Legislature(2013 - 2014)BARNES 124
04/02/2014 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
1:05:04 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, in relation to CSSB 138(FIN) am, invited
representatives of the Department of Transportation & Public
Facilities (DOT&PF) to make a presentation on improvements to
infrastructure that have been made - or need to be made - prior
to the construction of a gas pipeline.
1:05:35 PM
JEFF OTTESON, Director, Division of Program Development
(DOT&PF), informed the committee that during former Governor
Frank Murkowski's administration [2002-2006], focus was on
TransCanada's large-diameter gas pipeline project through
Canada, which was very different from the current project under
discussion. The biggest difference was the route of the
pipeline, which followed the Richardson and Alaska Highways,
utilizing the Haines Highway as the main port of entry for pipe
and materials. Elements of the project were also compared with
the construction of the Trans-Alaska Pipeline System (TAPS).
Prior to the construction of TAPS, the state's population and
vehicle traffic were one-third that of today; in fact, highway
fatalities doubled during the construction of TAPS due to the
increase in truck traffic. Another difference is that modules
are now used for many activities on the North Slope, and it is
expected that modules will be used for construction of the gas
treatment plant (GTP) and other elements of the liquefied
natural gas (LNG) pipeline. Modules weigh about 400,000 pounds
and when one is underway becomes "a moving traffic jam." The
third difference is that the gas pipeline will be buried rather
than built in the elevated position of the oil pipeline, and
thus will require many more truckloads of soil and rock for
construction. Finally, during the construction of TAPS, the
North Slope Haul Road [now known as the Dalton Highway] was
closed to the public.
1:09:26 PM
MR. OTTESON continued to explain that although the previous gas
pipeline project was shelved, DOT&PF recognized the importance
of upgrading the Dalton Highway and other related routes with
new bridges and passing lanes in order to prepare for
construction of the gas pipeline. Now, however, there are two
proposed gas pipeline projects: one large-diameter pipeline and
one medium-diameter pipeline, both of which follow all-Alaska
routes so that the roles of the Richardson, Alaska, and Haines
Highways and their ports become insignificant, and the ports of
Southcentral, Seward, Whittier, Anchorage, and Port MacKenzie
become prominent. The Alaska Railroad Corporation, (ARRC) also
gains importance as it follows the Parks Highway corridor and
could be utilized to carry pipe and earth materials. During the
construction season of 2014, eight or nine projects will be
underway on the Parks Highway in order to prepare for the
pipeline project. Mr. Otteson said the construction projects
can be viewed at www.AlaskaNavigator.org, Parks Highway
Construction Overview 2014. The Parks Highway projects address
congestion, safety, and pavement condition, separates the
highway from the railroad at one location, and will build many
new passing lanes to help separate slow-moving traffic from
higher-speed traffic. The ability of DOT&PF to react and
respond to needs in the highway system has been aided by
flexible federal highway funding; however, the state will need
to fund upgrades to airports, the railroad, and ports. In
addition, highway maintenance and operation (M&O) facilities are
not eligible for federal funds.
MR. OTTESON advised there is increased air traffic at the
Deadhorse Airport resulting from Senate Bill 21 [passed in the
28th Alaska State Legislature]. He noted that DOT&PF has not
learned much about the logistical plans of the Alaska pipeline
proposals.
1:12:34 PM
DAVE BLOOM, Gasline Liaison, Division of Statewide Design &
Engineering Services (DOT&PF), informed the committee DOT&PF has
had very little involvement or contact with the Alaska LNG
Project sponsors. On February 27, 2014, he attended a right-of-
way planning meeting which was a broad overview of the project,
and there have been two meetings on the permitting needs of the
project; however, further meetings have not been scheduled. He
said DOT&PF intends a commonsense approach to addressing the
impacts of the pipeline project on the highway system, by
exploring access and egress points, safety improvements, turn
lanes, the use of bridges, the use of material sites on the
Dalton Highway, and the level of service needed at airports
along the Dalton Highway. Mr. Bloom cautioned that all of these
logistics will need to be better defined. A DOT&PF consultant
is performing a pavement evaluation and analysis of the Parks
Highway from Willow to Fairbanks, a draft of which is due April
30, 2014. He advised that before DOT&PF can quantify the
impacts of pipeline construction, many factors have yet to be
determined such as the type of haul vehicle, port of entry,
alignment, and the material needs.
1:16:20 PM
REPRESENTATIVE TARR recalled DOT&PF estimated $2 billion of
improvements were needed for the previous pipeline proposal.
She asked whether the state should expect that level of costs
for the current proposal.
MR. BLOOM said he did not expect another estimate of $2 billion
because the improvements to the Parks Highway have been ongoing,
and many of the projects listed in 2008 have been completed.
Additionally, the Haines, Alaska, and Richardson Highways are no
longer relevant to the project. Also, many of the ongoing
projects on the Dalton and Parks Highways will be completed
under the State Transportation Improvement Program (STIP).
REPRESENTATIVE TARR expressed her hope that the upgrades have
benefits outside of the project, and are generally needed. She
questioned whether the state should assume all of the costs for
the transportation system upgrades for the project, in addition
to ongoing maintenance. Representative Tarr asked if the
upgrades will be funded by the state's annual DOT&PF maintenance
request and if so, the impact on other projects.
