Legislature(2013 - 2014)BARNES 124
04/05/2014 10:00 AM 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 |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
10:09:16 AM
CO-CHAIR FEIGE announced that the only order of business is CS
FOR SENATE BILL NO. 138(FIN) am, "An Act relating to the
purposes, powers, and duties of the Alaska Gasline Development
Corporation; relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated funds;
requiring state agencies and other entities to expedite reviews
and actions related to natural gas pipelines and projects;
relating to the authorities and duties of the commissioner of
natural resources relating to a North Slope natural gas project,
oil and gas and gas only leases, and royalty gas and other gas
received by the state including gas received as payment for the
production tax on gas; relating to the tax on oil and gas
production, on oil production, and on gas production; relating
to the duties of the commissioner of revenue relating to a North
Slope natural gas project and gas received as payment for tax;
relating to confidential information and public record status of
information provided to or in the custody of the Department of
Natural Resources and the Department of Revenue; relating to
apportionment factors of the Alaska Net Income Tax Act; amending
the definition of gross value at the 'point of production' for
gas for purposes of the oil and gas production tax; clarifying
that the exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit may not be
taken against the gas production tax paid in gas; relating to
the oil or gas producer education credit; requesting the
governor to establish an interim advisory board to advise the
governor on municipal involvement in a North Slope natural gas
project; relating to the development of a plan by the Alaska
Energy Authority for developing infrastructure to deliver
affordable energy to areas of the state that will not have
direct access to a North Slope natural gas pipeline and a
recommendation of a funding source for energy infrastructure
development; establishing the Alaska affordable energy fund;
requiring the commissioner of revenue to develop a plan and
suggest legislation for municipalities, regional corporations,
and residents of the state to acquire ownership interests in a
North Slope natural gas pipeline project; making conforming
amendments; and providing for an effective date."
10:09:18 AM
CO-CHAIR FEIGE resumed the committee's discussion of Amendment
7, labeled 28-GS2806\I.A.46, Bullock, 4/2/14. He reminded
members that yesterday, April 4, 2014, Amendment 7 had been
moved, objected to, and the committee was in discussion.
The committee took a brief at-ease.
10:10:42 AM
CO-CHAIR FEIGE set aside Amendment 7. He announced that the
committee would now look at amendments proposed by the
administration that have come back from Legislative Legal and
Research Services.
10:11:16 AM
CO-CHAIR FEIGE moved to adopt Amendment 8, labeled 28-
GS2806\I.A.67, Bullock, 4/4/14, which read:
Page 4, following line 24:
Insert new bill sections to read:
"* Sec. 4. AS 31.25.050 is amended to read:
Sec. 31.25.050. Legal counsel. Except as provided
in (b) of this section, the [THE] corporation shall
retain legal counsel to advise the corporation in
legal matters and represent it in litigation.
* Sec. 5. AS 31.25.050 is amended by adding a new
subsection to read:
(b) The attorney general shall
(1) be the legal counsel for the
corporation for legal services related to the
development of contracts and agreements by the
corporation that relate to an Alaska liquefied natural
gas project; and
(2) consult with the corporation when
procuring outside counsel for legal services related
to an Alaska liquefied natural gas project."
Renumber the following bill sections accordingly.
Page 14, line 3:
Delete "sec. 14"
Insert "sec. 16"
Page 17, line 24:
Delete "sec. 17"
Insert "sec. 19"
Page 21, line 16:
Delete "sec. 27"
Insert "sec. 29"
Page 25, line 9:
Delete "sec. 30"
Insert "sec. 32"
Page 31, line 18:
Delete "sec. 37"
Insert "sec. 39"
Page 53, lines 24 - 25:
Delete "sec. 23"
Insert "sec. 25"
Page 54, line 25:
Delete "sec. 14"
Insert "sec. 16"
Page 56, line 6:
Delete "Sections 1 - 14, 16, 17, 23 - 27, 29, 30,
37, 39, and 55 - 61"
Insert "Sections 1 - 16, 18, 19, 25 - 29, 31, 32,
39, 41, and 57 - 63"
Page 56, line 8:
Delete "sec. 38"
Insert "sec. 40"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 64 and 65"
REPRESENTATIVE HAWKER objected for discussion purposes.
CO-CHAIR FEIGE explained Amendment 8 addresses the status of
legal counsel for the Alaska Gasline Development Corporation
(AGDC). He requested the administration speak to the amendment.
10:12:04 AM
MICHAEL PAWLOWSKI, Deputy Commissioner, Office of the
Commissioner, Department of Revenue (DOR), explained Amendment 8
represents a considerable amount of work trying to define the
roles and relationship between the state agencies, as done in
other portions of the bill. To date, discussion has primarily
been in regard to the Department of Natural Resources (DNR),
DOR, and the Alaska Gasline Development Corporation (AGDC).
However, the Department of Law (DOL) has been left out in a lot
of the discussion. He noted that DOL provides legal services
and procures outside counsel on behalf of the agencies. The
intent of Amendment 8 is to clarify that the legal counsel for
AGDC, in its work related to the development of contracts and
agreements for the Alaska Liquefied Natural Gas (LNG) Project,
will be the attorney general. The idea is to present a unified
legal voice and ultimate responsibility despite that there will
be outside counsel. The administration believes it important to
ultimately have one voice in the state responsible for all three
of the major state entities involved in moving this project
forward. A key point is page 1, line 9, which provides that the
attorney general shall be the legal counsel for the corporation
in the development of these contracts; AGDC will maintain its
corporate counsel, but will also be the client in this
relationship to the Department of Law. An important potential
amendment to Amendment 8, Mr. Pawlowski suggested, would be to
add similar language to page 1, line 13, so it would read "legal
services for the corporation related to an Alaska liquefied
natural gas project." This would make it clear that in both
instances it is AGDC that is actually the client. He thanked
DOL for its work in support of the administration in moving the
gasline forward.
REPRESENTATIVE P. WILSON understood paragraph (2), line 12, of
Amendment 8 clarifies "exactly what the status between them is."
MR. PAWLOWSKI said his suggestion for additional language is to
do exactly that, to clarify the relationship.
10:15:03 AM
REPRESENTATIVE P. WILSON moved to adopt [Conceptual] Amendment 1
to Amendment 8 to "be a conforming amendment to clarify the
relationship there between the attorney general and the
corporation" so that it is exactly clear what that is.
REPRESENTATIVE P. WILSON, after discussion with committee
members, withdrew Amendment 1 to Amendment 8.
10:16:45 AM
REPRESENTATIVE HAWKER moved to adopt Amendment 2 to Amendment 8:
Page 1, line 13, after "services":
Insert "for the corporation"
Thus, page 1, line 13, would read, "legal services for the
corporation related to an Alaska liquefied natural gas project."
There being no objection, Amendment 2 to Amendment 8 was
adopted.
10:17:51 AM
REPRESENTATIVE SEATON understood the language in Amendment 8 on
page 1, lines 4-5, which reads, "Except as provided in (b) of
this section, the [THE] corporation shall retain legal counsel
to advise the corporation in legal matters", means within AGDC's
corporate structure. But, paragraph (b) with the attorney
general provides that if AGDC is doing anything with contracts
or hiring legal counsel, AGDC would consult with the attorney
general.
MR. PAWLOWSKI replied correct and added the intent is that AGDC
retain its internal corporate counsel for all of the broad range
of activities that AGDC on an individual basis does. Paragraph
(b) is saying that when AGDC is engaged in the development of
contracts for the Alaska LNG Project, the attorney general shall
be the legal counsel for the corporation. Secondly, it will not
always be DOL attorneys, but rather outside counsel hired and
supervised by DOL. The Department of Law does a panel in that
procurement process; AGDC would be consulted on the outside
counsel and that outside counsel would be for AGDC during the
development of those contracts. The intent is to narrowly
tailor the engagement of DOL within AGDC, which will, under HB 4
and CSSB 138(FIN) am, have a much broader mission on behalf of
the State of Alaska beyond the Alaska LNG Project.
10:19:32 AM
REPRESENTATIVE SEATON noted Amendment 8 says an "Alaska
liquefied natural gas project" which is the Alaska LNG Project.
Another term that has been used throughout amendments is an "in-
state gasline project." He inquired whether Amendment 8 means
that this only applies to this consortium partnership that is
going forward and otherwise AGDC will be using its internal
counsel.
MR. PAWLOWSKI confirmed the aforementioned is correct.
REPRESENTATIVE HAWKER added that the purpose of Amendment 2 to
Amendment 8 is to make it very clear throughout that the
attorney general's client in this process is AGDC.
10:20:35 AM
CO-CHAIR FEIGE asked whether AGDC agrees with Amendment 8.
DAN FAUSKE, President, Executive Team, Alaska Gasline
Development Corporation (AGDC), Department of Commerce,
Community & Economic Development (DCCED), responded AGDC is very
pleased and satisfied with Amendment 8.
10:21:05 AM
REPRESENTATIVE TARR inquired what it is that Amendment 8
accomplishes in terms of advancing the project.
MR. FAUSKE responded some issues have come up in the past that
have been regarding who is actually the client and who is
representing who. Amendment 8 gives a much clearer definition
so that when AGDC is engaged with the attorney general, AGDC is
the attorney general's client as well; but, as AGDC gets outside
counsel, it is clear that AGDC is also the client to outside
counsel. This clears up the conflict that that creates as to
who is representing who to where there is a much better
direction and a much cleaner relationship to help expedite the
project and not get hung up into legal issues involving lawyers.
He deferred to Mr. Ken Vassar for further comment.
KEN VASSAR, General Counsel, AGDC, Department of Commerce,
Community & Economic Development (DCCED), confirmed Mr. Fauske's
comment is correct. The language in Amendment 8, along with the
helpful amendment to the amendment, makes it very clear that the
attorney general, in providing legal counsel, is providing
counsel to AGDC as the client and therefore owes attorney-client
responsibilities and duties to AGDC. So, Amendment 8 is very
helpful.
10:23:18 AM
REPRESENTATIVE KAWASAKI asked whether the attorney general is
legal counsel for the Alaska Railroad Corporation, Alaska
Aerospace Corporation, and other public corporations.
MR. PAWLOWSKI deferred to Mr. Poag of the Department of Law.
CHRISTOPHER POAG, Assistant Attorney General, Labor and State
Affairs Section, Civil Division, Department of Law, replied the
Alaska Railroad Corporation has its own counsel. He did not
have an answer for the Alaska Aerospace Corporation, he said.
The Alaska Permanent Fund Corporation, Alaska Industrial
Development and Export Authority (AIDEA), and Alaska Energy
Authority (AEA) are represented by DOL. The vast majority of
public corporations are represented by the Department of Law, he
noted, but there are some exceptions, including AGDC.
10:24:30 AM
CO-CHAIR FEIGE moved to adopt Amendment 3 to Amendment 8:
Page 1, line 4, after "counsel.":
Insert "(a)"
There being no objection, Amendment 3 to Amendment 8 was
adopted.
10:25:28 AM
REPRESENTATIVE HAWKER removed his objection to Amendment 8.
There being no further objection, Amendment 8, as amended, was
adopted.
The committee took a brief at-ease.
10:27:49 AM
CO-CHAIR FEIGE moved to adopt Amendment 9, labeled 28-
GS2806\I.A.68, Bullock, 4/4/14, which read:
Page 30, lines 19 - 20:
Delete "upstream of the point of production of
gas"
Insert "and, under AS 43.55.020(e), considered as
gas produced from a lease or property for the purpose
of AS 43.55.011 - 43.55.180"
Page 30, line 21:
Delete "for"
Insert "in"
Page 30, line 22:
Delete "a reservoir"
Insert "and, under AS 43.55.020(e), considered as
gas produced from a lease or property for the purpose
of AS 43.55.011 - 43.55.180"
REPRESENTATIVE HAWKER objected for discussion purposes.
REPRESENTATIVE HAWKER explained Amendment 9 was brought to [his
and Co-Chair Feige's] attention by producers in the Cook Inlet.
He said the amendment provides very eloquent clarification to
avoid ambiguities over the point of production and essentially
links the exemptions for flared gas or gas used to re-pressurize
reservoirs to existing definitions and exemptions under the
payment of production tax statute. Amendment 9 has a great deal
of complexity that has been worked out in cooperation between
his and the co-chair's offices and the state agencies.
MR. PAWLOWSKI noted Amendment 9 is in Section 36, page 30, lines
18-23, of CSSB 138(FIN) am. He said there are normal instances
in the state where the production tax does not apply to gas and
certain activities around gas. These include when gas is flared
or released or allowed to escape and when used in the operation
of the lease or property. The language in Section 36 links it
to the upstream of the point of production. The language in
Amendment 9 would link it to the specific areas of statute. He
requested Ms. Pollard of the Department of Law to provide
further details.
10:30:08 AM
SUSAN POLLARD, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division, Department of Law, explained the point
of Amendment 9 or this particular subsection in the bill, is to
get clear in the statute that in the initial instance that gas
would be flared in excess of what the Alaska Oil and Gas
Conservation Commission (AOGCC) would approve of, that it would
not be considered tax gas, because that is the section that this
is in. This particular provision only applies to the oil and
gas production tax; it does not have anything to do with
royalty. Oil and gas severed from the state is considered
produced unless it meets the circumstances in AS 43.55.020(e),
which is typically gas used in the operation of a lease or
property for repressuring or gas that is flared. Gas is
continuously flared throughout production operations; as long as
it is within AOGCC limits, that gas is not considered produced.
Amendment 9 is to make all of that very clear and the
relationship between the general statute for "AK 55.020(e)" very
specific with respect to the tax gas statute, which is
AS 43.55.014.
10:31:50 AM
REPRESENTATIVE SEATON inquired whether this means there would be
no tax on the gas that is flared above the limits allowed by
AOGCC and no tax on the gas discharged from a gas conditioning
plant, which is downstream of the point of production.
MS. POLLARD answered this would not change existing and long-
standing law in the oil and gas production tax relating to what
is considered produced or not produced upstream of the point of
production. Gas flared in excess of AOGCC limits would be
considered produced, as it would be in current law, and it would
be taxed under the general 13 percent of gross value at point of
production, which is AS 43.55.011(e). Qualifying that she has
not been the DOL counsel for AOGCC, Ms. Pollard said she is
unaware of a circumstance where there has actually been an
excess flare that AOGCC has not approved. Amendment 9 does not
address downstream of the point of production, it only deals
with what would be happening upstream of the point of
production. Point of production is actually the more accurate
way to say it, she added.
10:33:58 AM
REPRESENTATIVE SEATON understood, then, that the statute
sections that would replace the terms "upstream of the point of
production of gas" would determine that same point.
