TransCanada as well. If we're
calling them the pipeline company, and not just the
State of Alaska through transfer of equity share
bringing them in and paying them, and the other
parties participating in other ways, but not similar
payment structure to a pipeline company, because no
longer are they a separate pipeline company, they're
part of us. And so I'm concerned that we have this
inequitable contribution into TransCanada which no
longer fulfills the same role that they assumed under
AGIA.
3:55:48 PM
COMMISSIONER BALASH advised that there may be some confusion
about the terms of the agreement. The project is a joint
venture; a new company - populated by representatives of each of
the sponsors - will be formed to build the pipeline. The new
joint venture company will build the project and TC will bring
its pipeline expertise to the venture. Regarding the allocation
of costs, he assured the committee that the costs will be split
fairly and proportionally to each party's respective interest in
the gas. The state's interest will be determined by the tax
rate set in the proposed legislation. Later in the project, the
costs incurred by the joint venture will be billed out to the
sponsors and the state will be watching to ensure that the state
pay only its 25 percent. TransCanada's role with the state will
be in the ordering of the payments during construction.
TransCanada's share, or its share on the state's behalf, will
dictate the payment schedule during those years. Ultimately, at
operation, the benefits of TC's ability to find additional
business and new customers for state gas will pay big dividends.
3:59:04 PM
REPRESENTATIVE SEATON noted that previous testimony before the
committee raised the possibility of using Alaska Railroad
Corporation (ARRC) bonds to secure AGDC debt. He asked whether
DOR is considering using tax-exempt ARRC bonds - and seeks a
private letter ruling from IRS - for this project.
COMMISSIONER RODELL said DOR is not seeking a private letter
ruling on ARRC bonds at this time. There is concern whether
this project would qualify, or receive a favorable IRS ruling,
due to the differences between the Alaska LNG Project and the
Alaska Stand Alone Pipeline (ASAP). Firstly, the ASAP project
is solely an in-state pipeline, and the Alaska LNG Project is an
export project that will benefit three private companies. In
addition, tax exemptions are presumed to benefit the public
good, and although the state's participation is for the public
good, the project overall is to sell gas primarily to overseas
markets in order to make a profit. She said there is a "huge
risk" of not getting an affirmative opinion from a private
letter ruling. Secondly, there are no provisions in statute for
DOR to issue bonds through ARRC. Commissioner Rodell stressed
the difference nature of the two gas pipeline projects.
REPRESENTATIVE OLSON returned to the possibility of obtaining a
private letter ruling from IRS on whether AGDC qualifies for tax
exemption. He surmised it takes one to two years to receive a
private letter ruling.
4:03:06 PM
COMMISSIONER RODELL opined the state does not need a private
letter ruling for AGDC's participation in the Alaska LNG
Project. Receiving a private letter ruling on tax exemption can
take a long or a short period of time; generally, an entity
wants to be confident of the outcome of the ruling and prepared
to deal with the consequences. In further response to
Representative Olson, she said a private letter ruling will not
be requested during the pre-FEED period. In response to Co-
Chair Feige, she confirmed the request would be prior to FID.
CO-CHAIR SADDLER asked whether an adverse ruling is a potential
detriment to ARRC's bonding authority on other projects.
COMMISSIONER RODELL said ARRC has clear authority to issue debt
through state statute.
CO-CHAIR SADDLER inquired as to whether FERC's authority to
regulate includes the transportation, shipping, storage, and
treatment of LNG, and "how broad is the potential scope of FERC
regulation?"
4:06:40 PM
MR. MINESINGER said the relevant provision in the [Natural Gas
Act, 15 U.S.C. § 717b (NGA)] has not been fully interpreted by
FERC. It is clear that FERC has exclusive jurisdiction to
regulate the LNG liquefaction plant; however, jurisdiction over
the regulation of the rates and services of the pipeline and the
gas treatment plant (GTP) has not been resolved. The definition
of an LNG terminal in the NGA refers to liquefaction and
transportation to the terminal, but it is debatable whether the
intent was to "sweep in an 800-mile pipeline as part of FERC
regulation of the LNG terminal itself." He concluded that there
is a lack of clarity on how far FERC regulation extends upstream
of the liquefaction terminal.