MR. OTTESON responded that many of the upgrades are for the good
of commerce and the traveling public. This is also true for the
projects that have already been completed such as rebuilding the
bridge over the Tanana River near Tok. He opined these projects
are not "something we're doing that takes away from the state.
It may change the timing a little bit, but it ultimately ...
it's all for the good of all."
1:20:24 PM
CO-CHAIR SADDLER inquired as to whether there are any
transportation needs specific to the pipeline but that are not
generally beneficial to the traveling public.
MR. OTTESON acknowledged that the movement of modules may
require turnouts so that traffic can pass; in addition, turning
and acceleration lanes will be needed near materials storage
sites and at employee camps. However, under the previous
proposal, it was well understood by the oil and gas companies
and TransCanada that they would have pay those costs. He said:
When an activity is really directed at the pipeline
alone, I think that's kind of where the line gets
drawn as to whose ledger it goes to be paid by.
CO-CHAIR SADDLER asked whether it is anticipated that special
accommodations, such as acceleration lanes and turn-outs, would
be funded by the project.
MR. OTTESON stated DOT&PF has not negotiated these costs, but
based upon precedent, "I would expect that would be our starting
position."
CO-CHAIR FEIGE turned to the current operating capacity of the
state's ports and their current percentage of total capacity.
The state's major port is Anchorage, and he asked whether there
is spare capacity in the port system to accept extra traffic
because of pipeline construction materials, and if there are
plans for expansion at any of the state's ports in addition to
the work underway at Port MacKenzie and the Port of Anchorage.
MR. OTTESON recalled under the previous proposal the principal
port of entry would have been Haines, where a large shipment of
pipe was planned every two and one-half weeks with 30-40 trucks
per day leaving Haines. In Southcentral there are four ports,
all of which will be connected to the railroad after the Port
MacKenzie extension is completed.
1:23:53 PM
REPRESENTATIVE KAWASAKI asked how DOT&PF handles municipally-
owned ports; for example, will the municipalities perform due
diligence for the pipeline project, or will DOT&PF negotiate for
the municipalities.
MR. OTTESON explained for the previous project there was a
substantial joint effort with the municipalities, ARRC, the
ports, and DOT&PF. This was in place about eight or nine years
ago, and at that time the department had been provided with a
logistics plan prepared by the industry. If necessary, DOT&PF
will organize similar opportunities to share information and
identify needs.
REPRESENTATIVE KAWASAKI observed that the logistics planning is
"far behind" and asked whether that causes concern for DOT&PF.
MR. OTTESON assured the committee that the public highway side
is "well along," but other needs, such as aviation, are unknown
and without funding. For example, the airports along the Dalton
Highway are not for general public use. Additionally, the
federal government will not participate in the cost for
improvements to ARRC and the ports. He cautioned that the state
or industry will have to provide [financial] resources for these
needs.
REPRESENTATIVE KAWASAKI asked whether the state provided general
funds (GF) for the improvements to the Deadhorse Airport.
MR. OTTESON said yes. A combination of state and federal funds
has been requested; the state provided funds primarily to build
additional employee housing for the fly-in camp.
1:26:56 PM
REPRESENTATIVE KAWASAKI asked whether future M&O costs are
included in the construction of new buildings.
MR. OTTESON responded:
There's a pretty good effort to try to identify those
costs. I can't tell you there's a pretty good effort
to actually attach additional dollars to those costs
when they come onto our ledger. It's just the budget
process.
REPRESENTATIVE SEATON assumed most of the facilities will be on
the North Slope. He inquired as to whether any facilities will
be built along the pipeline route that the state might want to
maintain, rather than require them to be removed.
MR. OTTESON related that some maintenance stations are
inefficient due to their age. Also needed is a new facility on
the Parks Highway to replace one that was removed.
1:29:24 PM
REPRESENTATIVE SEATON observed that industry may build private
airports to support the project, and asked whether DOT&PF may
negotiate to assume ownership. Especially in the North Slope
area, there are roads slated for removal and rehabilitation;
however, there are now municipalities there and perhaps the
state should not require roads to be removed. He urged DOT&PF
to plan for the future use of industrial facilities.
MR. OTTESON agreed. In fact, an airport in the Brooks Range was
funded by the state and industry to avoid the 20-year obligation
for M&O that attaches to federal funding.
CO-CHAIR SADDLER requested more details on ARRC's possible
participation in the project.
MR. OTTESON stated that DOT&PF does not have enough information
on the logistics of the project, except to say that the
department has undertaken a statewide rail plan. In further
response, he said the draft of the plan is overdue.
CO-CHAIR SADDLER then asked whether ARRC's bonding authorities
for industrial development could be used in any way to support
the project.
MR. OTTESON advised that the railroad can carry so much more
weight without damage to the public highway system - and at a
lower cost - it is to the industry's advantage to utilize the
railroad system for longer distances.
CO-CHAIR SADDLER noted rail and truck transportation both have
advantages.
MR. OTTESON indicated his agreement.