MS. POLLARD responded the reason for removing "upstream of the
point of production" is it causes confusion because it creates a
question as to why all of a sudden a phrase is being added that
sort of refers to AS 43.55.020(e) but not exactly. This section
only relates to the tax gas. Under Amendment 9, page 30, lines
[18-20], of the bill would read: "This section does not apply
to gas flared, released, or allowed to escape and, under AS
43.55.020(e), as considered as gas produced from a lease or
property." It just makes clear that the tax gas provision does
not apply to gas that would be considered produced under AS
43.55.020(e), which is gas flared to excess.
10:35:47 AM
REPRESENTATIVE SEATON said he thinks the problem is that members
have not seen this before and he wants to be clear as to whether
this is moving the point at which gas can be flared and/or lost
and not be taxed, or whether it is just a change in reference to
the status.
MR. PAWLOWSKI replied it is a change in reference that does not
change anything in existing practice and is more specific than
the term that was in the legislation as drafted. It is linking
back to that specific instance in AS 43.55.020(e), so DOR views
it as clarifying, not substantive.
REPRESENTATIVE SEATON, in regard to the definition of point of
production or where this point is on the Alaska LNG Project,
understood that Amendment 9 does not change anything that was
proposed, it just defines the place by using the statute.
MR. PAWLOWSKI answered correct.
10:37:15 AM
REPRESENTATIVE HAWKER removed his objection. There being no
further objection, Amendment 9 was adopted.
The committee took an at-ease from 10:37 a.m. to 10:43 a.m.
10:43:23 AM
CO-CHAIR FEIGE moved to adopt Amendment 10, labeled 28-
GS2806\I.A. 71, Bullock, 4/4/14, which read:
Page 30, lines 12 - 17:
Delete all material and insert:
"(d) An assessment under AS 43.05.245 against a
producer for an underpayment of a tax levied by this
section may be made in terms of an amount of gas or an
amount of money, as determined under regulations
adopted by the department. If the assessment is made
in terms of money, the amount for a month of
production for an oil and gas lease subject to an
effective election under (a) of this section is the
product of the number of units of gas by which the
producer's delivery to the state was less than the
amount required by (b) of this section, multiplied by
the gross value at the point of production for each
unit of the gas other than gas that was not subject to
tax or gas that was delivered to the state under (b)
of this section. The department may allow a credit or
refund under AS 43.05.275 for an overpayment of a tax
levied by this section that may be issued in the form
of gas or money, as determined under regulations
adopted by the department. If the refund is allowed in
terms of money, the amount of the credit or refund for
a month of production for an oil and gas lease subject
to an effective election under (a) of this section is
the product of the number of units of gas by which the
producer's delivery to the state was more than the
amount required under (b) of this section, multiplied
by the gross value at the point of production for each
unit of the gas other than gas that was not subject to
tax or gas that was delivered to the state under (b)
of this section. Interest that is determined as a
percentage of the amount of a tax underpayment or
overpayment and a penalty that is a percentage of the
amount of a tax underpayment are calculated as a
percentage of the amount of money determined in this
subsection. An amount of gas that was less than the
amount required to be delivered to the state under (b)
of this section or an amount of gas that was more than
the amount required to be delivered to the state under
(b) of this section that is adjusted as provided by a
gas balancing agreement to which the state is a party
under AS 38.05.020(b)(11) is not subject to assessment
under AS 43.05.245 or a credit or refund under
AS 43.05.275. In this subsection, "unit" means a unit
of measurement for gas identified by the department
under regulations adopted by the department and may be
expressed as 1,000 cubic feet, 1,000,000 British
thermal units, or another appropriate unit of
measurement specified by the department under
regulations adopted by the department."
CO-CHAIR SADDLER objected.
CO-CHAIR FEIGE explained Amendment 10 is an amendment of the
administration and is a product of many weeks work on the part
of tax attorneys.
10:44:22 AM
MR. PAWLOWSKI, to provide a history in regard to Amendment 10,
drew attention to CSSB 138(FIN) am, page 30, lines 12-17,
subsection (d), saying that when the departments and the
administration considered the opportunity of taking production
tax as molecules, thought was given to unforeseen circumstances.
When a tax is levied on a taxpayer there are, at times,
deficiencies -- the department may determine there was an
underpayment or overpayment of the tax. Moving into a world of
taking production tax as gas, it was recognized that guidance
needed to be provided to taxpayers about what happens in the
event there is a deficiency. The department sees a deficiency
as much less likely coming through a meter in a production
situation than in the standard form of a taxpayer doing a tax
return and missing a deduction or claiming too little of a
deduction. Under subsection (d), the words "a deficiency in a
tax levied by this section" relate to the production tax as gas.
The words "if a provision of this title providing for interest"
relate to the interest calculation on the overpayment or
underpayment of tax. For an overpayment the state owes interest
to the taxpayer and for an underpayment the taxpayer owes the
state interest. These are often not malicious; sometimes these
are just the natural order of doing complex tax returns. The
words "the amount of the deficiency and the tax amount on which
the interest or penalty percentage is calculated" relate to as
if the tax was levied under AS 43.55.011(e). If there is an
underpayment or overpayment, calculating the interest based on
molecules may be cumbersome, so the department wanted to do it
based on the value. However, that "opened some unforeseen
consequences where in the future there is a potential for an
auditor to take an in-value calculation, back calculate a
dispute over the actual volumes that were produced." The
department did not want to open that type of lack of clarity,
for both the department and the taxpayer, so DOR developed
Amendment [10] by working with taxpayers.
10:47:24 AM
MR. PAWLOWSKI addressed Amendment 10 itself, stating it provides
a methodical clarity to both the taxpayers and the department
about how, in principle, the department will handle the
potential for underpayments or overpayments of gas. Under
Amendment 10, an underpayment could be done either in gas or in
money, so the amendment is setting out two alternatives. Under
the production tax, the state receives installment payments on a
monthly basis, with true-up typically occurring at the end of
the year. There will be balancing agreements and the state
would like the opportunity, under regulations and under a
process, to be able to take in additional gas or in money. An
underpayment or overpayment is based on the gas produced by the
producer during the month. Amendment 10, page 1, line 10,
changes that to "the gas" and he wants to be clear on the record
that the gas being described is the gas produced by a producer
during the month. The value laid out in Amendment 10 relies on
the standard gross value at the point of production calculation.
The other values, seen on page 2, lines 5-9, will, under
regulation by the department, be expressed as either [thousand
cubic feet] or million British thermal units. While specific,
this provides for additional specifics because when calculating
value there may be the need to use British thermal units, given
that contracts for LNG are often done in heating content value,
whereas in-kind would look at actual volumes produced.
10:50:30 AM
REPRESENTATIVE KAWASAKI requested clarification on what would
happen in an overpayment situation.
MR. PAWLOWSKI responded that in an overpayment situation under
current law, the state refunds with interest due. Were the
state taking tax as gas, DOR would work with DNR in the
balancing agreements to determine whether it is in the state's
interest to give molecules back to the taxpayer during a later
month or to actually do a refund payment as the state would do
when in-value is taken.
REPRESENTATIVE KAWASAKI remarked he cannot conceive of a
situation in which this would happen.
MR. PAWLOWSKI concurred that an underpayment or overpayment in a
molecule-driven payment is unlikely. However, the state needs
to be prepared for an instance in which a meter breaks or
becomes out of caliber. A principle in the Heads of Agreement
is to avoid valuation disputes and part of the purpose of
Amendment 10 is to avoid a dispute about the methodology around
which such an unlikelihood would be resolved.
CO-CHAIR FEIGE commented it is better to have the rules in place
ahead of time.
10:52:18 AM
REPRESENTATIVE KAWASAKI said he cannot envision a situation in
which the producers would want to take gas instead of cash.
MR. PAWLOWSKI replied this is something a producer might often
prefer, particularly within a tax year. Making up the movement
of molecules between partners and producers is what actually
goes into the balancing agreement. As he understands it, the
preference, generally speaking, would be to actually take
molecules to make up with each other and within that there may
be capacity arrangements to provide the capacity for those
makeup molecules. He deferred to the commissioner of natural
resources for further comment.
JOE BALASH, Commissioner, Department of Natural Resources,
responded the balancing agreements from a royalty perspective or
a field management perspective allow for true-up on whatever
basis or term the parties agree to in the specific agreement.
That is something that is not uncommon and is something that
should be fairly straightforward as the royalty issues are dealt
with. However, because tax is different - it is not a property
right per se - this particular set of tools will allow for
management in the balancing agreements of these sorts of things
that could happen. In the royalty context, ability is needed to
make adjustments in those agreements in the event of
underproduction or overproduction. That is what a balancing
agreement is; it allows for relatively small amounts of
underlifting or overlifting, depending upon the commercial needs
of the individual player. Because so much of the state's share
in this arrangement is going to be comprised of tax gas, the
ability to use underpayments or overpayments and the
satisfaction of those obligations, either of the state or the
other parties, would be enhanced. Otherwise, it is going to be
difficult trying to do this all on the back of royalty and not
both royalty and tax.
10:55:03 AM
REPRESENTATIVE TARR recalled that this was presented in the
opposite way during the overview of the bill. She inquired what
new information helped it be understood that additional
flexibility was needed for how to deal with this.
COMMISSIONER BALASH replied it goes to further thought about the
balancing agreements and thinking through the kinds of things
that are going to be done in this phase of Pre-Front-End
Engineering and Design (Pre-FEED). More thought has been given
to what those balancing agreements might need to look like and
ensuring there are tools for dealing not just with the royalty
side but also the tax side.
MR. PAWLOWSKI added there is a fair point that in tax there is
both deficiencies and overpayments that happen regularly and
[the administration] focused on the state's side, which was a
deficiency. However, there is the question of what happens in
the other direction and that is also part of the conversation
that led to this discussion.
10:56:30 AM
CO-CHAIR SADDLER removed his objection. There being no further
objection, Amendment 10 was adopted.
10:56:57 AM
CO-CHAIR FEIGE moved to adopt Amendment 11, labeled 28-
GS2806\I.A.72, Bullock, 4/4/14, which read:
Page 47, line 23:
Delete "oil or gas"
Insert "oil and gas"
Page 48, line 1:
Delete "oil or gas"
Insert "oil and gas"
Page 48, lines 2 - 3:
Delete "oil or gas"
Insert "oil and gas"
Page 48, lines 8 - 9:
Delete "oil or gas"
Insert "oil and gas"
Page 48, line 17:
Delete "oil or gas"
Insert "oil and gas"
Page 48, line 18:
Delete "oil or gas"
Insert "oil and gas"
Objection was voiced by Co-Chair Saddler and Representative
Tarr.
10:57:25 AM
MR. PAWLOWSKI stated the administration has made it clear
throughout the committee's consideration of this bill that the
bill's intent is to allow lease expenditures, whether for oil or
gas, to be deductible against the oil production tax. This has
been clearly stated on the record from the moment the bill was
introduced and is actually a term in the Heads of Agreement.
Amendment 11 is intended to make a conforming or clarifying
amendment within Section 50, which is the lease expenditure
section. Current language uses the term "oil or gas" which
could, despite the record, potentially be deemed as exclusive
and the change to "oil and gas" is intended to be inclusive.
There is oil, there is gas, there is oil and gas, and there is
lease expenditures, and consistent with the intent of the bill
to be deductible. [The administration] does not believe it
makes any change to the intent or substance of the bill and is a
clarifying amendment.
10:58:52 AM
CO-CHAIR SADDLER removed his objection.
REPRESENTATIVE KAWASAKI objected, saying this is the part of the
bill that concerns him quite a bit. The potential costs for
Point Thomson could be $4 billion and the lease expenditures are
deductible under the bill. He said he does not think it gets
the state to a gas pipeline and could potentially cost the state
a couple billion dollars next year in unrealized earnings.
Another amendment will be introduced shortly to undo this, he
said. He opposed the clarifying language.
REPRESENTATIVE HAWKER said the purpose behind Amendment 11 is
simply dealing with the syntax of the word "or," which in a
logical operation of the English language can be taken either
inclusively or exclusively. The only thing about Amendment 11
is to make certain that it is viewed in the inclusive
interpretation. It is nothing more than clarification and
conformity with legislative drafting standards.
REPRESENTATIVE KAWASAKI removed his objection, saying the
committee will have this debate later.
11:01:06 AM
REPRESENTATIVE TARR maintained her objection.
A roll call vote was taken. Representatives Olson, Seaton, P.
Wilson, Hawker, Saddler, and Feige voted in favor of Amendment
11. Representatives Tarr and Kawasaki voted against it.
Therefore, Amendment 11 was adopted by a vote of 6-2.
11:02:11 AM
CO-CHAIR FEIGE moved to adopt Amendment 12, labeled 28-
GS2806\I.A.73, Bullock, 4/4/14, which read:
Page 52, line 15, following "transporting":
Insert "the"
Page 52, line 19, following "gas":
Insert "after completion of mechanical
separation"
Page 52, line 21:
Delete "gas"
Insert "the gas after mechanical separation"
Page 52, line 24:
Following "the":
Insert "gas processing"
Following "pipeline":
Insert "downstream of the gas processing plant"
Page 52, line 25, following "system":
Insert "downstream of the gas processing plant"
Page 52, line 26, following "transporting":
Insert "the"
Objection for discussion purposes was voiced by Co-Chair Saddler
and Representative Hawker.
11:02:26 AM
MR. PAWLOWSKI explained Amendment 12 adds additional clarifying
language to the definition of the point of production in Section
53 of CSSB 138(FIN) am. The exact point of production is an
important piece of statute in that expenditures above the point
of production towards the well are deductible as lease
expenditures under Alaska tax statutes. Expenditures downstream
of the point of production are recovered in tariffs or fees in
the transportation charges that are deductible against both
royalty and production tax. It is important to remember that
costs are recovered; it is just in what manner and over what
time period and against which tax. The development of the point
of production in this legislation was specifically intended to
move the point of production clearly to places that conform to
the definition of the Alaska LNG Project. For Point Thomson
that is the entrance to the transmission line that would deliver
gas to the gas treatment plant, and, while the gas treatment
plant itself may be within the Prudhoe Bay unit, guarantee that
the point of production is from the gasline leaving potentially
the central gas facility to the treatment plant; so, including
those downstream of the point of production and the language was
done to demarcate that. As the bill moved through committee,
concern was heard from producers in other parts of the state
that that change could have adverse impacts on the determination
of the point of production, particularly in the Cook Inlet
region where there may not be the same processing or separation
that occurs on a platform but rather the product is moved to
shore. It is not the intent of the department, nor was it the
intent of the department, to change the point of production in a
way that would drive further towards the well before the
completion of mechanical separation. Amendment 12, page 1, line
5, is conforming language that clarifies it is after completion
of mechanical separation. This protects the existing
interpretation of point of production while providing clarity
for the North Slope Alaska LNG Project about that point to
ensure that the transmission line and portions of the gas
treatment plant are not included upstream of the point of
production.