CO-CHAIR SADDLER asked when and how this issue would be
addressed.
MR. MINESINGER referred to the HOA, ARTICLE 6: REGULATORY
FRAMEWORK, ACCESS AND EXPANSION. Article 6.2 read [original
punctuation provided]:
During Pre-FEED, the Alaska LNG Project will be
advanced under NGA Section 3.
MR. MINESINGER explained that during pre-FEED the project will
be advanced under Section 3 of the NGA and the parties will
engage with FERC staff to discuss jurisdiction over the pipeline
and GTP. Of special interest are the commercial terms reflected
in the HOA, including the ability of the state to provide access
to third parties and the ability of any of the parties to
undertake an expansion of the project. As provided in the HOA,
this could occur during pre-FEED by informal discussions or by a
formal petition for declaratory order from FERC. He estimated
FERC's written response to a petition would take a few months.
4:10:44 PM
REPRESENTATIVE TARR returned to the subject of revenue, noting
that previous testimony has suggested that the state will likely
want to engage more partners during the terminal, liquefaction,
and marketing phases of the project. Although it is clear AGDC
and its subsidiaries are limited to only paying expenses, she
asked how the state will evaluate the revenue impact other
future commercial partners may have on the state's annual
revenue.
COMMISSIONER RODELL said the impact on revenue will be
determined on a case-by-case basis. After pre-FEED, the state's
participation will be better known because after the marketing
process begins, buyers will bid on the state's gas and will be
interested in having an equity position in the project. These
offers will be evaluated in the context of the overall sales
agreements, which will come back before the legislature for
approval. At that time, the administration will provide the
terms of the sales agreements, the benefits of bringing in new
participation in the project in terms of revenue to the state,
and the costs. She advised that if the cost of the prospective
participant "well-exceeds" what it is willing to pay for the
gas, there is no benefit to the state to pursue a partnership.
REPRESENTATIVE TARR asked whether is there a [financial] point
that determines the project is "no longer worth it to the state
because the reduction to the annual revenue would be so great."
4:14:19 PM
COMMISSIONER RODELL was unwilling to commit to a certain level
given the possibility of other factors. For example, a
potential partner may be willing to provide in-state gas even
though the revenue to the state in the partnership agreement is
low. Also, in the case of a partner such as the Alaska
Permanent Fund Corporation, the administration may be willing to
make concessions.
REPRESENTATIVE SEATON asked a question to be addressed by the
commissioners at the meeting on 4/2/14. He observed that oil
tax fiscal certainty is not a term to be negotiated in the
contract; however, gas development credits may offset oil tax
revenues. He asked for the maximum amount of credits for lease
expenditures over the next several years, and the possible
liability to the state.
4:16:27 PM
The House Resources Standing Committee meeting was recessed at
4:16 p.m., to be continued at 6:00 p.m.
6:04:36 PM
CO-CHAIR FEIGE called the House Resources Standing Committee
back to order at 6:04 p.m. Present at the call back to order
were Representatives Hawker, Olson, Tarr, Seaton, P. Wilson,
Kawasaki, Saddler, and Feige.
6:04:40 PM
CO-CHAIR FEIGE opened public testimony on CSSB 138(FIN) am. He
informed the committee additional written testimony was included
in the committee packet.