1:33:19 PM
REPRESENTATIVE TARR related that the Heads of Agreement (HOA)
indicates the state will assume the financial responsibility for
additional infrastructure upgrades. She recommended that the
intent should be clear, suggesting that the cost of upgrades
should be split based on the proportion of an entity's
involvement, and asked whether DOT&PF would be able to determine
the proportion of the upgrade that is for the state's benefit,
and the proportion that is for another party's benefit.
MR. OTTESON advised that DOT&PF routinely apportions costs for
access points into shopping malls to determine who is
responsible for the costs of traffic lights, turn lanes, and
other features; in fact, this is an example of apportioned cost-
sharing between the state and industry, thus the same principles
would apply to the pipeline.
REPRESENTATIVE TARR pointed out the HOA directs that the state
will fund the cost of the upgrades.
CO-CHAIR SADDLER said there is proposed legislation creating a
transportation infrastructure fund. He asked how such a fund
would help or hinder the funding for the pipeline project.
MR. OTTESON expressed his understanding that the transportation
infrastructure fund establishes a scoring process with criteria.
To the extent that the criterion includes an economic
development value, the project would score highly.
CO-CHAIR FEIGE invited the committee to address questions to the
commissioners of the Department of Revenue (DOR) and the
Department of Natural Resources (DNR).
1:38:08 PM
REPRESENTATIVE HAWKER directed attention to the bill beginning
at Section 10 which read:
* Sec. 10. AS 31.25.120 is amended to 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 asked:
How does the Department of Law read and how do they
understand what's being accomplished with the language
in this bill in Section 10 on page 9.
1:38:36 PM
SUSAN POLLARD, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division (Juneau), Department of Law (DOL), asked
whether Representative Hawker was referring to deleted language
of the bill beginning on page 9, line 17 which read:
[A SUBSIDIARY CORPORATION CREATED UNDER THIS SECTION
MAY BE INCORPORATED UNDER AS 10.20.146 - 10.20.166.
THE]
REPRESENTATIVE HAWKER said yes.
MS. POLLARD explained the reason for that change is that DOL had
interpreted the deleted language as limiting the Alaska Gasline
Development Corporation (AGDC) to only being able to form
subsidiaries under Alaska Statutes - Title 10. The purpose of
the change is to make clear that AGDC has existing authority
under AS 31.25.120, and the change is intended to expand the
subsidiary-creating power so that AGDC can choose to structure
any type of subsidiary.
REPRESENTATIVE SEATON asked the commissioners if the
subsidiaries have been eliminated, and whether the language is
still needed.
1:41:19 PM
MIKE PAWLOWSKI, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), stated that the power granted to
AGDC to create subsidiaries is an important tool so it can carry
out its business purposes. In CSSB 138(FIN) am, AGDC is given
the power to use any corporate mechanism through the powers
granted in House Bill 4 [passed in the 28th Alaska State
Legislature] to carry out its tasks. He opined this power is
necessary because the ultimate role of AGDC may entail not only
the LNG plant, but also in separate subsidiaries utilized for
other purposes such as operating gathering lines, and AGDC needs
the maximum flexibility to carry out its purposes for the state.
REPRESENTATIVE SEATON inquired as to whether the state is
required to approve the subsidiaries. He posed a scenario in
which subsidiaries are formed using a structure that could
inadvertently threaten the state's tax-free status.
MR. PAWLOWSKI answered that the nature of a specific subsidiary
and the circumstances of its tax status will depend upon its
structure and its development. The relationship between state
agencies and AGDC is similar to that of TransCanada Pipelines,
Limited (TC), in that AGDC will be providing services to DNR and
DOR - providing liquefaction services for the gas - and the
contract between DNR and AGDC will come back to the legislature
for approval. At that time there will be a better understanding
of the tax issues with AGDC; however, he pointed out that AGDC
has a board of directors, staff, and legal counsel for its
proper management.
1:45:05 PM
REPRESENTATIVE SEATON asked that the departments advise the
legislature if further provisions are needed on this topic.
REPRESENTATIVE HAWKER referred to previous testimony regarding
unclear language in the Memorandum of Understanding (MOU) and
asked for comments from the administration on the [unidentified]
language.
1:46:50 PM
JOE BALASH, Commissioner, Department of Natural Resources,
informed the committee he contacted Mr. Tony Palmer, Vice
President, TC, to confirm the intent of the MOU. He directed
attention to a document found in the committee packet entitled,
"Preliminary Agreements to be Negotiated Should Enabling
Legislation Pass," which outlines the various agreements and
actions that will take place following the passage of enabling
legislation. The Alaska Gasline Inducement Act (AGIA) [passed
in the 25th Alaska State Legislature] termination notice is
expected to take place in the second quarter of 2014 shortly
after the execution of the Precedent Agreement and the Equity
Option Agreements. Commissioner Balash said Mr. Palmer
concurred [with the foregoing statement], and he and Mr. Palmer
further discussed drafting a memorandum to the committee "on
this question."
REPRESENTATIVE HAWKER appreciated the data points found in the
document provided to the committee. However, the document
contains who, what, where and when, but no interpretive
information as to what each event is or clarification on
"exactly where you're headed with that MOU."
COMMISSIONER BALASH agreed.