11:05:30 AM
REPRESENTATIVE HAWKER supported Amendment 12, stating the
amendment is to ensure that the change in point of production
definition does not adversely affect Cook Inlet operations or
gas as piped from offshore platforms to the shore before being
separated and thus produced. Without this change there is some
risk that the definition could be interpreted as to disallow the
pipes and mechanical separation systems onshore from being
qualifying expenditures for the purposes of tax credits under
AS 43.55.023.
11:08:05 AM
REPRESENTATIVE HAWKER removed his objection to Amendment 12.
CO-CHAIR SADDLER removed his objection to Amendment 12. There
being no further objection, Amendment 12 was adopted.
11:08:50 AM
CO-CHAIR FEIGE moved to adopt Amendment 13, labeled 28-
GS2806\I.A.74, Bullock, 4/4/14, which read:
Page 13, line 28, following "confidential":
Insert "and must be made available to the public
at least 90 days before the proposed effective date
for the terms"
Page 13, following line 31:
Insert a new paragraph to read:
"(13) consult with the Alaska Gasline
Development Corporation in the development of
agreements or contracts under (10) or (11) of this
subsection for project services related to a gas
treatment plant, pipeline, liquefaction facility,
marine terminal, or marine transportation services
necessary to transport natural gas to market;"
Renumber the following paragraph accordingly.
Page 15, line 22, following "confidential":
Insert "and must be made available to the public
at least 90 days before the proposed effective date
for the terms"
Page 15, following line 25:
Insert a new paragraph to read:
"(13) consult with the Alaska Gasline
Development Corporation in the development of
agreements or contracts under (10) or (11) of this
subsection for project services related to a gas
treatment plant, pipeline, liquefaction facility,
marine terminal, or marine transportation services
necessary to transport natural gas to market;"
Renumber the following paragraphs accordingly.
Page 30, line 10:
Delete "AS 38.05.020(b)(13)"
Insert "AS 38.05.023(b)(14)"
CO-CHAIR SADDLER objected.
11:09:16 AM
COMMISSIONER BALASH explained Amendment 13 addresses two
matters. The first, on page 1, lines 1-3, is the amount of time
which the public, and consequently the legislature, might have
to see and review any proposed contracts that come out of the
process that the administration is asking the authority to
initiate here. For any contract that is proposed to have an
effective or start date, this provides that the contract itself
must be made public at least 90 days before that start date.
Before such a contract could be executed, there is still the
requirement that the legislature would have to approve it if it
is for longer than two years. This is intended to provide a
window for the public in particular because the administration's
plan going forward is to keep the legislature briefed in
executive session and under confidential agreements (CAs) up
until the point the contracts are concluded and made public.
This will give the public a window of opportunity to be engaged
in whatever process it is the legislature uses thereafter.
CO-CHAIR FEIGE thanked the administration for bringing forward
this particular point in the amendment, saying it addresses
several members' concerns regarding the time the legislature
would have to consider some of these contracts, which are
expected to be far more complicated than this legislation. He
said this provision adequately addresses his concerns with
having sufficient time.
11:11:22 AM
COMMISSIONER BALASH, continuing his explanation of Amendment 13,
said the second matter addressed by the amendment relates to the
powers and duties of the commissioner of natural resources in
the development of contracts. Similar to [Amendment 5] that was
tentatively discussed on April 4, 2014, this provision would
make the consultation between the agencies and AGDC reciprocal.
More narrowly crafted than what members saw on April 4, 2014, it
speaks specifically to contracts associated with the
infrastructure. It may be that DNR actually will consult with
AGDC more than that and beyond that particular scope, but in
these instances it makes sense for DNR to be in discussion and
consultation with AGDC regarding these types of contracts,
ensuring DNR knows what "they can and cannot provide to us as an
alternative, perhaps, to those services we might be discussing
with somebody else."
11:12:41 AM
REPRESENTATIVE KAWASAKI offered his appreciation for the
amendment and inquired what agreements and contracts would be
made public under the amendment.
COMMISSIONER BALASH responded the specific contracts that will
be brought forward will depend upon the completion of those
contracts, so there may be many in [2015] and later there may be
more, depending upon what is needed to complete the total
package. The anticipation is it will be balancing agreements,
marketing agreements, or disposition. The offtake and balancing
agreements are going to be the key contracts next year as they
relate to the overall commercial structure and the agency role
in that structure, vis-a-vis the other parties that will be the
equity parties. The important point here is that these are
contracts which have duration of more than two years and so
these will be the long-term contracts that really enable the
project to go forward.
MR. PAWLOWSKI added that those sections also reference the firm
transportation services agreement with TransCanada or another
transporter like AGDC and the liquefaction services agreements
for gas and capacity within the LNG plant. These agreements
would also be brought back within that timeframe for legislative
consideration. The Memorandum of Understanding (MOU) [with
TransCanada] calls out certain dates on the firm transportation
services agreement; so, 90 days prior to that effective gives a
window on a deadline for the administration to deliver an
agreement.
11:16:08 AM
CO-CHAIR SADDLER removed his objection. There being no further
objection, Amendment 13 was adopted.
REPRESENTATIVE SEATON brought attention to CSSB 138(FIN) am,
page 13, lines 29-31. He inquired whether the word "or" on line
31 is intended to be an "and/or" so information could be shared
in executive session and with confidentiality agreements or with
individuals with confidentiality agreements. He offered his
opinion that the way it is currently written, it could be an
executive session and not have confidentiality agreements once
that session is over.
CO-CHAIR FEIGE said the next amendment addresses this issue.
11:17:52 AM
CO-CHAIR FEIGE moved to adopt Amendment 14, labeled 28-
GS2806\I.A.80, Nauman/Bullock, 4/4/14, which read:
Page 13, line 30:
Delete "the legislature only"
Insert "members of the legislature under
confidentiality agreements, either"
Page 13, line 31:
Delete "under confidentiality agreements":
Insert "with any member of the legislature
individually"
Page 15, line 24:
Delete "the legislature only"
Insert "members of the legislature under
confidentiality agreements, either"
Page 15, line 25:
Delete "under confidentiality agreements":
Insert "with any member of the legislature
individually"
CO-CHAIR SADDLER objected.
CO-CHAIR FEIGE explained Amendment 14 addresses exactly what
Representative Seaton pointed out. The amendment broadens the
conditions under which confidentiality agreements are required
for members of the legislature when members are in executive
session and in individual meetings with any of the parties or
the departments. Confidentiality agreements will need to have
been signed for confidential information to be conveyed.
11:19:44 AM
REPRESENTATIVE KAWASAKI offered his appreciation for Co-Chair
Feige's willingness to clarify this particular issue. He drew
attention to the bill, page 13, line 29, which states "the
commissioner 'may'" saying he does not think this issue has yet
been addressed. Further, he noted, in previous confidentiality
agreement processes within this legislature, key staff members
have sometimes been a party; he asked whether this is something
that is necessary to address.
CO-CHAIR FEIGE responded that right now the bill says strictly
members of the legislature and inquired whether Representative
Kawasaki is advocating pros or cons for staff members.
REPRESENTATIVE KAWASAKI said he is just throwing out the issue.
11:20:54 AM
REPRESENTATIVE HAWKER noted he has a similar concern [in regard
to legislative staff]. Regarding the bill's language that "the
commissioner 'may' share confidential information" he opined
that it is important it be permissive. This is not a blanket
discharge of information between the very important confidential
negotiating information from the agency to anyone in the
legislature that wants to sign a confidential agreement. Going
forward, it is important that key legislative staff be involved
in these conversations, especially as the project develops and
the forthcoming agreements are looked at. It is potentially not
only key staff but also legislative consultants who might need
to be brought into the appropriate discussion under a
confidentiality agreement. He reiterated it is permissive and
is not mandating that the agency give that authority to
consultants or to legislative staff or to legislators. He
inquired whether the sponsor would be receptive to a conceptual
amendment to Amendment 14 that would allow it to apply to
legislative staff and legislative consultants.
11:22:41 AM
CO-CHAIR FEIGE replied there would be some concerns on the part
of the administration, but allowed it is a legitimate point. He
requested the administration's comments.
COMMISSIONER BALASH said that as a former staff person to the
Legislative Budget and Audit Committee, he can assure members
that the legislature's ability to keep up and be able to act
swiftly upon completion of the negotiations and to review the
contracts would be enhanced by having that kind of participation
during the confidential period. On behalf of the administration
he requested the word "may" be kept in the language because if
[the administration] is constantly briefing individual
legislators, their staff, and their consultants, there would be
little time to do the negotiations. There needs to be the
ability to manage that in a way that works for all the parties.
CO-CHAIR FEIGE concurred with keeping "may" and said part of
what is involved in all parties moving forward is a certain
amount of trust and confidential information is confidential for
whatever reason. It is important that that information stay
confidential because if the trusts are violated, whether by
members or staff, it will hurt the process and everyone moving
forward. The commissioner should have the discretion depending
on who he is talking to and as long as that level of trust is
maintained, may be allowed to share the confidential information
and not mandated to share it. Regarding a conceptual amendment
to Amendment 14, he suggested taking a brief at-ease to work out
specific language. He inquired whether there is further
discussion on the amendment before taking the at-ease.
11:25:32 AM
REPRESENTATIVE TARR expressed her concern regarding "may" and
"shall", and said this issue is in a later amendment she plans
to offer. Her concern is that members have been assured they
will know what is going on by getting the briefings through
confidential agreements. Leaving "may" in the language feels
like there could be a time when members are left out of that
conversation, which is the intent of her [later] amendment. She
appreciated the statements about the need for some level of
trust, but said if that is the only opportunity for getting
information she wants to ensure members can get enough
information to be able to make those decisions. She said she
will not move the amendment she had planned to move, [labeled
28-GS2806\I.A.45, Nauman/Bullock, 4/2/14].
11:26:35 AM
REPRESENTATIVE HAWKER appreciated Commissioner Balash's response
of recounting his experience as staff. However, as the
committee works on an amendment to Amendment 14, there was no
clarification as to whether it would also be appropriate that
that it would include the legislature's consultants at the
discretion of the commissioner.
MR. PAWLOWSKI encouraged members to consider including language
for legislative consultants. There may be different levels of
confidentiality agreements, he said. For example, DOR has very
strict statutory confidentiality and the legislature's
consultants may be able to engage in a higher level of
confidentiality to get the appropriate numbers. Saying that
similar things have been done in the past, he again encouraged
members to support the concept because it would promote the
efficient movement forward of the project by the consultants
being able to see the numbers and more detailed modeling.
11:28:03 AM
REPRESENTATIVE SEATON said he appreciates this because if a
contract comes back for which there is worry about the terms, it
will be a much more messy process than if legislators can have
input up front.
CO-CHAIR FEIGE reiterated that the issue of trust and the
sharing of confidential information depends on how that is
followed. Recalling the saying "loose lips sink ships" from
World War II, he said "loose lips can sink agreements" and
prevent projects from moving forward. This is something that
will be very closely monitored.
The committee took an at-ease from 11:29 a.m. to 11:45 a.m.
11:45:02 AM
REPRESENTATIVE HAWKER moved to adopt Conceptual Amendment 1 to
Amendment 14 as follows:
Page 1, line 3, after "legislature":
Insert "and their respective agents and
contractors on request"
REPRESENTATIVE HAWKER added that his motion directs Legislative
Legal and Research Services to conform the remainder of
Amendment 14 to that language.
CO-CHAIR FEIGE understood the inserted language would apply to
members of the legislature and to staff in meetings held in
executive session as well as meetings held as individuals, all
under confidentiality agreements.
REPRESENTATIVE HAWKER replied yes, and added that "individuals
might mean a group of individual or individuals that may, for
whatever reason, be being briefed at the same time."
11:47:35 AM
There being no objection, Conceptual Amendment 1 to Amendment 14
was adopted.
11:47:43 AM
REPRESENTATIVE HAWKER emphasized the importance and significance
of a confidentiality agreement and the bond under which it
places someone executing that agreement. As the process goes
forward and as agents are nominated and brought into levels of
confidentiality, legislators may want to have the Legislative
Budget and Audit Committee or legislative counsel provide
training and guidance to ensure that both legislators and staff
understand the obligations under which they are placing
themselves when executing a confidentiality agreement.
11:49:09 AM
CO-CHAIR FEIGE queried whether the administration has anything
to add regarding Amendment 14.
COMMISSIONER BALASH replied the only question he has relates to
the conceptual language of "on request" that was added. He
asked whether that language is intended to help [DNR] understand
who should or should not be talked to, or is this language meant
to obviate or interfere with the word "may" on line 29.
REPRESENTATIVE HAWKER explained this language mirrors the
language that exists in the Alaska Gasline Inducement Act
statutes today. It was chosen for consistency, but it is to
make certain that it is on request to the [DNR] commissioner to
allow a legislator, or the legislator's agent or contractors, to
participate under a confidentiality agreement. As the entire
paragraph in the statute operates, it is requesting a permissive
action from the [DNR] commissioner.
11:50:34 AM
REPRESENTATIVE SEATON requested clarification that the requests
are made by a legislator, not by staff, or the contractor or
agents.
CO-CHAIR FEIGE said his intent is that members of the
legislature would be the ones designating who those agents are.
Whether they are staff members or contractors employed under
contract by the legislature, those individuals would be
specifically designated by members of the legislature and the
request made to the [DNR] commissioner.
11:51:32 AM
CO-CHAIR SADDLER removed his objection to Amendment 14. There
being no further objection, Amendment 14, as amended, was
adopted.
11:52:26 AM
CO-CHAIR FEIGE moved to adopt Amendment 15, labeled 28-
GS2806\I.A.81, Nauman/Bullock, 4/4/14, which read:
Page 53, line 18, following "BOARD.":
Insert "(a)"
Page 53, line 20, following "project.":
Insert "The board shall review available
information, hold public meetings, and provide to the
governor by December 15 of each year annual reports
that
(1) review the potential effects and
benefits of new infrastructure for North Slope natural
gas development, whether designed to provide natural
gas for in-state sale or for export, or both, on
communities in the state, including consideration of
tax structure under AS 29.45 and AS 43.56, and
consideration of other payments before construction of
new infrastructure associated with North Slope natural
gas development;
(2) provide recommendations for changes to
the oil and gas exploration, production, and pipeline
transportation property taxes under AS 43.56 related
to infrastructure for commercialization of natural gas
that would facilitate development of a major natural
gas project and mitigate financial effects on
communities from development of a North Slope natural
gas project;
(3) provide recommendations for changes to
AS 29.45.080 related to the commercialization of
natural gas that would facilitate development of a
North Slope natural gas project and mitigate financial
effects on communities from a North Slope natural gas
project;
(4) provide recommendations for legislative
or other options to minimize the financial effects on
communities in proximity to North Slope natural gas
project infrastructure during construction of a
natural gas pipeline and associated infrastructure;
and
(5) provide recommendations on the effects
on and benefits to communities not in proximity to a
North Slope natural gas project.