6:05:42 PM
BILL WARREN informed the committee he is a 60-year resident of
Alaska, expressed his long interest in an in-state gas pipeline,
and supported the involvement of the Alaska Gasline Development
Corporation. However, in-state gas for residents outside of
Anchorage seems to be an afterthought, and he questioned the
project's alignment with Alaskans. He said in-state gas is more
important than exporting LNG to China because Alaska needs cheap
energy in order to prosper, which can happen with a small bore
line from Prudhoe Bay to Fairbanks, and the big line can wait
for the future. He strongly urged for two pipelines with one
being a small in-state gas pipeline that could be financed with
Alaska Railroad Corporation bonds, regulated by the Regulatory
Commission of Alaska, and which would go directly to downtown
Fairbanks with no need for offtake ports. The pipeline could
provide natural gas and propane for small businesses and for
residents. Mr. Warren noted that this has been a problem for 60
years and urged for action on the in-state gas pipeline. He
said he was glad that the House Resources Standing Committee is
thoroughly vetting this project.
REPRESENTATIVE OLSON asked about an ongoing project in Nikiski.
MR. WARREN said Hillcorp has increased production, but has not
alleviated the need for in-state gas to help Cook Inlet
establish a market for natural gas and reopen the LNG plant. He
pointed out that a lot of the activity was in search of oil.
There are two jack-up rigs that "[are] a start."
6:11:44 PM
TOM PATMOR provided a brief personal history of his experience
in the oil and construction industries. He said oil companies
are disreputable and not to be trusted and gave several
examples. If the 800-mile pipeline does not get built, he
suggested building a pipeline across the Alaska Peninsula
because LNG tankers could ship from Prudhoe (Bay) to Naknek and
there would be 300 miles of pipeline that would only cross one
river. Mr. Patmor reminded the committee the Trans-Alaska
Pipeline System (TAPS) was to cost $905 million, but cost over
$8 billion, which was a tenfold increase in cost.
6:16:38 PM
RICHARD FINEBERG said a North Slope natural gas pipeline is a
mistaken and risky venture, and the state should instead focus
on continued oil development. He provided ten reasons to vote
against SB 138 and keep the successful Alaska's Clear and
Equitable Share (ACES) [passed in the 25th Alaska State
Legislature] tax regime: 10) previous attempts to build a
natural gas pipeline have failed; 9) the production of LNG is
doomed because the economy of scale has been reduced without
reducing cost; 8) the LNG project is unwise due to its high
cost; 7) confusing testimony by consultants before the House and
Senate; 6) natural gas is undesirable compared to oil; 5)
questions regarding the administration's credibility; 4)
questions regarding the oil companies' veracity; 3) oil
companies' profits prove that Alaska's current tax regime does
not need an overhaul to assure production; 2) profits from North
Slope production under ACES prove its value to investors; 1)
North Slope profits despite declining production indicate the
oil industry uses highly misleading tactics. To avoid
repetition, he said, he stood by his testimony that he has given
at previous hearings. Documented and graphic support for his
observations can be found on his web site and in written
testimony submitted to the committee. He concluded that the
industry creates a misleading impression that industry net
revenues decline when oil prices rise from $80 per barrel to
$130 per barrel, but the opposite is the case. Mr. Fineberg
noted that his figures have not been disclaimed by the industry.
He suggested the present political system enables "tall tales to
triumph."
6:24:16 PM
REPRESENTATIVE TARR asked Mr. Fineberg to provide written
testimony.
MR. FINEBERG agreed to send further information on a ruling by
FERC Administrative Law Judge Cintron.
6:27:24 PM
LYNN WILLIS paraphrased from a written statement as follows
[original punctuation provided]:
I am a residential consumer of Natural Gas
representing myself. I am extremely leery of this
Legislation and I believe, based on our track record
regarding gas supply, I have good reason to be so. I
urge you to thoroughly vet this legislation before
passage.
I have listened to the testimony regarding SB138. I am
impressed with the analysis and your questions. Thank
you for inviting testimony that was not invited by the
Senate.
I am sure you have hired the best and the brightest
consultants to evaluate this proposition; however,
didn't you do that with AGIA? Now six years later
after creation of AGIA with over 300 million dollars
gone from the state treasury and with at least 130
million more owed to Trans Canada we have neither an
inch of pipe purchased nor any application from any
producer to AOGCC for release of a single molecule of
gas.