CO-CHAIR SADDLER also appreciated the information contained in
the aforementioned document. He recalled previous testimony by
Mr. Roger Marks [petroleum economist, contract consultant to
Legislative Budget and Audit Committee] related to the extent of
regulatory enforcement of the project either by the Federal
Energy Regulatory Commission (FERC) or by the Regulatory
Commission of Alaska (RCA). He questioned whether regulatory
enforcement by FERC or RCA applies to the project, or if there
is the right balance with regulation by contract.
1:49:53 PM
COMMISSIONER BALASH explained that the regulation of the oil
industry has been relied upon by the state for years to ensure
that the tariffs charged for the transport of oil are accounted
for, and charged appropriately to protect the state's netback
values. He characterized the history of that regulation as
"mixed." Regulation is not necessarily an answer; however,
because the state's focus turned from an overland project to an
LNG project, the lack of regulation on the liquefaction
facility, the terminal, access, and rates became an issue of
concern for the administration. If the liquefaction facility is
the major access point to markets outside of the state,
regulation on pipeline terms will not be helpful. Therefore,
there was an effort to address this topic in the HOA, Appendix A
Pro-Expansion Principles. Regarding the pipeline itself, the
state "ha[s] no decision-making on" the pipeline due to
questions of jurisdiction; for example, the pipeline is integral
to and part of the liquefaction facility, and the liquefaction
facility is not subject to regulation. If the entire project is
regulated pursuant to [Section 3 of the Natural Gas Act, 15
U.S.C. § 717b (NGA Section 3)] the state needs to focus on
access, terms, and the provisions in the HOA, ARTICLE 6:
REGULATORY FRAMEWORK, ACCESS, and on key terms in the MOU with
TC, related to the provision of third-party services. He
observed that the state has committed - with the producers -
under NGA Section 3 to ascertain whether NGA Section 3 provides
sufficient assurance, and if so, the question remains whether
FERC agrees that "they" have NGA Section 3 authority on the
pipeline.
CO-CHAIR SADDLER requested an explanation and the implications
of NGA Section 3.
1:54:24 PM
COMMISSIONER BALASH advised NGA is the federal body of law
governing natural gas facilities, including pipelines and
liquefaction terminals. Of NGA, Section 7 governs interstate
pipelines, and Section 3 governs liquefaction facilities. A key
difference between the two sections is that Section 7 regulates
pipelines for environmental, health, and safety purposes, and
also regarding access to the pipeline and rates. Section 3 does
not include economic regulation, leaving a question of
jurisdiction, which will be decided by FERC. The state seeks to
establish fundamental principles to apply to the pipeline should
FERC decide that the regulatory framework will be Section 3.
MR. PAWLOWSKI, in response to Co-Chair Saddler, directed
attention to the HOA, ARTICLE 6.4 that included a sentence which
read [original punctuation provided]:
Each Party must be satisfied with commercial terms and
regulatory framework prior to the execution of the
FEED Agreement for the Alaska LNG Project.
MR. PAWLOWSKI informed the committee that the parties to the
agreement include the state, AGDC, the producers, and TC, and
the aforementioned sentence indicates that jurisdictional
clarifications must be settled prior to the FEED stage scheduled
for early 2016.
1:57:45 PM
COMMISSIONER BALASH, in response to Co-Chair Saddler, said the
process to establish jurisdiction will begin with a series of
informal conversations with FERC staff; subsequently, there may
be a request for a petition for declaratory order (PDO) that
would be formally filed with FERC, and responded to during the
pre-FEED phase.
REPRESENTATIVE TARR expressed her understanding that the
pipeline would be under RCA jurisdiction and only jurisdiction
over the liquefaction facility is in question.
COMMISSIONER BALASH pointed out that FERC jurisdiction would
preempt state jurisdiction, thus if Section 3 governs the
pipeline, the outcome is unclear at this time. Again, the pre-
FEED phase is the time to clarify the process.
2:00:20 PM
REPRESENTATIVE HAWKER directed attention to section 49 of the
bill which read:
* Sec. 49. AS 43.55.160(g) is amended to read:
(g) On and after January 1, 2014, in addition to the
reduction under (f) of this section, in the
calculation of an annual production tax value of a
producer under (a)(1)(A) or (h)(1) [(a)(1)] of this
section, the gross value at the point of production of
oil or gas produced from a lease or property north of
68 degrees North latitude that does not contain a
lease that was within a unit on January 1, 2003, is
reduced by 10 percent if the oil or gas is produced
from a unit made up solely of leases that have a
royalty share of more than 12.5 percent in amount or
value of the production removed or sold from the lease
as determined under AS 38.05.180(f). This subsection
does not apply if the royalty obligation for one or
more of the leases in the unit has been reduced to
12.5 percent or less under AS 38.05.180(j) for all or
part of the calendar year for which the annual
production tax value is calculated. This subsection
does not apply to gas produced before 2022 that is
used in the state or to gas produced on and after
January 1, 2022. A reduction under this subsection may
not reduce the gross value at the point of production
below zero.
REPRESENTATIVE HAWKER observed this is the part of the bill
recognizing conforming changes to the gas tax regime. However,
adding "north of 68 degrees North latitude" within section 49 is
a substantive change, and he asked for clarification.