(b)"
CO-CHAIR SADDLER objected for discussion purposes.
11:52:52 AM
CO-CHAIR FEIGE explained Amendment 15 applies to Section 58 of
the bill where the governor is requested to establish an interim
advisory board. The governor, anticipating passage of the bill,
last week issued Administrative Order 269, which establishes
that board. Amendment 15 inserts into statute the language from
page 2 of the administrative order that is within paragraphs 1-5
under the caption "Duties and Responsibilities".
The committee took an at-ease from 11:55 a.m. to 12:06 p.m.
12:06:37 PM
CO-CHAIR FEIGE pointed out that there are systemic differences
between the language in Amendment 15 and the language in
Administrative Order 269. He requested the amendment drafter,
Emily Nauman, to explain these differences because the request
was that the language in the amendment be exactly the same as
that of the administrative order. For example, he noted, the
word "impact" in all five paragraphs of the administrative order
has been changed to "effects" in Amendment 15; and in the second
and third paragraphs of the order, the words "affected by" are
replaced by "from" in the amendment.
EMILY NAUMAN, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Alaska State Legislature, explained
she viewed the changes as purely stylistic and that she did not
think they would make any impact on the intent of the request.
12:08:43 PM
REPRESENTATIVE HAWKER proposed Conceptual Amendment 1 to
Amendment 15 to make the entirety of Amendment 15 conform with
the entire section in Administrative Order 269 entitled "Duties
and Responsibilities" [on page 2 of the order], with one
exception to make this work properly. That exception relates to
the proper noun that identifies the "Municipal Advisory Gas
Project Review Board." In the statute, the committee is only
requesting the governor to establish an interim advisory board.
So, to conform statute to the language identified in
Administrative Order 269, Representative Hawker suggested the
conforming language should begin without the proper noun and
instead simply refer to "'the board' shall review available
information, hold public meetings ...."
REPRESENTATIVE P. WILSON objected [for purposes of discussion].
She inquired whether "the board" needs to be defined.
REPRESENTATIVE HAWKER replied no.
12:11:13 PM
REPRESENTATIVE P. WILSON removed her objection. There being no
further objections, Conceptual Amendment 1 to Amendment 15 was
adopted.
12:11:31 PM
CO-CHAIR FEIGE moved discussion to Amendment 15 itself.
REPRESENTATIVE SEATON brought attention to the third to last
paragraph on page 3 of Administrative Order 269 which states,
"Records of the Municipal Advisory Gas Project Review Board are
subject to inspection and copying as public records under
AS 40.25.110 - 40.25.220." He inquired whether this means the
board will not be considered part of a deliberative process and
therefore confidential.
MR. PAWLOWSKI understood the intent in the administrative order
is to create a very transparent public process to involve the
communities in the recommendations that will come forward to the
legislature so that both the public and the legislature can see
the "consensus recommendations" that will come back for changes
to the property tax.
12:13:27 PM
CO-CHAIR SADDLER drew attention to paragraph (5) of Amendment
15, page 2, lines 1-2, which state, "provide recommendations on
the effects on and benefits to communities not in proximity to a
North Slope natural gas project." Remarking that this seems
pretty broad, he inquired as to how broadly this provision is to
be construed in terms of proximity and terms of the reach of
effects and benefits.
MR. PAWLOWSKI responded the key to Administrative Order 269, in
thinking about the impact and benefits of an Alaska LNG project
on the state, was the recognition that all communities in the
state have an indirect interest in this project. A substantial
portion of the property tax derives to the state government and
that is an interest of other communities potentially through
revenue sharing and funding for schools. For example, Seward
may not be considered in direct proximity, but it has a rail
line and could be an important place to bring pipe through. As
was heard in the committee's discussion with the Department of
Transportation & Public Facilities, the needs of ports must be
considered for moving material into support of the project. So,
there may be impacts throughout the state to which attention
must be paid. Given the board contains members of communities
that are not directly along the route, the administration thinks
it important to provide the broadest latitude to consider the
impacts across the state.
12:15:08 PM
CO-CHAIR SADDLER said the aforementioned indicates a report on
the effects and benefits is being requested, but the amendment
language says recommendations shall be provided on the effects.
He said he does not understand how the effects would be
recommended.
MR. PAWLOWSKI replied he is considering it with the conceptual
amendment, so it is recommendations on the impact. There would
be impacts to communities outside of the proximity to the
project.
CO-CHAIR SADDLER, regarding the language, "recommendations on
the impact," said the board would not recommend impacts. Thus,
he understands a report on the impacts but not recommendations
on impacts.
COMMISSIONER BALASH offered his belief the co-chair is touching
on something that might be caught up in shorthand. He explained
that impacts, generally, are going to be addressed through
impact payments and the schedule of impact payments that will be
received throughout the state by communities, depending upon the
level of impact the communities are expected to experience
during construction. In addition to the impacts during
construction are the benefits, which the administration is
expecting will be a component of the overall payments in lieu of
taxes (PILT) agreement itself, in terms of how that property tax
revenue will be shared among the communities throughout the
state and not just those that have portions of the project
running in or through their borders.
12:17:16 PM
REPRESENTATIVE P. WILSON observed that Administrative Order 269,
page 2, points 5 and 6 under the heading of "Composition and
Chair of Board", state that there will be one member of an
organization representing the interest of municipalities in the
state and two members of the public who do not reside [in areas
directly impacted]. She offered her belief that those members
will bring in their concerns so that the state as a whole is
looked at and those members will take part in the debate when it
takes place.
REPRESENTATIVE HAWKER brought attention to Administrative Order
269, page 2, "Duties and Responsibilities", and noted that the
lead-in paragraph states "provide annual reports by December 15
of each year to the Governor that include" the items listed in
the following five paragraphs. Continuing, he pointed out that
paragraph (4) talks about recommendations for communities in
proximity to North Slope natural gas project infrastructure and
paragraph (5) talks about recommendations on the impact and
benefits to communities not in proximity to a North Slope
natural gas project. Thus, paragraph (5) is an extension of (4)
and cannot be looked at in isolation from its context in (4).
12:19:35 PM
REPRESENTATIVE KAWASAKI observed Amendment 15, page 2, line 3,
includes "(b)" which deals with the members of the advisory
board. He recalled the governor "took a drumming ... after the
letter came out from the mayors" and said this is an appropriate
response in this administrative order. The members of the
advisory board in the bill are representatives from
municipalities, DNR, DOR, oil and gas lessees on the North
Slope, and others. He said he likes the administrative order's
language better in regard to the 12-member board.
CO-CHAIR FEIGE pointed out that this is not in Amendment 15.
REPRESENTATIVE KAWASAKI responded that is what he is saying. He
said he prefers the language in Administrative Order 269 to the
language in Section 58 of the bill, because the order sets out
who will be on the board and which municipalities will be on the
board. He said he thinks subsection (b) should be changed.
CO-CHAIR FEIGE suggested that either an amendment to Amendment
15 be made or that a separate amendment be drafted by
Representative Kawasaki.
REPRESENTATIVE P. WILSON said "it does not take the rest of that
out."
REPRESENTATIVE KAWASAKI noted that the bill language puts in a
municipal advisory board that has a different set of people than
the administrative order. He said he likes the language for the
composition of the board that is in Administrative Order 269
better than what [is in the current version of the bill].
CO-CHAIR FEIGE replied he does not disagree with Representative
Kawasaki's point, but suggests bringing back another amendment.
REPRESENTATIVE TARR observed that page 53, lines 18-19, of the
bill state, "The legislature requests the governor to establish
an interim advisory board under AS 44.19.028 ...." She queried
whether there is any conflict in statutory references between
the bill and the order.
12:23:29 PM
The committee took an at-ease from 12:23 p.m. to 12:27 p.m.
CO-CHAIR FEIGE announced the committee is trying to get answers
to the aforementioned concerns from the Department of Law.
The committee took another at-ease from 12:27 p.m. to 1:39 p.m.
1:39:52 PM
CO-CHAIR FEIGE resumed discussion of Amendment 15.
CO-CHAIR SADDLER said he would like to address his concerns
about providing recommendations on the "effects of." He moved
to adopt Conceptual Amendment 2 to Amendment 15:
Page 2, line 1 after "recommendations":
Delete "on"
Insert "to address"
Thus, page 2, lines 1-2, would read "(5) provide recommendations
to address the effects on and benefits to communities not in
proximity to a North Slope natural gas project."
REPRESENTATIVE HAWKER objected.
CO-CHAIR SADDLER explained he is making this a conceptual
amendment to provide latitude to the drafters to conform the
amendment to the language in Administrative Order 269.
Conceptual Amendment 2 will provide clarity for the
recommendations to address the effects, he said, because
"recommendations on the effects of" does not make sense to him.
REPRESENTATIVE HAWKER maintained his objection to Conceptual
Amendment 2, saying the core intent behind Amendment 15 is to
mirror the duties and responsibilities that are established in
Administrative Order 269 and to ensure that there are no
ambiguities between statute and what are the duties and
responsibilities of the Municipal Advisory Gas Project Review
Board. Taken in context, paragraph (5) is quite clear without
trying to wordsmith one small difference into it, which could
potentially allow for the entire duration of this board the
perpetuation of that ambiguity.
1:42:56 PM
CO-CHAIR SADDLER reiterated that the language is not clear to
him. He requested clarification from the administration as to
the actual intent of paragraph (5) in the administrative order.
COMMISSIONER BALASH answered that the interpretation and reading
provided by Representative Hawker is consistent with that of the
administration. Under the duties of this particular board, a
report would be provided to the legislature and the broader body
politic and public. The recommendations in paragraph (5) are
consistent with those in paragraph (4). It is going to be some
combination of legislation, a structuring of the PILT payments
themselves, and/or impact payments. The desire to be an exact
mirror of Administrative Order 269 is helpful. He suggested
that just the committee's discussion is perhaps adequate if the
concern identified by Co-Chair Saddler is one that nobody wants
to leave in question, but otherwise a statement of intent of
some sort or a letter of intent might do the trick.
1:45:43 PM
CO-CHAIR SADDLER requested Commissioner Balash to provide more
interpretation as how that report might include recommendations
on the impact and benefits.
COMMISSIONER BALASH brought attention to paragraph (4) which
states, "Recommendations for legislative or other options to
minimize the ... impact ...." He said this is the consistent
reading and it is taken from paragraph (4) down to paragraph
(5). Minimizing the impacts and maximizing the benefits is what
is wanted. The administration expects there will be benefits to
virtually every community in the state. The question is how to
ensure that.
CO-CHAIR SADDLER understood the intention of Administrative
Order 269 is to have this report include recommendations to
minimize the impacts and maximize the benefits to communities
not in proximity to a natural gas project. Having declared the
intent on record, he withdrew Conceptual Amendment 2 to
Amendment 15.
COMMISSIONER BALASH stated that, as a member of this particular
board, he will be happy to carry that interpretation and
expectation to the board.
1:47:42 PM
REPRESENTATIVE TARR referenced AS 44.19.028 and suggested there
may be a structural problem because an interim advisory board
[as established in the bill] would be short in duration and
would potentially be statutorily dissolved before the time that
the work anticipated by Administrative Order 269 is completed.
The administrative order sets up a review board and includes
other statutory references to such things as per diem and public
records. Thus, there may now be a structural problem where the
interim advisory board is different than the Municipal Advisory
Gas Project Review Board in time of duration and what the board
members are potentially entitled to. For example, per diem and
travel expenses would not be available to individuals on an
interim advisory board in the same that they are on this review
board. She reported that the Department of Law was going to
look into this during the time the committee was at-ease to
determine whether changes to that language are needed.
MR. PAWLOWSKI responded the guidance he received from the
Department of Law is that either through a separate amendment or
an amendment to Amendment 15, the reference to AS 44.19.028 on
page 53 of the bill, line 19, which is not amended by Amendment
15, would be replaced with the reference of AS 44.19.145(c) for
consistency.
CO-CHAIR FEIGE suggested Representative Tarr bring this up as a
separate amendment.
REPRESENTATIVE TARR replied she could do that or do an amendment
to the amendment. She said this would be the only amendment she
has on this matter.
CO-CHAIR FEIGE requested it be brought back as a separate
amendment from Legislative Legal and Research Services to ensure
everyone is on board with exactly what it is that Representative
Tarr is trying to do.
REPRESENTATIVE TARR agreed to do so.
1:50:48 PM
CO-CHAIR SADDLER removed his objection to Amendment 15. There
being no further objection, Amendment 15, as amended, was
adopted.
1:51:38 PM
CO-CHAIR FEIGE moved to adopt Amendment 16, labeled 28-
GS2806\I.A.86, Nauman/Bullock, 4/4/14, which read:
Page 4, line 21:
Delete "shall"
Insert "may"
Page 4, line 22, following "The":
Insert "board may appoint a separate program
director for an in-state natural gas pipeline as
described in the July 1, 2011, project plan prepared
under former AS 38.34.040 and defined in AS 31.25.390.
A"
Page 4, line 24:
Delete "the board and"
REPRESENTATIVE HAWKER objected for discussion purposes.
CO-CHAIR FEIGE explained the purpose of Amendment 16 is to allow
the Alaska Gasline Development Corporation (AGDC) to appoint
separate program directors for the in-state project and the
Alaska LNG Project.
1:52:16 PM
REPRESENTATIVE HAWKER said the issue on deck is regarding the
authority of the board of directors to manage the affairs of
AGDC and not violate an appropriate chain of business command
within the same organization. There is "double-breasting" of
AGDC to work on both the in-state Alaska Stand-Alone Pipeline
(ASAP) and the Alaska LNG Project. Amendment 16 allows the AGDC
board, within its existing corporate authority, the latitude to
appoint a separate program director for the in-state natural gas
pipeline, as well as a program director for the Alaska LNG
Project. Amendment 16 is a clarifying amendment to ensure
nothing is cross-wired within AGDC and to give the board the
latitude it needs to have the best and the most qualified and
most appropriate personnel dedicated to each individual project
while respecting the corporate organization that the board
establishes for AGDC as a whole.