My concern is about domestic supply of energy for
Alaskans including natural gas. The Alaska State
Government has yet to create a comprehensive energy
plan that would identify the primary source of
renewable and non-renewable energy for each region of
the state for electrical generation, space heating,
vehicle mobility, local industrial production and
energy resources for export. This failure to have a
comprehensive plan results in what we see currently as
we purchase study after study and/or expend state
revenue in a seemingly endless pursuit of the next
best idea.
We have spent how much on the "Cook Inlet Renaissance"
for supply contracts through 2018? We have spent how
much on the AGDC/ASAP project which now seems about to
be abandoned for this AKLNG project. AGIA is still
restricting volume limits for the AGDC/ASAP project.
We won't even consolidate our natural gas demands in
the rail belt region as we pursue trucking LNG into
Fairbanks. Aren't we now competing with the Cook Inlet
gas producers and haven't we created the almost
unbelievable situation where, to various degrees, we
are expending state funds to pay for three pipe line
efforts at the same time (AGIA, AGDC/ASAP, and AKLNG).
If the House emulates the Senate, this Legislation
will become law. Soon we will be in pre-election pre-
feed and once again hopes of Alaskans will rise.
I ask you to not restrict yourselves to a specific
time limit to vet this legislation. If for no other
reason you should be extremely cautious in your
deliberations because we are now in deficit spending.
I would like to remind you that we live in a sovereign
not an investment bank.
As you proceed toward passage of SB 138 please reflect
on testimony from Professor Emeritus Scott Goldsmith
who has long been associated with the University of
Alaska Institute of Social and Economic Research
(ISER). Professor Goldsmith was testifying as a
private citizen on March 25th (at 73:10) before Senate
Finance. At that hearing, Professor Goldsmith stated
that we are now drawing down our cash reserves at a
rate of about 7 million dollars per day.
At that rate of spending we will soon enough not be
able to afford business as usual in State Government
including passing legislation that might cost us
millions of dollars just for testing the viability of
the AKLNG project as currently envisioned. We need to
learn as much as we can, including exploring our
options, before passage of SB 138. Thank you.
6:30:45 PM
REPRESENTATIVE OLSON noted three or four of the committee
members voted against ACES and AGIA.
6:31:39 PM
CHARLES MCKEE said he was a resident of Alaska since 1967 and
took part in the oil pipeline primarily in Valdez. At that time
it was possible to bring propane to tidewater, and he related
that he saw the propane pipe and model "being unpacked,
photographed, and then destroyed." He gave a brief history of
his experience with the Resource Development Council for Alaska,
Inc., the administration of former Governor William Sheffield
[1982-1986], and the oil and gas industry. In regards to the
Alaska LNG project, he said he was in favor of small and large
projects and urged the committee to maintain the virtue of
individuals, which is something corporations lack. Mr. McKee
said he holds a copyright on a technology that is now in use.
TransCanada is using a process called Keystone Generators but
other technology is available, and royalties for its use are due
to him. He cautioned against government non-competitive
contracts for pipeline companies that use modifications of
years-old contracts for systems and specifications.
6:40:05 PM
RICK ROGERS, Executive Director, Resource Development Council
for Alaska, Inc. (RDC), informed the committee RDC supports
policies aimed at increasing the commercial viability of
developing natural gas resources, especially in the areas of
alignment and durability. The HOA signifies the essential
alignment not seen in prior gas pipeline projects. Unlike oil,
the marketing of LNG requires long-term durability in fiscal
terms. He noted that CSSB 138(FIN) am has required a lot of
work and analysis, and urged for continued due diligence by the
committee in order to have a project that can compete globally
and secure the contracts needed to sanction the project. Mr.