2:01:31 PM
MR. PAWLOWSKI directed attention to section 48 of the bill which
read:
Sec. 48. AS 43.55.160(f) is amended to read:
(f) On and after January 1, 2014, in the calculation
of an annual production tax value of a producer under
(a)(1)(A) or (h)(1) [(a)(1)] of this section, the
gross value at the point of production of oil or gas
produced from a lease or property north of 68degrees
North latitude meeting one or more of the following
criteria is reduced by 20percent: (1) the oil or gas
is produced from a lease or property that does not
contain a lease that was within a unit on January 1,
2003; (2) the oil or gas is produced from a
participating area established after December 31,
2011, that is within a unit formed under AS
38.05.180(p) before January 1, 2003, if the
participating area does not contain a reservoir that
had previously been in a participating area
established before December 31, 2011; (3) the oil or
gas is produced from acreage that was added to an
existing participating area by the Department of
Natural Resources on and after January 1, 2014, and
the producer demonstrates to the department that the
volume of oil or gas produced is from acreage added to
an existing participating area. This subsection does
not apply to gas produced before 2022 that is used in
the state or to gas produced on and after January 1,
2022. A reduction under this subsection may not reduce
the gross value at the point of production below zero.
In this subsection, "participating area" means a
reservoir or portion of a reservoir producing or
contributing to production as approved by the
Department of Natural Resources.
MR. PAWLOWSKI explained the sequence of statutes enacted in
Senate Bill 21 begins in section 48. The primary intent in
amending these sections is to remove the gross value reduction -
enabled in Senate Bill 21 - from gas produced after 1/1/22 which
is specified in sections 49 and 50. The relationship between
the gross value reductions in section 49, subsection (g) refers
back to subsection (f), thus the qualification [north of 68
degrees North latitude] is not a substantive change, but
provides clarity to taxpayers.
REPRESENTATIVE HAWKER remarked:
In the (f), I already had the geographic isolation,
when I look at that [subsection] (g), it prefaced
what, in addition to the reduction under (f). I
understand is really we're just making very, very
certain that we were talking about applying these
provisions to the same geographical areas of the
state. ... In that this second call it ring-fencing of
that area north of 68 was not in or discussed in the
development of the original S[B] 21 language, does it
have any material change to industry or the way
regulations have been developed?
2:03:44 PM
MR. PAWLOWSKI answered that the regulations as developed, and
the implementation of Senate Bill 21, are unchanged.
REPRESENTATIVE HAWKER restated his question as to whether there
is a material change to the application of tax provisions to
industry.
MR. PAWLOWSKI said to his knowledge, no.
REPRESENTATIVE SEATON recalled testimony on April 1, 2014, from
several mayors across the state - based on their previous
experience - that there is the possibility that proposed
property tax changes could be implemented even though the
project fails. He asked if there is a way to avoid a similar
situation.
2:05:17 PM
MR. PAWLOWSKI assured the committee that if a project does not
get built the appropriate property tax statutes are irrelevant.
In addition, he referred to the Alaska State Constitution,
Article 9 ~ Finance and Taxation, section 4 which read in part
[original punctuation provided]:
The real and personal property of the State or its
political subdivisions shall be exempt from taxation
under conditions and exceptions which may be provided
by law.
MR. PAWLOWSKI explained that there must be a statutory change to
enable the type of payment in lieu of taxes (PILT) and impact
payment arrangements that are highlighted in the document
provided in the committee packet. On that document it is shown
that Impact Payment & PILT Proposal/Recommendations require
consultations with communities, need to be authorized by the
fourth quarter of 2014, and require legislative statutory
approval. The timing of this process indicates the importance
of engaging with advisory groups now, and bringing legislation
back before the legislature to further contractual development,
although the effective dates depend on the future statutory
change, and how the contracts are written. Conceptually, the
effective date for production tax after 1/1/22, having a future
application of the tax is open for discussion.
REPRESENTATIVE SEATON noted the bill includes implementing
language on what can be negotiated at this point in time. He
asked whether there is a disadvantage to the state of having a
provision that says an agreed-upon renegotiation or property tax
negotiation will only apply if the project proceeds, due to the
concern that the negotiations on this project may include other
portions of oil and gas property. A provision such as this
would ensure that unless the project advances to completion, the
property tax relationship will not change.
2:08:49 PM
MR. PAWLOWSKI apologized for misunderstanding the premise of
Representative Seaton's question. He further explained that
property tax is applicable to the Alaska LNG Project. Mr.
Pawlowski continued:
The question of whether changes to the property tax
would be recommended for existing and other
infrastructure is again, going back to the
constitution, a question of statutory changes that are
brought back out of the recommendations of this impact
advisory group, for consideration by the legislature.
I know there are other pieces of legislation in this
building being considered today that deal with the
property tax. How those issues get discussed are
relevant, and I would worry about placing limits on
something that needs a statutory change even prior to
the contracts being fully fleshed out or executed, so
I guess the concern of expanding the development of
these agreements beyond the scope of the AKLNG project
would again ... depend on a statutory change that this
legislature would consider before they even consider a
contract.