1:54:15 PM
REPRESENTATIVE KAWASAKI asked how it will work on the ground
level with two different program directors dealing with two
separate activities for a board that has direction to do both
projects.
MR. PAWLOWSKI answered that Representative Hawker appropriately
described the separation that is attempted for the corporation
to take on both of these efforts; it is up to the board to
maintain the appropriate separation. Amendment 16 gives
permissive ability for the board to set up program directors on
the two different projects reporting to the executive director
as part of the normal operation of the corporation. It provides
flexibility for the corporation to manage two very important
efforts for the state that the corporation is tasked with.
1:55:34 PM
CO-CHAIR FEIGE pointed out that, unamended, page 4, line 21, of
the bill only says that the AGDC board shall appoint a program
director for the Alaska LNG Project. Currently, there is no
program director for an in-state pipeline. The executive
director is to supervise the operations of AGDC and is expected
to be able to supervise both projects. It makes sense to
provide the opportunity to have program directors for each of
those projects. Those program directors are dealing with a pool
of specialists within AGDC that, as required, are able to shift
from one project to another. The reason for that is simply
economy of scale and keeping the expertise that applies to both
projects available in one particular corporate entity. The
board, in conjunction with the executive director, would hire
that program director and that person would then report to the
executive director so there would be a clear and distinct chain
of command.
REPRESENTATIVE KAWASAKI said that answers his question.
1:57:45 PM
REPRESENTATIVE HAWKER removed his objection to Amendment 16.
There being no further objection, Amendment 16 was adopted.
1:58:09 PM
CO-CHAIR FEIGE withdrew Amendment 5, which was offered and set
aside on 4/4/14. He said the committee addressed the concerns
within Amendment 5 through an amendment passed earlier today.
1:58:32 PM
CO-CHAIR SADDLER withdrew Amendments 6 and 7, [which were
offered and set aside on 4/4/14], with the intent that he will
bring them back at a later time under different numbers.
The committee took an at-ease from 1:59 p.m. to 2:01 p.m.
2:01:54 PM
CO-CHAIR SADDLER moved to adopt Amendment 17, labeled 28-
GS2806\I.A.83, Nauman/Bullock, 4/4/14, which read:
Page 55, following line 30:
Insert a new bill section to read:
"* Sec. 61. The uncodified law of the State of
Alaska is amended by adding a new section to read:
LEGISLATIVE BRIEFINGS. Before the first flow of
gas in a North Slope natural gas project developed
under the authority of this Act, the parties to the
project shall, at least once each calendar quarter,
provide briefings to interested legislators,
legislative staff, and legislative consultants on the
progress of a North Slope natural gas project
developed under the authority of this Act. A briefing
under this section must be accompanied by a written
report provided by the Department of Natural Resources
of the amount of money the state may be obligated to
pay a third party under an agreement or contract under
AS 38.05.020(b)(10) or (11) if a North Slope natural
gas project is terminated before the first flow of gas
in the project."
Renumber the following bill sections accordingly.
Page 56, line 6:
Delete "61"
Insert "62"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 63 and 64"
CO-CHAIR FEIGE objected for purposes of discussion.
2:02:11 PM
CO-CHAIR SADDLER explained Amendment 17 is a revised version of
Amendment 6, which the administration had previously expressed
some concerns about. First, Amendment 17, page 1, line 10,
makes it clear the report is to be provided by the Department of
Natural Resources. Second, Amendment 17, page 1, line 11, uses
the word "obligated" rather than "liable". Third, Amendment 17,
page 1, line 12, specifies the report must include payments that
the state is obligated to pay as a result of the precedent
agreement or a firm transportation services agreement. He
offered his hope that these three clarifications address the
administration's concerns.
MR. PAWLOWSKI offered his belief that this language provides the
clarity the administration was looking for to fulfill the intent
of offering the amendment.
2:03:23 PM
REPRESENTATIVE HAWKER said he just heard that Amendment 17
provides clarity of intent, but he did not hear a ringing
endorsement of the amendment per se. He expressed his concern
with Amendment 17, saying the legislature or committee co-chairs
can call a committee meeting any time briefings on a project are
wanted and can bring anyone before the committee for a briefing
of any scope. Amendment 17 would place into uncodified law that
"the parties to the project shall, at least once each calendar
quarter ...." The parties to this project are some level of
subsidiary organization within the larger organizations of
ConocoPhillips, BP, ExxonMobil, some level of organization
within AGDC, and some level of organization within TransCanada
or a TransCanada subsidiary. If elsewhere in statute there is
established a public buy-in process, the public is a party to
the project and will need to be brought into that briefing by
this definition. Amendment 17 states the obvious; it is not
needed in uncodified law in order to allow the legislature any
improved access to information, the parties, or any briefing
data that might be made available in such hearings. It is an
answer looking for a problem and that problem does not exist.
2:06:02 PM
CO-CHAIR SADDLER, in response to Representative Hawker's
concerns, said he thinks the public has a tremendous interest in
this project. He related there are lingering concerns about the
amount of reimbursement to TransCanada that the state has run up
in previous versions. It is important to give the public
reassurance that there will be in uncodified law an obligation
to have meetings at least quarterly to provide information to
let the public know how high that tab is running. Nothing in
Amendment 17 says it is not possible to have whatever meetings
of the parties for confidential briefings to the legislature, as
provided for in other amendments, and to have a separate meeting
available to the public that makes that information available to
the public. He conceded it is a bit of belt and suspenders, but
said it is important enough to give the public reassurance that
this is "going to" happen, not just "may" happen.
2:06:57 PM
REPRESENTATIVE SEATON raised the relationship between the
confidential briefings and the provision in Amendment 17. He
pointed out that the sponsor's intention in Amendment 17 is that
these will be public briefings, so the public can be brought
along in the process, not just confidential hearings with the
legislature.
CO-CHAIR SADDLER confirmed the aforementioned is correct.
2:07:35 PM
REPRESENTATIVE TARR supported the sponsor's intent because it is
with the public in mind. She said she has been hearing the same
concerns from her constituents about costs and what commitments
the state is making. She inquired whether quarterly briefings
would be hard to meet or would twice yearly be sufficient.
MR. PAWLOWSKI agreed the timing is something to think about. He
pointed out that the Heads of Agreement, page 9, includes a
commitment by the Alaska LNG parties, during the Pre-FEED phase,
to provide regular Alaska LNG Project updates to the
administration, the Alaska State Legislature, and the public.
He deferred to the Department of Natural Resources to answer
whether the report is a reasonable expectation, given it will
depend on accrual of work plan and budgets and what is actually
going on within the venture.
2:09:26 PM
CO-CHAIR FEIGE requested clarification from the amendment
sponsor regarding "the parties to the project" on line 6 of the
amendment. He noted there are several different corporations
individually that all comprise the parties to the project. He
inquired whether the sponsor's intent is that each individual
company shall give an individual briefing or whether there be a
collective briefing delivered by whoever is running public
affairs for the project.
CO-CHAIR SADDLER responded there are three different parties --
the producers, the State of Alaska, and TransCanada. His intent
is for all five of those parties. However, the drafters did not
see fit to define parties. Each of the producers has its own
pipe within a pipe and its own individual interests, so it would
be appropriate for each of them to be participants in that
briefing.
CO-CHAIR FEIGE understood the sponsor to be saying participants
in the briefing, but not necessarily five different briefings;
that it would be one briefing with representation by each of the
parties involved.
CO-CHAIR SADDLER replied correct.
CO-CHAIR FEIGE requested clarification regarding the written
report provided by DNR that begins on line 9 of Amendment 17.
He presumed the sponsor's intent is that the written report
would be publically distributed on a wide basis.
CO-CHAIR SADDLER answered his intent is for the report to be
publically available, but there is no provision for mailing it
to everybody in Alaska. Making it available publically presumes
Internet publication.
2:11:16 PM
REPRESENTATIVE KAWASAKI, regarding the issue of parties, pointed
out that this is being thought about in terms of the big Alaska
LNG Project. However, under the bill, there is also instruction
for perhaps an in-state gasline. Thus, his question relates to
the definition of project and whether one or both of the two
projects are being included [in the amendment].
CO-CHAIR SADDLER appreciated the question, saying he suspects
the extent that AGDC is involved in the North Slope natural gas
project development through this act, means that, yes, AGDC,
would need to be included in those parties and he therefore
stands corrected.
2:12:07 PM
CO-CHAIR FEIGE asked whether a North Slope natural gas project,
by definition, is either/or.
REPRESENTATIVE KAWASAKI responded he does not know.
MR. PAWLOWSKI offered his belief that a North Slope natural gas
project definition that is linked to AS 38.05.020(b)(10) or (11)
would include either project. He pointed out that this is a
report by DNR, which is incurring the obligation, and AGDC has
actually separate work that it does for outreach and therefore
no nexus with DNR in the incurrence of an obligation on behalf
of the state. This is why, in working with the amendment
sponsor, DNR was chosen -- to target very clearly where the
obligation is coming from to be reported.
2:13:15 PM
REPRESENTATIVE KAWASAKI said when he reads Amendment 17 he has a
question of who the parties are; he knows it is the HOA and the
MOU that are being talked about in terms of the bill. He
inquired whether "the project" includes the small diameter, in-
state gasline that is currently being developed.
MR. PAWLOWSKI noted the reference to "North Slope natural gas
project" is in CSSB 138(FIN) am, page 20, lines 6-8, which state
that it "means a project to produce natural gas from state oil
and gas and gas only leases that include land north of 68
degrees North latitude for transport in a gaseous state from the
North Slope". At this stage, he continued, AGDC has not asked
for, or incurred to his knowledge, any agreements under
AS 38.05.020(b)(10) or (11) because those do not exist yet. In
the event that AGDC does start to enter into those agreements,
it may start to bring in an alternative project, but his
interpretation is that that would be a world where the project
itself is different.
REPRESENTATIVE KAWASAKI understood "the project conceived in
this" is the big Alaska LNG proposal and not any other
alternative project.
MR. PAWLOWSKI replied that his interpretation of the sponsor's
intent, and what the language reflects, is that it is limited at
this stage. He added he was just trying to point out that if
projects change, it may become relevant.
CO-CHAIR SADDLER confirmed that [Mr. Pawlowski's interpretation]
is his intent.
2:15:34 PM
REPRESENTATIVE SEATON noted it was mentioned that under the
Heads of Agreement there are regular reports. Amendment 17
specifies quarterly. He inquired whether quarterly reports
would be a burden or whether the HOA will fit into the
requirements as long as the reports are done.
MR. PAWLOWSKI answered it is important to be very specific with
the language in this context because reports are always a burden
to the group preparing the report. As he reads the language,
Amendment 17 describes briefings. To him, that sounds
consistent or closely consistent with the commitment on page 9
of the HOA, which is for updates. The report by DNR is separate
within this section and that is what the administration was
really looking at with the sponsor. In calling for a report it
needs to be clear whose responsibility it is and what
specifically is to be articulated in the report.
2:16:43 PM
REPRESENTATIVE SEATON asked whether Mr. Pawlowski sees the
briefings required by Amendment 17 as being burdensome, or more
burdensome, or would quarterly briefings suffice and coordinate
with the HOA.
MR. PAWLOWSKI responded the administration has not gone back to
the parties to the Heads of Agreement to define the regular
updates and the schedule around those updates. He assumed that
in certain circumstances the updates may be more than quarterly,
as it could depend on the progress in the project; for example,
progress on an export license or engagement with the Federal
Energy Regulatory Commission (FERC). He said the administration
would want to talk to the partners to the HOA about the burdens
of timing around that, but he just wanted to point out that
there was a commitment in the HOA to regular updates by the
project for the public, the legislature, and the administration.
CO-CHAIR SADDLER stated that, certainly, the intent is to put
more teeth into the agreement than the HOA requiring regular
meetings. Regular could mean every year, twice a year, every
quarter, or every month. Given the intense nature of the
negotiations that will be ongoing for the next year and a half,
quarterly is not too onerous. Further, it is not his intent to
dictate the exact content of what those briefings should be
other than the specificity of requiring DNR to report on how
much the state's obligation financially might be to TransCanada.
The content, format, and duration of the briefings are entirely
up to the parties and would be complimentary to the regular
reports envisioned in the HOA.
2:18:46 PM
REPRESENTATIVE TARR, in regard to Amendment 17 possibly being
problematic, inquired whether Mr. Pawlowski thinks discussion in
this regard could happen prior to a time when there would not be
an opportunity to address it.
MR. PAWLOWSKI replied there are a couple of ways [the
administration] engages with the Alaska LNG Project parties. In
the legislative process, that has been through the public
hearings. They have come to the table and testified. If a
provision like this went into the legislation, they would have
an opportunity to talk about it. Conversations around the bill
have been kept to when provisions specifically go in.
2:19:36 PM
REPRESENTATIVE HAWKER maintained his objection to Amendment 17.
2:19:46 PM
REPRESENTATIVE P. WILSON remarked that quarterly seems too much
and perhaps three times a year would be better. She moved to
adopt Amendment 1 to Amendment 17, which would:
Line 7, before "provide":
Delete "each calendar quarter,"
Insert "every four months,"
CO-CHAIR SADDLER objected, saying he proposed quarterly because
that is a standard frequency of business activities. Every four
months is a strange "dipsy-doodle." There is enough negotiation
that will be ongoing so that every quarter is not too frequent.
He requested the administration's perspective.
COMMISSIONER BALASH answered the rationale in terms of financial
reporting makes sense with regard to the obligation for DNR
providing a written report. In terms of providing a briefing, a
meeting, to interested legislators and staff, the cycle of the
year needs to be considered. There is the intense 90 days of
the legislature in Juneau and that would make a lot of sense.
But during the interim, would those meetings/briefings occur in
Anchorage? Would that require travel for those who are
interested or would they watch on television? If a briefing was
done during session, how many interim briefings would there be?
How frequently would they occur? The last thing anyone wants to
see is briefings at which very few legislators or staff show up
because they happen so frequently. He calculated that under
Amendment 1 to Amendment 17, two briefings would be given during
the interim and one briefing during the session.
2:23:58 PM
REPRESENTATIVE SEATON noted that Amendment 17 says "at least" so
if the provision is for at least three times a year, nothing
would prevent more frequent meetings. He therefore offered his
support for Amendment 1 to Amendment 17 because it serves the
purpose of making the material available in a timely fashion.