Rogers opined the most beneficial pipeline for the use of
natural gas by Alaskans is a large-capacity pipeline, sanctioned
with the producers, and in partnership with the state. The
economics of the project will determine its completion, but the
proposed legislation will provide the project the best chance.
Finally, he said that the state needs to maintain a robust oil
industry on the North Slope because oil pays the bills needed to
support the infrastructure required to produce gas. He opined
that it is important to defeat Ballot Measure 1 [in the
statewide election of August, 2014] to move the project forward.
Mr. Rogers concluded that the passage of the proposed enabling
legislation is not the final decision, and reminded the
committee of the importance of alignment, durability, and a
vibrant oil industry to the success of the project.
6:43:19 PM
REPRESENTATIVE TARR inquired as to whether Mr. Rogers
specifically supports CSSB 138(FIN) am.
MR. ROGERS expressed RDC's support of the general premises of
the proposed bill such as moving the project forward, the
alignment, the general structure, and the business-like
agreement which puts the state in a position of partnership.
6:45:07 PM
GRETCHEN O'BARR said her large family has mostly left Alaska and
expressed her total support for any legislation that is pro-
business and jobs. She opined the legislation is moving in the
right direction although mistakes have been made in the past.
6:46:07 PM
GEORGE PIERCE expressed his belief that Alaskans should own the
controlling interests in their resources. He questioned whether
a pipeline connecting the Arctic to TAPS will benefit the
producers or Alaskans. He referred to previous testimony by Mr.
Roger Marks, legislative consultant, who expressed concern about
a state partnership with TransCanada. Mr. Pierce asked why the
state should give "gasline decision-making control" to its
competitors. He cautioned against funding an expensive gas
pipeline study even though the state will not be part of the
decision process. In a manner similar to the Point Thomson
settlement, an agreement was executed by the state before any
details were made public. Mr. Pierce pointed out that only the
state - but not the producers - must pay TransCanada if the
project fails. Also, there are unanswered questions regarding
the MOU between the state and TransCanada. He strongly urged
for additional advice from experts and for the state to stop
wasting money on yearly pipeline proposals.
6:49:24 PM
LISA WEISSLER disclosed she is a former state oil and gas
attorney and a former legislative staffer who worked during the
gas fiscal contract days. She paraphrased from a written
statement as follows [original punctuation provided]:
Among the many questions and concerns regarding the
AlaskaLNG Project, I am particularly concerned about
what terms will be in any "project--enabling"
contracts negotiated by the Administration, how much
pressure there will be on the legislature to authorize
one or more contracts next year, and the level of
public participation in the decision--making process.
Under the Heads of Agreement, Article 4, the Alaska
LNG Parties will continue Pre--FEED work through to
completion "provided Enabling Legislation acceptable
to the Parties is passed and other support referenced
in Article 10 is maintained or progressed." Under
Article 7, in addition to providing for a confidential
negotiation process, acceptable Enabling Legislation
will allow for the negotiation of project--enabling
contract terms that could address a wide range of
topics from state participation to upstream costs and
lease expenditures to any other terms the Parties
consider necessary to advance the project. Some of
these contract terms are addressed as principles in
the HOA, but many of the terms under Article 7 are yet
to be negotiated.
Among other thing, Article 10 calls for State support
of use of eminent domain rights to facilitate the LNG
project; appropriations, permitting and legislation
for the construction of infrastructure; and
unspecified support for a "healthy, long-term oil
business." The list is non-inclusive so there could
be more.
At least some of the State support for Article 10
items likely to be included as terms in a project-
enabling contract. Since the HOA indicates that
continuation of Pre-FEED work to completion is
contingent on State support, there could be enormous
pressure on the legislature to ratify a proposed
contract with such terms.
SG 138 is the Enabling Legislation and gives the
commissioner of the Department of Natural Resources
full discretion to negotiate any terms for inclusion
in the proposed contracts. Though the Administration
has testified they will keep the legislature informed
on a confidential basis as negotiations progress,
there is nothing in SB 138 to assure consultation
occurs or any requirement for involving the public.