REPRESENTATIVE SEATON restated his concern about negotiating a
"big block" of terms all at one time, and subsequently modifying
certain terms later. He suggested having the terms not
applicable unless the project is successful, instead of
returning to the legislature for a statutory change.
2:11:09 PM
CO-CHAIR SADDLER asked what calculations the administration has
made to justify its decision that it is in the state's best
interest to include TC in the project, rather than seeking
alternative financing arrangements or acting alone. He asked
what assurance can be given to Alaskans that this structure will
produce the best deal.
COMMISSIONER BALASH acknowledged that multiple factors are
weighed in a project as complicated as this. In its
calculations and analyses, the administration considered the
impact to the state's revenues, its debt capacity, its ultimate
ability to assume a position in the project, and cash flow
analyses such as present value, opportunity/cost, and
undiscounted cash, as has been presented to the committee by the
administration's consultants. He opined the question of "best"
comes down to the bidding process when further comparisons will
be made. Clearly, at the point that bids are made public and
the results of bids are made public, the commercial behavior of
the companies disclosing their bids changes; in fact, there is
an opportunity cost and impact cost to transparency after the
loss of confidentiality. The administration worked hard to
achieve advantageous terms - especially with regard to the
capital structure - with TC when compared to other recent
pipeline projects in North America. He pointed out the
alternative to having TC as a partner is to proceed alone, or
find another partner that meets the minimum qualification (MQ)
standard for the project, of which there are few. He concluded
that it is in the interest of the state to pursue a partnership
with TC.
2:17:17 PM
REPRESENTATIVE OLSON referred to a TC document that indicated TC
has undertaken one megaproject - defined as one in excess of $1
billion - the Keystone Pipeline System Phases l and ll. He
assumed that of the producers on the North Slope, ExxonMobil
Pipeline (XOM) has probably built pipelines at a cost in excess
of $6 billion, and BP and ConocoPhillips have built projects
larger than the Alaska LNG Project. Representative Olson
suggested that the partners have the capability to complete this
project.
MR. PAWLOWSKI stated that from DOR's perspective, there are
encouraging facets to all of the parties in the project. The
level of expertise ExxonMobil, BP, ConocoPhillips, and TC offer
is the reason the state is also participating. In addition, TC
has expertise in project management, and the business interest
of the state has directly aligned with TC in seeking the maximum
throughput from the North Slope. The department values the
expertise of all of the companies involved.
REPRESENTATIVE OLSON offered his opinion that the main thing TC
brings to the project is AGIA.
2:20:25 PM
MR. PAWLOWSKI said that is a fair point considering the
unreimbursed work, support for the work done between Livengood
and the North Slope, and the expertise and data on the gas
treatment plant (GTP) and pipe that is directly applicable to
the project, in addition to TC's commitments in the MOU to exit
from AGIA and move to a commercial relationship.
REPRESENTATIVE HAWKER directed attention to section 31,
paragraph (17) of the bill which read:
(17) direct the disposition of revenue received from
gas delivered to the state under AS 43.55.014(b) by
entering into agreements with the commissioner of
natural resources related to the management of the
custody and disposition of gas delivered to the state
under AS 43.55.014(b).
REPRESENTATIVE HAWKER said this amendment adds another duty to
those of the commissioner of DNR: to direct the disposition of
revenue received from gas delivered to the state, basically in
the "tax as gas, gas as tax provisions." He suggested
strengthening the state's position by directing the disposition
into an appropriate fund of the state.
MR. PAWLOWSKI agreed to review the language.
REPRESENTATIVE TARR recalled that Mr. Marks suggested the state
is "using [TC] as a bank," and traditional financing may produce
better terms. She asked whether the administration considered
simply contracting with TC on its portion of the project rather
than entering into a partnership.
2:23:56 PM
MR. PAWLOWSKI responded that the state's participation is in one
portion of the pipeline, and all of the partners together will
decide how the project will be built and managed. The state
could hire TC as a consultant but unlike TC, consultants are not
investing for equity. Furthermore, a bank would not provide the
state with expertise on the location of compressor stations,
logistics, gas throughput, third-party participation, and all of
the nuances of an LNG pipeline. He reminded the committee that
the state is wholly aligned with the producers on wanting to
achieve the highest possible price for its LNG in Asia, and is
also aligned with TC on wanting maximum production from the
North Slope. The interest that TC holds in the project is not
possible with any bank, and is one of the reasons DNR considers
TC a partner and a co-investor.
COMMISSIONER BALASH supported Mr. Pawlowski's comments, saying
the characterization of TC as a bank is silly. Although the
terms offered by TC could be bested or matched by other
institutions, the service and expertise provided by TC benefits
the state. Many levels of participation were considered during
negotiations; however, TC needs a certain level of return in
order to allocate personnel and provide expertise. Regarding
whether the state could purchase engineering services and
consultancy, he said those services do not come cheaply and are
limited in depth.
2:30:29 PM
REPRESENTATIVE HAWKER asked Commissioner Balash to further
define AGDC's role - as stated in the HOA, the MOU and the
legislation - in the natural gas pipeline portion of the
midstream.