2:24:47 PM
REPRESENTATIVE TARR pointed out that the enabling legislation
has fiscal notes and that next year there will be additional
pieces of legislation. Briefings about financial commitments
will be necessary for consideration of legislation and the
appropriation necessary should that legislation pass. Because
legislative appropriations would need to be made, even twice
yearly [briefings] should be sufficient, she concluded.
COMMISSIONER BALASH said he thinks Representative Tarr's point
is a good one. He added he is pleased with the language on line
11 of Amendment 17 which says "may be obligated" because not all
of the specifics of the agreements, and how often financial
information is reported back from the venture to the transporter
and ultimately the agencies, have yet been put down on paper.
It may be that estimates will need to be done based on the last
bit of information that was had and there might not necessarily
be up-to-date, real-time numbers in terms of cash calls.
2:26:36 PM
CO-CHAIR SADDLER said he had envisioned that the quarterly
frequency might be the most advantageous, but if things have not
yet been nailed down then every four months would not be any
diminution of the effort and intent of the amendment to ensure
that information is available to the public. He withdrew his
objection to Amendment 1 to Amendment 17.
2:27:10 PM
REPRESENTATIVE P. WILSON stated that under Amendment 1 to
Amendment 17, the words on lines 6-7 of "at least once each
calendar quarter" would be deleted and replaced with "once every
four months".
REPRESENTATIVE SEATON objected [for discussion purposes]. He
said "at least" should be left in the language so there is not a
problem with reporting more often.
REPRESENTATIVE P. WILSON concurred and restated Amendment 1 to
Amendment 17, saying the last word on line 6 and the first three
words on line 7 would be deleted. Inserted would be the words
"every four months". Thus lines 6-7 would read, "the parties to
the project shall, at least every four months, provide briefings
to interested legislators ...."
REPRESENTATIVE SEATON removed his objection to the restated
amendment to the amendment. There being no further objection,
Amendment 1 to Amendment 17 was adopted.
2:29:52 PM
REPRESENTATIVE HAWKER removed his objection to Amendment 17.
There being no further objection, Amendment 17, as amended, was
adopted.
2:30:21 PM
CO-CHAIR SADDLER moved to adopt Amendment 18, labeled 28-
GS2806\I.A.84, Bullock, 4/4/14, which read:
Page 53, following line 14:
Insert a new bill section to read:
"* Sec. 58. The uncodified law of the State of
Alaska is amended by adding a new section to read:
AGREEMENTS AND CONTRACTS RELATING TO THE
TRANSPORTATION OF NATURAL GAS. (a) An agreement or
contract entered into by the state or an agency of the
state for the transportation of natural gas may not
allow a transporter to have an option to participate
in an in-state natural gas pipeline project as
described in AS 31.25.005(4) that is designed to
transport more than 2,000,000,000 cubic feet of North
Slope natural gas a day.
(b) In this section, "transporter" means a
person providing gas treatment plant processing and
natural gas transportation services in natural gas
pipelines and gas transmission lines that are
components of an Alaska liquefied natural gas project,
as that term is defined in AS 31.25.390(7), enacted by
sec. 12 of this Act."
Renumber the following bill sections accordingly.
Page 56, line 6:
Delete "61"
Insert "62"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 63 and 64"
REPRESENTATIVE SEATON objected for discussion purposes.
2:30:56 PM
CO-CHAIR SADDLER explained the intent of Amendment 18 is to
ensure that the provisions to allow TransCanada to reenter a
deal for a natural gas pipeline project in Alaska - what is
called the five-year back-in or the five-year hook - would not
extend to the right for TransCanada to reintroduce itself into
what has been described as the Alaska Stand-Alone Pipeline
(ASAP), the smaller diameter line. The question of what would
constitute a substantially similar project has not been
thoroughly defined to his satisfaction. There was some effort
to get that clear definition, but having not yet seen that,
Amendment 18 seeks to draw the line at the daily volume of
2 billion cubic feet per day of natural gas, such that
TransCanada would not have a right to back-in to a deal under
AS 35.25.005(4) that was smaller than 2 billion cubic feet per
day. Subsection (b) clarifies the definition of "transporter."
REPRESENTATIVE SEATON pointed out that page 9 of Amendment 18
states "designed to transport 'more' than ...."
REPRESENTATIVE TARR said she thinks it should say "less" than.
2:32:24 PM
CO-CHAIR SADDLER concurred and moved to adopt Amendment 1 to
Amendment 18, which would:
Page 1, line 9, after "transport":
Delete "more"
Insert "less"
There being no objection, Amendment 1 to Amendment 18 was
adopted.
2:33:13 PM
REPRESENTATIVE SEATON requested the administration to speak to
Amendment 18.
COMMISSIONER BALASH responded that moving to a volumetric
limitation triggers a reaction along the lines of "oh my gosh"
due to the experience with the 500 million cubic feet per day
limitation that had been in the Alaska Gasline Inducement Act
that a number of folks stubbed their toe over. He called the
committee's attention to line 8 and the specific reference of AS
31.25.005(4), saying the kind of project described there is one
which would not have liquefaction powers for AGDC. This leads
to the question of how to get to 2 billion cubic feet per day
without having a liquefaction component to the project. Maybe
there will be some other industrial use or load along the way,
but the administration does take some comfort in that line of
demarcation of AS 31.25.005(4) because of that distinction with
regard to liquefaction rather than a specific volume.
2:35:19 PM
CO-CHAIR SADDLER recalled that earlier in the testimony, several
questions were heard about what would be defined as a
substantially similar line. At that time, willingness was
expressed by Mr. Balash to accept someone driving in a stake and
saying this is the bright line. Co-Chair Saddler asked whether
the administration has, or is working on, a definition of
substantially similar or whether there is a better mechanism to
drive a stake someplace to draw that bright line. This is his
effort to do so.
COMMISSIONER BALASH replied that yesterday's feedback was to tie
the configuration of the project referenced in AS 31.25.005(4)
to the current plan that is in place. The statutory reference
of AS 31.25.005(4) goes to describe the plan developed in 2011,
but then allows it to be updated. It has been updated since
2011 and it is known what ASAP is today, and everybody agrees,
including TransCanada, that TransCanada is not trying to back-in
to the ASAP Project. The question is just how much definition
is wanted here and he thinks everyone would agree that the ASAP
plan that the AGDC board and staff are pursuing right now is not
substantially similar. A back-in right would not occur until
getting to the firm transportation services agreement (FTSA),
and whatever back-in right at whatever point in time would not
give TransCanada a right of entry to. The feedback provided by
the administration yesterday was an understanding of the desire
to try and get more specific.
2:37:51 PM
MR. FAUSKE added that the state is limited under AGIA at 500
million cubic feet [per day] and unless that limitation goes
away, AGDC is designing everything to 500 million cubic feet.
He understood Amendment 18 is a look into the future as to what
potentially might happen. Discussion was had with TransCanada
and others as to what significantly similar means. Some of the
folks in the room had concerns as to the legalization of that.
He said he does not know if the right answer is 2 billion cubic
feet. There have been approaches to AGDC from all kinds of
folks in a variety of ways and AGDC remains committed to ASAP as
well as to making the Alaska LNG Project work. It may not be a
bad idea to have something out in the future that allows some
other type of development if, in fact, the state's dream does
not come true and the project does not work. He understood the
sentiment behind the amendment. From what he heard yesterday he
thought there was going to be a side letter addressing some of
these issues as to the confusion of that language. He
apologized if he missed some clarification that was offered.
COMMISSIONER BALASH said a side letter has been put together
with TransCanada regarding the timing of the AGIA license
termination. TransCanada has executed it and he and [DOR]
Commissioner Rodell will do so promptly. The letter was
delivered to them from TransCanada in signature form last night.
2:40:39 PM
CO-CHAIR FEIGE understood Amendment 18 is trying to draw that
bright line over what is substantially similar. He asked
whether it is correct that changing the 2 billion cubic feet of
North Slope natural gas a day to 500 million cubic feet of North
Slope natural gas a day would describe the ASAP line at its
current stage of development today.
MR. FAUSKE answered correct.
2:41:45 PM
REPRESENTATIVE HAWKER argued Amendment 18 gets the legislature
into micromanaging the terms of the MOU, and the MOU is integral
to the HOA. It is known that in complex transaction
negotiations like this, for every provision that someone does
not like in the accord, something was received that is liked.
Legislators do not know about the negotiations that led to that
five-year tag provision, which in isolation he has concerns
about. If legislators push here it is unknown what comes up
over there with TransCanada, especially given that TransCanada
has the absolute right to walk away from this whole transaction
right up front if this enabling legislation is not to its
satisfaction. He said he will continue to be leery of any
future amendments that try to micromanage parameters within the
MOU and overall transaction because legislators are messing with
things they do not know about. While one micromanagement
provision might be okay, an aggregate of micromanaging
provisions could result in something that is unacceptable to
TransCanada. While legislators are not here to be acceptable to
TransCanada, legislators are here to move a project forward with
the greatest possible assurance and clarity, and he does not
want to cloud that. The ASAP Project today is limited to 500
million cubic feet a day. He could easily support Amendment 18
if the 2 billion cubic feet a day was 500 million cubic feet
because there has been testimony on the record that 500 million
cubic feet would not be considered substantially similar by
TransCanada. Why 2 billion cubic feet? Why not 1.75 or 2.25
billion? A line is being drawn in the sand that members really
do not know what they are doing. He therefore maintained his
objection to Amendment 18.
2:44:52 PM
REPRESENTATIVE OLSON shared the sponsor's sentiments. He
suggested the sponsor could hold on to the amendment for a day
or two until more can be found out. Noting that this has been
one of his sticking points all along, he said he chose not to
bring his own amendment when he found out about Amendment 18.
REPRESENTATIVE SEATON remarked he does not mind putting
sideboards on negotiations that are going forward if the
legislature decides it would not want to approve something that
is beyond that. However, talking about 2 billion cubic feet a
day, when the existing one is 2.4 billion cubic feet a day, does
not seem helpful and does not give a good demarcation on things
that he believes would be substantially similar.
2:46:09 PM
REPRESENTATIVE TARR surmised what is being suggested is that
instead of less than 2 billion cubic feet a day, the amendment
would say more than 500 million cubic feet a day.
REPRESENTATIVE HAWKER replied [the suggestion] is less than 500
million [cubic feet a day].
CO-CHAIR FEIGE pointed out 500 million cubic feet a day is the
current size limitation under AGIA. In further response to
Representative Tarr he said it would be "less than" [500 million
cubic feet a day].
The committee took an at-ease from 2:47 p.m. to 3:00 p.m.
3:00:34 PM
CO-CHAIR FEIGE set aside Amendment 18, as amended.
3:00:41 PM
REPRESENTATIVE TARR moved to adopt Amendment 19, labeled 28-
GS2806\I.A.87, Nauman/Bullock, 4/4/14, which read:
Page 47, line 15:
Delete "a new subsection"
Insert "new subsections"
Page 47, line 23:
Delete "or gas"
Page 48, line 1:
Delete "or gas"
Page 48, lines 2 - 3:
Delete "or gas"
Page 48, lines 8 - 9:
Delete "or gas"
Page 48, line 17:
Delete "or gas"
Page 48, line 18:
Delete "or gas"
Page 48, following line 22:
Insert a new subsection to read:
"(i) For purposes of (h) of this section, for a
lease or property that produces both oil and gas, the
portion of the
(1) operating costs that are lease
expenditures attributable to oil incurred to explore
for, develop, or produce an oil and gas deposit is a
fraction the numerator of which is the production of
oil expressed in BTU equivalent barrels and the
denominator of which is the total production of oil
and gas expressed in BTU equivalent barrels; and
(2) capital costs that are lease
expenditures attributable to oil incurred to explore
for, develop, or produce an oil and gas deposit is a
fraction the numerator of which is the total proven
reserves of oil of the lease or property expressed in
barrels and the denominator of which is the total
proven reserves of oil and gas of the lease or
property expressed in BTU equivalent barrels."
CO-CHAIR FEIGE objected.
3:01:13 PM
REPRESENTATIVE TARR explained Amendment 19 replaces an amendment
[she did not offer] labeled 28-GS2806\I.A.37, Nauman/Bullock,
4/2/14. The intent is similar, but the language is clearer at
the suggestion of [the enalytica] consultants. Dealt with
earlier today was [Amendment 11], related to oil and gas lease
expenditures in which there was "or" and "and". Amendment 19 is
a further clarification on what would be deductible. She said
her concern and the spirit of Amendment 19 is that enalytica had
calculated that if the gas expenses are allowed to be deducted
from oil taxes it could cost [the state] between $250-$375
million a year and it is possible that it would reduce oil tax
collections from Point Thomson to close to zero. With some of
the other modifications that have been made, the state has found
itself with bigger budget deficits than perhaps anticipated and
[the question is] whether the state can afford to potentially
take a hit of almost $400 million annually for a four-year time
period, for a cumulative amount of about $1.6 billion. She did
not believe any of this was modeled when [SB 21] was considered
last year because it would not have been relevant at that time,
so there was not the opportunity to consider the cumulative
impact. Amendment 19, page 1, would delete "or gas"; but
regarding page 2, there would not be a real ability to delineate
that until such time as there is gas production. So, for
purposes of figuring out what would be deductible, it was
suggested [by enalytica] that operating costs be done from the
production tax because for operating cost there would actually
be oil production, and that capital cost would be done against
the known reserves.
3:04:25 PM
CO-CHAIR FEIGE directed attention to Amendment 11, which changed
the wording in each of the lines [addressed by Amendment 19].
As now amended, he pointed out, the bill currently reads "and
gas" rather than "or gas". He said the drafters at Legislative
Legal and Research Services will make conforming amendments as
appropriate, but he wants to make members are aware of this.
REPRESENTATIVE P. WILSON inquired whether page 2, line 5, of the
amendment should read "a fraction of the numerator" rather than
"a fraction the numerator".
REPRESENTATIVE TARR replied she, too, read that as a grammatical
error and said the drafters would fix that.
CO-CHAIR FEIGE disagreed, saying it reads correctly because the
"gas deposit is a fraction the numerator of which" - so it is
talking about the ratio there.
REPRESENTATIVE TARR concurred.
3:06:22 PM
CO-CHAIR FEIGE asked whether the administration has comments on
Amendment 19.
MR. PAWLOWSKI responded this issue has come up in just about
every committee and discussion around the advancement of a North
Slope natural gas project. Regarding the statement that the
effects of lease expenditures were not modeled in the discussion
of legislation last year, he would respectfully point to the
broad presentations that are posted on both the administration's
web site and the Legislative Budget and Audit Committee's web
site about the impact of lease expenditure, specifically ones
that were provided to this committee of the effect of the old
tax system which had a much higher tax rate and marginal tax
that has a higher impact on lease expenditures than the SB 21
flat 35 percent rate. This was seen in the depictions of heavy
oil, of some of the unconventionals, where the state actually
had negative value for each barrel produced because of the
effect of deducting in the progressivity equation in the old tax
system. That was resolved by moving to a flat 35 percent tax.