That means that Alaskans will not see a proposed
project-enabling contract until the contract is
brought to the legislature for an up or down vote,
with little opportunity to comment.
Similar to what was required under the Stranded Gas
Development Act, it is reasonable to include in SB 138
a requirement for a best interest findings and
determination for a proposed contract that would be
subject to public review and comment and legislative
consultation. Reasons to support such a requirement
include:
State participation in the LNG project and
associated obligations is a significant public policy
decision with long-term consequences to the fiscal
future of the state. Alaskans have the right to know
the basis for the Administration's decisions and the
right to weigh in on these decisions.
The public comment period will give legislators
advance opportunity to consider contract terms and to
hear from their constituents before a contract is
formally presented to the legislature for
ratification.
There was a findings and determination with a
public comment period prepared for the Stranded Gas
Fiscal Contract so we know it is doable.
A draft amendment follows:
CSSB 138(FIN) am
Best Interest Findings Amendment
AS 38.05 is amended by adding new sections to read:
[Sec. 1]. Preliminary findings and determination for a
North Slope natural gas project contract.
(a) If the commissioner develops a proposed contract
under AS 38.05.020(b)(11) - (12), the commissioner
shall make preliminary findings and a determination
that the proposed contract terms are in the best
interest of the state.
(b) In making the preliminary findings and
determination required by (a) of this section, the
commissioner shall address the reasonably foreseeable
effects of the proposed contract on the public revenue
and public services, and shall describe the principal
factors upon which the determination
made under (a) of this section is based.
[Sec. 2]. Notice and comment regarding the contract.
The commissioner shall
(1) give reasonable public notice of the preliminary
findings and determination made under [Sec. 1].
(2) make available to the public the proposed
contract, the commissioner's preliminary findings and
determination, and, to the extent the information is
not required to be kept confidential under
AS 38.05.020(b)(12), the supporting financial,
technical, and market data, including the work papers,
analyses, and recommendations of any independent
contractors used by the state during development of
the contract;
(3) offer to appear before the Legislative Budget and
Audit Committee to provide the committee a review of
the commissioner's preliminary findings and
determination, the proposed contract, and the
supporting financial, technical, and market data; if
the Legislative Budget and Audit Committee accepts the
commissioner's offer, the committee shall give notice
of the committee's meeting to the public and all
members of the legislature; if the financial,
technical, and market data that is to be provided must
be kept confidential under AS 38.05.020(b)(12), the
commissioner may not release the confidential
information during a public portion of a committee
meeting; and
(4) establish a period of at least 30 days for the
public and members of the legislature to comment on
the proposed contract and the preliminary findings and
determination made under [Sec. 1].
[Sec. 3]. Coordination of public and legislative
review.
To the extent practicable, the commissioner shall
coordinate the public comment opportunity provided
under [Sec. 3](4) with a review by the Legislative
Budget and Audit Committee under
[Sec. 3](3).
[Sec. 4]. Final findings, determination, and proposed
amendments; execution of the contract.
(a) Within 30 days after the close of the public
comment period under [Sec. 3](4), the commissioner
of natural resources shall
(1) prepare a summary of the public comments received
in response to the proposed contract and the
preliminary findings and determination;
(2) after consultation with the commissioner of
revenue, prepare a list of proposed amendments, if
any, to the proposed contract that the commissioner of
natural resources determines are necessary to respond
to public comments;
(3) make final findings and a determination as to
whether the proposed contract, including any proposed
amendments prepared under (2) of this subsection, is
in the best interest of the state.
(b) After considering the material described in (a) of
this section and securing the agreement of the other
parties to the proposed contract regarding any
proposed amendments prepared under (a) of this
section, if the commissioner determines that the
contract is in the best interest of the state, the
commissioner shall submit the contract to the
governor.
(c) The commissioner's final findings and
determination under (a) of this section are final
agency decisions.