COMMISSIONER BALASH explained over the next two years during the
pre-FEED phase, AGDC will be focused on the Alaska Stand Alone
Pipeline (ASAP) project; in fact, that role is specifically
described in the HOA. In the longer term, AGCD would be the
state government agency assigned through a separate memorandum
of understanding to exercise the equity option with TC and hold
40 percent interest. Furthermore, in the event TC or the state
terminates the Precedent Agreement, the equity stake in the
midstream most likely would be transferred to AGDC.
MR. PAWLOWSKI directed attention to section 1, paragraph (1) of
the bill which read:
Sec. 31.25.005. Purpose. The corporation shall, for
the benefit of the state, to the fullest extent
possible,
(1) develop and have primary responsibility for
developing natural gas pipelines, an Alaska liquefied
natural gas project, and other transportation
mechanisms to deliver natural gas in-state for the
maximum benefit of the people of the state;
MR. PAWLOWSKI advised the Senate made the above referenced
amendment to put AGDC in a position "to receive the interest in
the midstream."
2:34:19 PM
REPRESENTATIVE HAWKER stated he was hearing a conflict between
statute and intent: Section 1 clearly places AGDC in a
participatory position in the development of the Alaska LNG
Project and other pipelines, and Commissioner Balash related the
intent that AGDC would work on ASAP, yet execute the equity
option agreement and potentially hold 40 percent interest. He
questioned how AGDC could receive interest on an informed basis
if it is not involved in the underlying details of the process.
COMMISSIONER BALASH clarified that the equity option agreement
will be signed by DNR and DOR and then assigned to AGDC, all of
which the AGDC board of directors is aware. Regarding
agreements to which AGDC is a direct party, AGDC has been
involved in multiple meetings and discussions. He said:
With regard to the specific agreements between the
agencies and TransCanada, there has been a very
careful bit of consideration given to the authority
that AGDC has today versus what they will have going
forward. And so the law of the land today is that
AGDC is ... looking at an in-state pipeline only [and
is] not involved in a big export project. And so
there's been a very delicate set of steps that have
been taken over the course of the last six, seven
months, and the development of this legislation.
2:37:55 PM
REPRESENTATIVE HAWKER then turned attention to [Exhibit B to
Memorandum of Understanding, Alaska LNG Project Equity Option
Term Sheet] point 1 which read:
1. Upon execution of the Transition Agreements, TADI
or its Affiliate would grant the State an
exclusive and irrevocable right to acquire
("Option"), either for its own account or through
a State Affiliate designated by the State acting
through the Commissioners (the "Optionee"), up to
40% (see point 2 below) of the limited
partnership interests in one or more limited
partnerships (or similar entities; see point 10
below) (the "Limited Partnership") that would
hold an equity participation interest (see point
2 below) in the PTU Gas Transmission Line, PBU
Gas Transmission Line, GTP, and Gas Pipeline
(collectively, the "Midstream Component").
REPRESENTATIVE HAWKER asked whether AGDC is a useful tool or is
it involved in any of the decision-making.
2:38:47 PM
COMMISSIONER BALASH advised that AGDC has been identified as a
useful tool; in fact, it is the instrument to carry the state's
interest in the Alaska LNG Project. He pointed out that the
role of the agencies after the project is past the FEED gate, is
going to "dial back considerably," and the role of AGDC as one
of the equity parties is going to increase. At that point the
biggest role [the administration] will play is to develop
marketing instruments for the sale of the gas: sales purchase
agreements (SPAs).
REPRESENTATIVE HAWKER observed that the language as originally
drafted created a statutory subsidiary within AGDC for the
purpose of its immediate participation in the Alaska LNG
Project. He said it was sensible to have AGDC take a role in
this and "the backstop project" from the beginning so it would
be prepared by its early involvement in the business management
development process. He asked, "Are you compromising our
ability to put our state's best foot forward by excluding AGDC
from that front-end participation?"
COMMISSIONER BALASH said he does not believe that is the case.
REPRESENTATIVE P. WILSON warned that care must be taken to
ensure that the agreements in AGIA are not jeopardized. She
inquired whether that is a factor in how provisions in the bill
are now written.
2:44:04 PM
COMMISSIONER BALASH recalled at the time of AGDC's origin,
[Committee Substitute for House Bill 369(FIN) passed in the 26th
Alaska State Legislature], it was accepted that the bulk of
North Slope gas would flow through a pipeline across Canada and
North America. The main pipeline was not expected to reach into
Southcentral to respond to the shortage of Cook Inlet natural
gas, thus there was a high priority to build a spur line off the
main pipeline or to build a "stand alone pipeline" to
Southcentral. Currently, with a large pipeline planned for
Southcentral, there is an overlap with AGDC's interest; the
mission that AGDC was given last year to "get gas to Alaskans"
remains intact. He assured the committee that one of the
parallel projects will fall away, or the two projects will
merge. The HOA ensures that AGDC remains focused on its mission
until it is assured that the Alaska LNG Project will deliver
North Slope gas to Alaskans.
REPRESENTATIVE P. WILSON said her question was indirectly
answered.