MR. PAWLOWSKI continued, stating that the idea of separating
lease expenses introduces an important policy distortion to the
efforts to move a gasline forward. He noted he will address
this issue from a "30,000" foot level, which is beyond the
detail that the Department of Revenue is concerned about as far
as what expenditure is for gas or is for oil. The Point Thomson
settlement is really where this issue is coming from, and this
settlement gives the lessees three options to maintain the field
in its entirety. One option is to build the "cycling project"
and recover the hydrocarbons, which at Point Thomson directly
come out as condensates in oil from the gas production. Under
his interpretation of Amendment 19, the policy call would be
that if Point Thomson were to make the investments for oil
production and to only produce oil, the lease expenditures would
be deductible. So long as that gas was being put back in the
ground, and the oil was being produced, all the lease
expenditures would be deductible. Therefore, an economic
incentive was introduced for the operators at Point Thomson to
defer gas production simply to maximize the deductibility of
lease expenditures in the production tax system. That, as a
fundamental concern, worries him because Point Thomson will be
producing oil with the gas. The oil comes out of the gas
cycling, so when looking at that option available in the Point
Thomson settlement, coupled with this policy call, more than
just the economics of that near-term reduction in revenue must
be considered. Also needing to be looked at are the economics
of the incremental oil production that comes from the "expanding
cycling" and the gas production that comes to the state. This
was part of the equation that was put into the evaluation of
what the appropriate tax rate was when the administration looked
at lease expenditures. So, from a just operational perspective,
but more importantly from a policy perspective, the
administration would be very concerned about a move to separate
lease expenditures on gas for the odd incentives it may create,
which are things that were seen under the old tax system.
3:10:24 PM
REPRESENTATIVE HAWKER endorsed Mr. Pawlowski's comments and said
[CSSB 138(FIN) am] creates a new flat tax on gas in the form of
a 13 percent royalty-in-kind (RIK) for production taxes. As he
mentioned earlier, there has been give and there has been take;
the bill before the committee is carefully balanced. The
committee cannot keep looking at this just in the places where
the state gave; the committee must also look at what the state
is taking away, which in this case is an upfront 13 percent
taking away of production from the wellhead and the deduction of
costs against that is not being allowed. It is a gross tax.
But, in that the state is now going to this blended gross and
net tax structure - gross on gas, net on oil - the state is
still allowing those expenses to get deducted against oil
because otherwise, for a fair tax system, the state would have
to allow them to be taken against the gross value at which the
state is taxing gas or else the state is just going to strand
those costs and tell industry that it wants industry to develop
gas, but industry does not get the benefit of any of the costs
that are incurred to accomplish that task. That is not a
business incentive and it certainly is not a policy that [the
legislature] wants to be introducing into this statute.
3:12:23 PM
REPRESENTATIVE KAWASAKI recalled that legislators visited Point
Thomson last fall. He requested elaboration on when those plans
of development were made and signed and how current the plans
are at this point.
COMMISSIONER BALASH answered the work ongoing now was first put
forward as a plan of development during the process of dispute
and litigation that occurred during the timeframe of 2007-2008.
The litigation itself was resolved in 2012 and the work that has
been ongoing since has certainly escalated. Two wells were
drilled prior to the final settlement. In actual development
there has been the installation of the pads, the airport, and
this winter's installation of the vertical support members and
pipes. A tremendous amount of activity will be taking place
this summer when there is again open water. The initial
production system plan was tabled in late 2007, early 2008.
3:14:44 PM
REPRESENTATIVE KAWASAKI supported Amendment 19, saying he does
not know whether it is because of the Point Thomson settlement
directly or other factors, but that he certainly wants to see a
gasline built. The problem he sees is trying to find nickels to
scrape together to finish the state's operating budget. The
[Point Thomson operators] ran the numbers as early as 2007 and
have said they want to monetize. So, to essentially give [the
Point Thomson operators] these expenditures means that the State
of Alaska is going to be out a lot nickels.
MR. PAWLOWSKI responded that the changes in SB 21 had negative
impact on the financial contributions of the state to the
operators and other working interest owners at Point Thomson.
The State of Alaska is contributing less to that development
through the tax system today.
3:16:20 PM
REPRESENTATIVE KAWASAKI asked whether it is being said that the
ability to give these lease expenditure deductions is part of
that payment that is going to make the project go.
COMMISSIONER BALASH replied it is being said that for the
economics of gas to make sense, the cost associated with gas
must be dealt with. Those costs cannot be stranded. All of the
models that [the administration] and the companies have looked
at assume a healthy ongoing oil business to carry the costs of
the fields at Prudhoe Bay and Point Thomson. If the gas
revenues and investment numbers are burdened with the cost of
maintaining Prudhoe Bay and Point Thomson, those economics would
degrade and potentially degrade rapidly. If those costs are not
accounted somewhere and the state tries to take its share of
those costs and jam it to the other sponsors, the state is going
to wind up in a different place, as will the other sponsors.
MR. PAWLOWSKI added he does not want to leave uncontested that
the deductibility of lease expenditures is somehow a trade
because no one in the administration who worked through the
issue sees it that way. If lease expenditures are prohibited or
somehow separated based on gas production, there will be an
economic incentive to put gas back in the ground rather than
produce that gas to maximize the lease expenditures. It is a
distortion that gets introduced into the decision making process
that upsets what really should be a sharing of the cost to the
infrastructure and, as has been done in CSSB 138(FIN) am, a
greater share of the gas taken as production that is then
disposed of for revenue. The policy calls made in SB 21 were
not based on a short-term view, but rather a long-term view and
how these things operate over the long term. A fundamentally
similar policy call in the long term is also being made in CSSB
138(FIN) am with the decision to allow lease expenditures to be
deductible.
3:19:04 PM
CO-CHAIR FEIGE inquired how long the State of Alaska has been
offering reimbursements for lease expenditures as part of the
fiscal regime.
MR. PAWLOWSKI offered his understanding that lease expenditures,
and the deduction for lease expenditures, were first recognized
with the passage of the production profits tax (PPT) in the
transition from a gross to a net system. They were reaffirmed
in Alaska's Clear and Equitable Share (ACES) and were continued
in SB 21.
CO-CHAIR FEIGE surmised that if lease expenditures were limited
oil-to-oil and gas-to-gas under Amendment 19, then those lease
expenditures on infrastructure to produce gas would only be
deductible against gas actually flowing down the pipeline.
MR. PAWLOWSKI said he reads Amendment 19 as having no process
for carrying forward expenditures, it is not in that profit-
share lease. Lease expenditures happen in the year they are
incurred. The introduction on page 2, line 2, of the amendment,
describes "for a lease or property that produces both oil and
gas". If the gas is put back in the ground to re-pressurize in
a cycling project, as will be done in the initial production
system, the field would only be producing oil. That would be
the only product severed from the lease and committed at the
point of production. As he interprets Amendment 19, the lease
expenditures in that instance would be applicable against the
production of oil until gas is produced and then the lease
expenditures would be divided when the lease is producing both
oil and gas.
CO-CHAIR FEIGE asked whether the lease expenditures would be
deferred or not able to be deducted at all.
MR. PAWLOWSKI offered his belief that the entirety of the lease
expenditures would be deducted against the oil production in any
event.
3:21:45 PM
CO-CHAIR FEIGE inquired whether the legislature's consultants
have anything they would like to add.
JANAK MAYER, Partner, Energy Consultant, enalytica, responded
CSSB 138(FIN) am proposes an entirely gross system of tax on
gas. The costs are attributed separately to oil and to gas, so
there is no ability to deduct those expenditures; it is simply a
gross system that disregards the question of upstream costs
altogether for that gas. Under Amendment 19, separation is done
by saying that capital cost must be separated by its own
reserves and operating cost must be separated on production;
therefore, he would concur with Mr. Pawlowski that it provides
some incentive either to postpone gas production or at least to
maximize condensate recovery at Point Thomson to ensure that the
maximum amount of liquids is recovered to allow the maximum cost
deduction. That may or may not be in the state's interest as
much of that is determined by the relative pace of gas
production from Point Thomson. Whether that is ultimately in
the state's interest is unknown until much additional technical
work is undertaken. If they were to be separated, separating
them on the basis of reserves for upfront capital costs and
production for subsequent operating costs is the only way to do
it, but he would concur with the concern that it does put a
particular incentive on a particular way of producing the field
that may or may not be optimal. Overall, the test is what the
total share is that is coming to the state from any tax system.
When the numbers are run and enalytica looks at what is
proposed, it seems a reasonable share as it is proposed.
3:23:58 PM
CO-CHAIR FEIGE posed a scenario in which gas condensate cycling
proves not to be economic and the Alaska Oil and Gas
Conservation Commission allows the Point Thomson operators to
blow down the field. He asked whether Amendment 19 would create
an obstacle for a gas pipeline to be filled with Point Thomson
gas.
MR. MAYER replied he would not go so far as to say it creates an
obstacle, but it would somewhat change the incentives producers
face when looking at plans of production toward trying to
maximize recovery of condensates, possibly at the expense of the
pace of gas production because of the ability to write costs
against that oil production if that is included in the initial
reserve estimate.
3:25:03 PM
REPRESENTATIVE TARR said that that point seems in contrast to
what is being accomplished with the enabling legislation and the
other two documents that the state is moving forward on. There
may be a brief window in time when that would potentially have
the aforementioned negative incentive, she allowed, but it seems
that would be such a limited period in time as to not be a real
concern because as things move forward, some of these other
agreements and commitments are locked in as to what is coming
from Prudhoe Bay and Point Thomson. Secondly, if the intent was
the allowable deductions, then it would have been cleaner to
have an ACES-style deduction of an upfront capital expenditure
reimbursement with a timeframe on it, but now is not the time to
get into that conversation. Regarding the negative incentive,
she inquired whether the time period would be brief.
MR. PAWLOWSKI answered it is a fair point and the degree to
which it is or is not an incentive is debatable as the company
runs the numbers for its particular situation. Alaska's
production tax is by the segment -- the entire North Slope. So,
one company's particular view of that situation will depend a
lot on the other activities it has ongoing on the North Slope at
the time. Regarding consistency with the Heads of Agreement and
moving the project forward with the fiscal structure that has
been described, the question is whether it would even get to the
aforementioned described agreements coming back to the
legislature for advancement. He concurred with Mr. Mayer that
in evaluating these things the totality of the state's share and
the cash the state receives for disposition must be looked at.
Additionally, there are nuances in the Point Thomson settlement
that may have adverse impacts that the state has not necessarily
modeled for going down this road. He deferred to Commissioner
Balash to discuss those impacts in the settlement.
COMMISSIONER BALASH explained the matter being referenced by Mr.
Pawlowski has to do with field costs. Because of timing
considerations and where Point Thomson was at the time that
there was a settlement reached on Prudhoe Bay gas, there is a
field cost allowance that is a product of a settlement for
Prudhoe Bay. Because Point Thomson has the same types of
leases, it is likely that an argument would be made by the
lessees that a similar cost allowance mechanism should be
included. In anticipation of some of these things, the
administration struck an element of the agreement in the
settlement that provides there will be no claim for a field cost
allowance under the terms of the leases so long as the state's
production tax system recognizes upstream costs. So, in all
likelihood, Amendment 19 would trigger the undoing of that
particular element in the settlement and provide an avenue for
the lessees to then seek that upstream cost allowance - that
field cost allowance - that would weigh against the state's
royalty in a negative manner.
3:29:20 PM
REPRESENTATIVE KAWASAKI said the committee would not be having
this conversation if gas was at $15 per thousand cubic feet, but
that is not the case and the state is challenged. Alaska has
been an oil state for a long time and is now transitioning to a
gas state and is trying to figure out how these pieces all work
together. He asked whether there are examples of other
sovereigns that do things differently and do not link oil and
gas or when it comes to expenditures in the field.
MR. PAWLOWSKI responded that his general observation is if it
can be thought of then there is probably a jurisdiction
somewhere in the world that does something similar to it. The
diversity of oil and gas tax regimes around the world is
mindboggling when getting into the specific nuances in each
instance. He deferred to enalytica to provide an answer.
3:31:00 PM
MR. MAYER said he can think of regimes that distinguish between
oil and gas production from the perspective of cost recovery in
a number of ways. In production-sharing contracts around the
world, it is not unusual to see both oil and gas treated as
production-sharing items with the ability to recover costs but
to account for them separately and to maintain a separate oil
cost account and a separate gas cost account. There are also
many regimens that may treat them together for cost purposes
under a production-sharing contract but then have an additional
pure gross royalty with a gross rate on the gas that is
different from the gross rate on the oil. So, that is entirely
feasible to do in terms of international comparison and is not
uncommon. The questions here are more about specifics of the
circumstance -- whether it be the overall nature of what is
proposed and how [Amendment 19] might change that and whether
that is a question of incentives for production of Point Thomson
or any other number of fields, or the terms of the Point Thomson
settlement.
NIKOS TSAFOS, Partner, Energy Consultant, enalytica, added that
when looking at big gas projects around the world, one of the
greatest project facilitators in terms of the projects moving
forward is having liquids with the gas. One project in
Australia started the liquids part of the project first to
generate revenue to pay for the gas later on, which is in some
ways similar to Alaska. In terms of the tax system, the
standard practice is generally that the economics of the oil and
liquids assist the development of the gas, which is usually more
costly and less economic. From an accounting perspective there
are different ways to do that. Even in a place like Qatar where
gas is cheap to produce, the gas is piggybacked on the oil
production, the condensate production, to drive the economics of
the projects. Therefore it is pretty standard practice
internationally to have the gas piggyback on the economics of
the oil to make the gas look like an attractive project.
3:33:54 PM
REPRESENTATIVE KAWASAKI queried whether it is limited to
production-sharing countries or whether there are sovereigns
that do not adopt production-sharing agreements.
MR. MAYER responded that when talking about deducting costs in a
fiscal regime, typically one of two things is talked about:
either a profit-based taxation system or production-sharing
contract. At the moment, he said, he cannot think of examples
of profit-based taxation systems where one distinguishes between
the two. What is proposed here by being a profit-based system
on oil, but a gross system on gas, is unusual, but makes a great
deal of sense for the purposes that have been before in terms of
establishing a state gas share. So, the only logical comparison
he can find are ones in the world of production-sharing
contracts rather than the world of profit-based tax systems. In
further response, Mr. Mayer said profit-based taxation systems
by and large tend to be simple uniform taxes applied to all
hydrocarbons without distinguishing between the two.