[Sec. 5]. Legislative authorization.
The governor may transmit a contract developed under
AS 38.05.020(b)(11) - (12) to the legislature together
with a request for authorization to execute the
contract. A contract developed under
AS 38.05.020(b)(11) - (12) is not binding upon or
enforceable against the state or other parties to the
contract unless the governor is authorized to execute
the contract by law. The state and the other parties
to the contract may execute the contract within 60
days after the effective date of the law authorizing
the contract.
6:54:08 PM
CO-CHAIR SADDLER asked who Ms. Weissler worked for during her
time with the legislature.
MS. WEISSLER said she worked as a legislative staffer for
Representatives Sam Cotton, Ethan Berkowitz, and Beth Kerttula,
and Senator Hollis French.
6:54:41 PM
RACHAEL PETRO, President/CEO, Alaska Chamber of Commerce
(Chamber), informed the committee the Chamber represents
hundreds of businesses, manufacturers, and local chambers
throughout Alaska. Ms. Petro said the execution of the HOA
between Alaska businesses and the state was welcome news and the
Chamber supports the principles found in the HOA and CSSB
138(FIN) am as follows: state participation in an Alaska gas
project; the state taking a percentage of gas share and tax
share; state participation at the same percentage as the gas
share; establishing a clear process to move the project forward,
including the tools necessary to develop confidential agreements
and contracts; and a public process with legislative oversight,
review, and approval. Also, the Chamber believes the best way
for Alaska to develop its resources is for the state to
participate as a business partner. Members of the Chamber are
aware that to succeed the state must provide a competitive,
predictable, and stable business environment. In summary, the
Chamber supports the aforementioned principles and the
committee's due diligence on the proposed legislation.
6:56:47 PM
REPRESENTATIVE SEATON asked whether the Chamber's perspective is
that previous state public-private partnerships such as the
Barley Project, the Kodiak Launch Complex, and the Knik Arm
Bridge and Toll Authority were beneficial to the state, and if
this model is used similar issues may arise with the Alaska LNG
Project.
MS. PETRO said that Alaska does not have a good track record;
however, the partners in the HOA are very successful businesses
and that is the basis of the Chamber's support of the principles
in the HOA.
REPRESENTATIVE SEATON asked if the problems are not caused by "a
mix of the regulator and the sovereign into private business,"
were the problems caused by the people involved. Representative
Seaton remarked:
We want to promote business in this state, and I'm
just trying to get a feeling whether that is the most
successful model that we've been using, and why it
would be so different if we did it this time.
6:58:53 PM
MS. PETRO opined this project is significantly different than
anything the state has done. The principles of a gated process
are distinct and allow for opportunities for the state [to
review the project]. In addition, the businesses involved "do
not take risks lightly." Ms. Petro said the state has a
responsibility to develop its resources and act like a business
partner. She acknowledged that Chamber members have expressed
concern about inappropriate levels of state involvement in past
projects.
7:00:23 PM
REPRESENTATIVE TARR inquired as to why the Chamber is supporting
the principles of the bill but not the version under discussion.
MS. PETRO explained that the Chamber supports the HOA document,
but has not fully reviewed the bill.
REPRESENTATIVE TARR stated that one of the more contentious
issues in the bill is the payment in lieu of taxes (PILT) that
will go to local communities. Because the Chamber represents
local chambers, and local chambers may take different positions
on this or other issues, she asked for the Chamber's role in
resolving conflicts.
MS. PETRO acknowledged [local issues] are one of the reasons it
is not easy for the Chamber to come to an agreement, as each
local member has a seat on its board of directors. The Chamber
agrees on many "high-level principles and positions." She
encouraged the committee to continue its deliberation with the
municipalities on this issue, adding that the Chamber has not
discussed this.
REPRESENTATIVE TARR inquired as to whether the Chamber would
discuss this issue before the legislature votes on the bill.
MS. PETRO said probably not.