2:48:14 PM
COMMISSIONER BALASH continued to explain that the relationship
between the state and TC is a commercial one intended to
facilitate the efficient and economic transmission and marketing
of gas. This mission differs with getting gas to Alaskans, and
after the passage of House Bill 4 there was an effort not to
provide inducements to a competing project. However, the state
and TC have reached a point of understanding that allows AGDC to
pursue ASAP, subject to the status of the Alaska LNG Project at
the end of 2015.
REPRESENTATIVE SEATON recalled previous testimony advocating
that the state guarantee to make its investment at the point of
project sanction, instead of at pre-FEED. He has heard that
earlier involvement assures the state can influence compressor
spacing, and asked, "What would be the downsides and the losses,
and what [are] the gains in avoiding the risk of ... going
through a $600-$800 million investment ...?"
2:52:57 PM
COMMISSIONER BALASH shared a lesson learned from the AGIA
experience: The state was entitled to information through
monitoring visits but its rights to the assets generated by the
project were contained in an option to buy out the assets - such
as information, reports, and engineering studies - if the
license were abandoned. This was a costly and unsatisfactory
position. The state's position in the Alaska LNG Project is as
an equity participant from the beginning, and thereby will have
an ownership stake in the assets should the project fail. He
cautioned that renegotiating the state's position in the current
project has not been broached with the other parties; in fact,
the administration is committed to pursuing the Alaska LNG
Project.
REPRESENTATIVE SEATON asked for confirmation that ownership in
the project is by tenants in the entirety: The state has 25
percent interest and if the project fails, the state owns 100
percent of the information without further cost, and can proceed
with or without the other parties in a future project.
2:56:22 PM
COMMISSIONER BALASH clarified that in the AGIA framework the
state was paying 90 percent of the cost after the completion of
open season, and in the current project the state will pay a
much smaller percentage. Although, through the partnership with
TC, the state has deferred its costs imposed by AGIA, the nature
of the access to, and the use of information and assets
generated, will be the material terms of the equity agreements.
REPRESENTATIVE SEATON opined it is important to clarify whether
all four parties are tenants in the entirely of the information
and engineering, and if the project does not go to sanction,
whether the state can use the information without buying out the
interest of the other parties. For example, if the state elects
to pursue ASAP, he asked, "... Do we have to go back and
purchase the producers' portion of the information?"
COMMISSIONER BALASH affirmed that the ASAP effort and the Alaska
LNG Project effort are going to be working cooperatively to
share as much information as they can, subject to commercial
agreements. He expressed his understanding that the equity
agreements will not direct that parties would have to buy out
other parties with regard to assets and information that can be
duplicated. For non-divisible assets, future agreements will be
negotiated by the project parties, including AGDC and TC,
operating on the state's behalf.
REPRESENTATIVE SEATON stated he is very hopeful that this
project succeeds; however, the state must also plan for the
possibility that it does not. Because the state is making an
early investment, he urged for the administration to ensure the
state's access to the information for a future effort.
3:00:47 PM
REPRESENTATIVE HAWKER directed attention to section 17,
paragraph (3) of the bill which read:
(3) modify net profit shares for oil and gas and
sliding scale royalty rates for gas by establishing
fixed royalty rates that 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.
REPRESENTATIVE HAWKER said the above paragraph addresses the net
profit shares for oil and gas leases, and asked whether net
profit share leases (NPSLs) are expected to be a source of gas
for the Alaska LNG Project and if so, how the commissioner would
determine their value.
COMMISSIONER BALASH confirmed that NPSLs will be supplying gas
to the project. For accounting, there is a system that tracks
investments made on behalf of the lease, which must be paid back
before additional payments are made. The payments will be
determined by an economic analysis and a written determination
based on a reasonable set of forecasts and pricing, followed by
conversion into an equivalent fixed royalty that would be added
to the base royalty amount. He further described the accounting
procedure, noting that all of the parties have agreed to the
procedure.
3:04:29 PM
REPRESENTATIVE HAWKER acknowledged "the [accounting] mechanism,"
but restated his question as to whether there are a significant
number of NPSLs affecting the project. He also questioned how
the above-described task will be accomplished.
COMMISSIONER BALASH answered that the determination will require
judgments on the part of DNR as to the costs, and the expected
revenue associated with the project, because the lease itself
contributes to the project. He offered to provide the committee
with specific information on the number of NPSLs affecting the
project, adding that "there are far more net profit share leases
in the Point Thomson Unit then there are in the Prudhoe Bay
Unit, but those are relative counts ...."
CO-CHAIR SADDLER related there has been public concern
throughout the AGIA process about what the state gained in
return for its reimbursements to TC. He suggested adding to the
bill a requirement for regular updates to the public from the
legislature regarding the reimbursable expenses TC has
undertaken on the state's behalf.
COMMISSIONER BALASH responded that the HOA describes regular
updates that are to be provided by the project to the
legislature and the public, including cost information.
[CSSB 138(FIN) am was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES 4.2.14 DOTPF Infrastructure Update.pdf |
HRES 4/2/2014 1:00:00 PM |
SB 138 |
| Corrected HRES 4.2.14 Agreements Matrix REVISED.pdf |
HRES 4/2/2014 1:00:00 PM |
SB 138 |