REPRESENTATIVE KAWASAKI asked whether the Chamber supports the
MOU with TransCanada.
MS. PETRO said the Chamber has not had a discussion on that
portion of the bill.
7:03:51 PM
REPRESENTATIVE KAWASAKI noted that the committee has heard
testimony from smaller pipeline producers that later access to a
"mainline" such as TAPS is sometimes difficult, thus the
legislature decided to include expansion principles to allow
small producers to access the pipeline through rolled-in tariff
rates. He asked whether the Chamber would support the expansion
principles in the proposed legislation.
MS. PETRO advised that is not something the Chamber has
discussed.
7:05:16 PM
DON ETHERIDGE, Lobbyist, Alaska AFL-CIO State Federation,
expressed the Alaska AFL-CIO State Federation's support of the
legislation although there will be changes and corrections. His
organization supports the idea of building a gas pipeline and
getting gas to Alaskans, especially the local hire language and
the training funds provisions included in the HOA. The problem
during the construction of TAPS was that [Alaska] did not have
enough trained workers; however, organized labor now has
training schools preparing workers for gas pipeline and other
pipeline work. He said that as a result of local hire on this
project, during construction money will come back to the state
through local people who will spend their wages at home.
REPRESENTATIVE KAWASAKI recalled during testimony on AGIA there
was intense debate related to project labor agreements (PLAs)
until the substantive portion of AGIA required a commitment to a
PLA. Currently, language in the proposed bill, the HOA, and the
MOU is vague although the Senate version of the bill includes a
letter of intent, which does not carry the full weight of
legislation. He asked whether Mr. Etheridge would "like to see
[that language] tightened."
MR. ETHERIDGE remarked:
We have reached an agreement with the folks on the
Senate side that we wouldn't mess with any of that
language if we were able to keep our language that's
in there now ... so that's our commitment, is to leave
it alone. ... We'd love to see it tightened, but
we're not going to work towards that, we're not
advocating for it ....
7:08:56 PM
CO-CHAIR FEIGE asked whether there is currently enough work for
those who have been trained until pipeline construction begins;
ideally, Alaskans will have sufficient experience to become
supervisors on the project.
MR. ETHERIDGE advised that jobs are provided for those in the
training programs; in fact, with the present level of activity
on the North Slope, the training programs have expanded. Even
though some of the trained workers have left to work in North
Dakota, they are gaining experience.
REPRESENTATIVE TARR confirmed that the language Mr. Etheridge
referenced in the HOA is related to local hire.
MR. ETHERIDGE said that is right, and the letter of intent
attached to the bill.
7:11:13 PM
PAUL GROSSI, Lobbyist, Alaska State Pipe Trades UA Local 375;
Ironworker Management Progressive Action Cooperative, informed
the committee that the organizations he represents support the
bill - to the extent that it will build the pipeline - for four
basic reasons: the jobs on the pipeline will be for Alaskans to
the full extent of the law through a PLA; there will be in-state
access to gas; there will be gas for commercial and industrial
development; and there will be adequate state revenue to
continue state-funded programs and for capital projects.
Because this is a complicated process, those he represents are
dependent upon legislators to ensure that the aforementioned
provisions are included in the bill.
REPRESENTATIVE TARR observed that access to gas for Alaskans has
been an issue and that the provisions in the bill currently
under review intend for in-state gas to be available at a
comparable cost; however, there is concern that in-state gas may
be at a higher cost. If that is the case, she asked, "Do you
think that your position would be the same?"
MR. GROSSI was unsure whether Alaska will always have the low
cost gas that it has now, and the future price of gas is
unknown. He restated that it is the committee's responsibility
to ensure that Alaskans have gas at a "reasonable" cost.
7:15:20 PM
CO-CHAIR FEIGE, after ascertaining that no one else wished to
testify, closed public testimony on CSSB 138(FIN) am.
[CSSB 138(FIN) am was held over.]
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