3:35:19 PM
REPRESENTATIVE TARR offered her understanding that the field
cost allowance would typically not be 100 percent of the cost;
she presumed there would be some percentage or a cap. Even if
the state went to something that could trigger that provision,
the state would probably negotiate something that was a little
less costly to the state than 100 percent. She requested
enalytica to comment in this regard.
MR. MAYER deferred to Commissioner Balash as someone who is more
familiar with the details of settlement negotiation.
COMMISSIONER BALASH said the field cost allowance is expressed
as an amount of money per unit of gas. So, yes, in that regard
a "cap" could be put on it. That is something that perhaps
could be negotiated here and, yes, that cost would be borne by
the state's royalty gas. The question would then be what the
state is going to do about its tax gas. If the same charge
applied, would it be fixed? Yes, it would. However, there
would still be these costs that from the state's perspective
look like they go away, but they will be borne by somebody.
They will burden the economics of hydrocarbon production on the
North Slope. The state can pretend it is doing something to cap
or limit the costs, but they do not go away. If a positive
outcome is wanted for the overall prospects of this project
moving forward, what is come to in the body of the Heads of
Agreement is a way to be a partner in the overall project, where
the state is going to pay its share of the costs. If the state
wants to move away from that, if the state is going to try
avoiding paying its share of the cost, there then needs to be
some fundamental re-thinking of things.
3:37:49 PM
REPRESENTATIVE TARR recalled discussion about the state having
skin in the game but said none of those talks included this
potentially $375 million as part of that. What would be
appropriated this year was looked at, as were other decision
making points and what financial commitments would be necessary
through the stage-gated approach. She said she feels this was
not fully considered as part of the state's commitment and
perhaps this should have been brought up sooner. Last year,
while doing reform, the theme of incentivizing was that it would
only be done based on production, whereas the previous regime
allowed these deductions for capital costs. Thus, it has not
been consistent in her mind and she is concerned about the
financial impact of that on an ongoing basis for the next
several years.
CO-CHAIR FEIGE maintained his objection to Amendment 19.
3:39:36 PM
A roll call vote was taken. Representatives Tarr and Kawasaki
voted in favor of Amendment 19. Representatives Seaton, P.
Wilson, Hawker, Olson, Saddler, and Feige voted against it.
Therefore, Amendment 19 failed by a vote of 2-6.
3:40:24 PM
REPRESENTATIVE SEATON moved to adopt Amendment 20, labeled 28-
GS2806\A.65, Bullock, 4/3/14, which read:
Page 15, following line 30:
Insert a new bill section to read:
"* Sec. 16. AS 38.05 is amended by adding a new
section to read:
Sec. 38.05.023. Expansion of a North Slope
natural gas project. An agreement or contract
negotiated under AS 38.05.020(b)(11) or other
agreement or contract in which the state is a party
and that is associated with a North Slope natural gas
project may allow all parties the benefit of cost
savings that result from the expansion of the project.
However, the agreement or contract must provide that
an expansion that results in an increase in the cost
of transportation may not, for a party that does not
participate in the expansion, increase the
transportation cost for each 1000 cubic feet of
natural gas above the highest cost of transportation
for that party before the expansion."
Renumber the following bill sections accordingly.
Page 17, line 24:
Delete "sec. 17"
Insert "sec. 18"
Page 21, line 16:
Delete "sec. 27"
Insert "sec. 28"
Page 25, line 9:
Delete "sec. 30"
Insert "sec. 31"
Page 31, line 18:
Delete "sec. 37"
Insert "sec. 38"
Page 53, lines 24 - 25:
Delete "sec. 23"
Insert "sec. 24"
Page 56, line 6:
Delete "16, 17, 23 - 27, 29, 30, 37, 39, and 55 -
61"
Insert "16 - 18, 24 - 28, 30, 31, 38, 40, and 56
- 62"
Page 56, line 8:
Delete "Section 38"
Insert "Section 39"
Page 56, line 9:
Delete "secs. 62 and 63"
Insert "secs. 63 and 64"
CO-CHAIR FEIGE objected for purposes of discussion.
REPRESENTATIVE SEATON explained Amendment 20 addresses expansion
of a North Slope project that goes forward. He recalled there
was discussion about allowing benefits to parties that were not
parties to the expansion and were not providing in the costs and
that on a per-unit-volume basis they could receive a benefit for
that. However, if it costs more on a secondary expansion,
Amendment 20 would also mean that the cost for non-participating
parties could not rise above those parties' original per-unit-
volume cost; so everyone would share in both of those.
Otherwise, there could be an expansion that is going to be
avoided because all of that further cost would be borne by so
much differential in the price of the gas for transportation.
Amendment 20 means that no party will ever have to pay more than
it did originally, but at least if there is an expansion to
provide more throughput, then the cost would at least be shared
somewhat, but no further than any party's original cost.
3:42:18 PM
CO-CHAIR FEIGE requested the administration to comment on the
amendment.
MR. PAWLOWSKI said the administration understands the issue
behind Amendment 20 and the interest described by the sponsor is
in allowing rates in an expansion to rise back to the rate that
was charged prior to the expansion. That is a concept loosely
related to rolled-in rates. When the administration started
talking with the parties about this project, it became clear
that much of the thinking related to expansions, and the
treatment of expansions, changes when moving to an LNG project.
While the pipeline is much talked about in this project, it
really is an LNG project with a pipeline and a treatment plant
attached. An LNG project, by its nature, is market constrained.
The addition of a train is necessary for large volumes of
expansion. When he looks at Amendment 20, a particular scenario
troubles him deeply. To illustrate, he posed a scenario of an
in-state gas price that is based on a hypothetical wellhead cost
of $2 plus a pipeline tariff of $4, so that gas for Alaskans
would be $6 leaving the pipe. In this scenario there is then an
expansion that the state does or does not participate in and the
tariff drops to $2 so that the in-state gas price is now $2
wellhead plus $2 transportation, effectively lowering the in-
state gas price. Then let's say there is another expansion
after a few more years, but this time the costs in the expansion
roll back up to the original $4 and in effect the in-state gas
price goes back to $6. This may set up the dynamic of a
political conflict around an expansion. The expansion
principles in the Heads of Agreement do not allow specifically
for this rolling back up of the cost to the original tariff; it
allows for the opportunity for the state or a party of the state
to initiate an expansion, provide that access, but it is really
built on the premise of live and let live and let the economics
drive the expansions. In that this is counter to expansion
principles, he said he believes the administration has a concern
with Amendment 20, as well as for the fundamental scenario that
it could set up in the state related to how the citizens of
Alaska might view an expansion and the impact on their in-state
rates. There are multiple other scenarios in which gas that the
state has no fiscal interest in comes into the line, and while
the state loves the construction, the jobs, and the expansion,
now the state's tariff goes back up and that will come out of
the price of the gas that the state is selling on the market, so
state revenues might go down. Those are all things that can get
worked out commercially. Putting this principle as a limiting
on the agreement or contract runs counter to the static nature
of an LNG project and gives the administration some concern.
COMMISSIONER BALASH concurred with Mr. Pawlowski and
respectfully opposed Amendment 20.
3:46:56 PM
REPRESENTATIVE HAWKER opposed Amendment 20, saying he will vote
against the amendment for the aforementioned reasons. He said
he also continues to be concerned about legislators imposing
micromanagement points and constraints into the negotiation
process. The MOU and the HOA are a framework for conducting
negotiations. However, he noted, he does not want his no vote
on Amendment 20 to in any way imply a constraint on those
negotiations should they actually find a time and a place to
incorporate some element of the amendment or what is proposed in
the amendment if it became appropriate in the process. Right
now, however, there is a huge risk in making it a statutory
constraint.
MR. PAWLOWSKI thanked Representative Hawker for the statement,
saying it made him realize that within the MOU with TransCanada
is a particular arrangement where the state can elect for
rolled-in rates on certain parts of the pipe. Given that that
would be a contract under [Amendment 20], [Representative
Hawker's] clarification on the record is important because the
administration will look to the record during the discussion for
guidance as it moves into negotiations.
3:48:48 PM
REPRESENTATIVE SEATON related that in previous discussion it was
said the State of Alaska was probably going to be the outlet for
expansions in the pipeline. If that is the case, any secondary
expansion that would increase the cost probably means that the
project will not go forward. It also might mean that even if
one of the parties finds other gas and if none of the parties'
rates can go up, including the state's rate, the project will
not go forward. The question is whether expansion in the
pipeline is wanted. "Do we want to say that ... if it goes down
further on the second expansion everybody benefits, but if the
cost is higher to get expansion in this pipeline, do we want to
make that happen?" It will not happen if the cost is solely
borne by the expansion and therefore the economics become
terribly offset. The parties going into this project are saying
they will sanction the project at whatever base rate they have
for the throughput for which it is designed. If the parties are
now saying that on the first expansion [the costs] will go down
and will never go up such that for a second expansion the costs
cannot go up so the expanding party must bear that whole
expansion cost, then the expansions will not take place because
the expanding party bears all of the cost, even above the
original cost. Representative Seaton said is not looking for
the AGIA 115 percent of original rate, but maintained that it is
very reasonable to say that to stimulate expansions that if the
new expansions are higher than the original, a party's rate
cannot go above what it originally said was economic to have the
project go forward. This is really important to enable future
expansions to take place, he opined. There will be a big
economic drag on expansions if there is not some provision like
this because the transportation cost of that other expansion
will be so high and un-uniform from what was determined to be
economical in the first place, which will result in gas being
left in the fields. That is not in the state's benefit and the
whole idea was that the state would probably be the expansion
party for new people that find fields. It does not have to be
for LNG, it could be a mine that needs a lot of gas and which
would require an expansion on part of the pipeline to do that;
but if the cost is totally borne on just that expansion, the
state might not be able to do that. Therefore, Amendment 20 is
a reasonable way to ensure future expansions.
3:52:33 PM
CO-CHAIR FEIGE noted that for the administration speaking as a
future partner in this project, it would certainly be in the
state's best interest to keep the state's cost of transportation
at a level that is predictable and is not going to rise because
that affects the state's economics as well as the economics of
the other partners. It is to the state's advantage as a partner
that if there is an expansion that results in lower overall unit
costs to take advantage of that decrease, which is a benefit
that cannot necessarily be planned for and the economics of the
original investment are not necessarily based on. The problem
does come in if there is a subsequent expansion, but it does
raise a legitimate issue that if the additional expansion
capacity is not fully utilized on the first round of expansion
it does not seem unfair. Depending on the nature of what the
expansion is, it could be that the additional expansion actually
results in a further lowering of per unit costs, in which case
all parties would be able to enjoy the benefit of further
lowering of those unit costs. But, if for some reason, by the
nature of the expansion the costs were to rise, a
disproportionate share of that operating cost would be placed on
one expansion party, which could be the state if it were a
partner to the secondary expansion, or it could be placed on the
additional expansion partner, perhaps affecting the economics
such that that expansion does not happen. It is in the state's
best interest to have the expansion happen. It is in the
[interest of the] original investors in this project to have a
cap on how high their transportation costs could go. He
therefore inquired where the middle ground is [in relationship
to Amendment 20].
The committee took an at-ease from 3:55 p.m. to 4:13 p.m. at the
request of Mr. Pawlowski so he could look up the information to
provide an answer to Co-Chair Feige.
4:13:45 PM
MR. PAWLOWSKI, responding to the question about a middle ground
in relation to Amendment 20, noted that the expansion principles
in the Heads of Agreement were a carefully balanced back and
forth. It was a place where [the administration] found
TransCanada's involvement to be particularly important from the
state's perspective. The terms enable expansions, but there are
potentially economic impediments which are the economic
realities of what it will take to do an expansion. He divided
the question into two types of expansions. He characterized the
first type of expansion as a relatively small-scale in-state
expansion where somebody finds a small amount of gas, in the
range of 20-50 million cubic feet a day, and wants to move it to
a mine. The [Alaska LNG Project] pipe will be designed with
expansion capacity available within it for efficient expansions,
which is where there is not much or any incremental capital cost
to put a bit more gas in the pipe. Compressors run better in
the winter, so there can be more capacity one time of the year
and less capacity at another time of the year. During the Pre-
FEED stage, work will be done to understand the sizing and the
benefits of those types of expansions. There is also an
incremental expansion, which would require one compressor or a
relatively modest capital increment that could be a benefit to
the expander. The second type of expansion is one that would
pose a substantial challenge to the state. That is addition of
a new train -- where it is not the pipe that is the issue, but
the market beyond Alaska that is really the constraint. The LNG
plant envisioned today is for three trains at a cost of $22-24
billion. The addition of a fourth train at the LNG facility is
a multi-billion dollar investment. An expansion to carry
additional large-scale reserves will have to be large enough to
justify that expansion. Justifying the additional investment
necessary to open that additional window to the market is driven
more by the cost of the train than the addition of expenditures
in the midstream in the pipeline or the gas treatment plant.
4:17:02 PM
MR. PAWLOWSKI continued his response, saying the impact that
this type of large-scale expansion potentially has on Alaska's
share of the project is important because the state's revenues
come after cost. If it is a situation where the state has
enjoyed the benefits of the efficient expansions by a lowering
of the state's rates for several years and then new gas comes
into the project that would increase those rates, even if it is
back to the initial rate, the result would be a reduction in the
state's revenue from where the state was at the time.
[Amendment 20] would set up that concern, particularly when
looking to the future and seeing that there are different state
fiscal interests in different gas; for example offshore gas.
Today the state does not have revenue sharing for offshore gas
development. The state likes the jobs, throughput, expansion,
and all the economic activity that creates, but from a fiscal
perspective the state does not, as yet, have revenue sharing for
that gas being developed. So, the state would have a different
interest in how that expansion gets treated. Those were the
things [the administration] thought through in crafting the
expansion principles in tension with the other parties that are
looking out for their interests as well. The gives and the
takes must be looked at in any of these agreements. In the
expansion principles, the unilateral ability for one of the
parties to initiate an expansion, and for that expansion to
proceed, is a powerful principle that protects the opportunity
for an expansion. There are a range of economic scenarios, but
[the administration] believes it has landed on, at this stage,
an opportunity to work through some of these issues as things
continue. The administration is not sure it sees a potential
for a middle ground under Amendment 20, given the uncertainty of
the project at this stage, all of the potential scenarios where
a downside is seen for state, and pending actual detailed design
of the size of the pipe and the opportunity for efficient
expansion in-state.
4:19:24 PM
REPRESENTATIVE KAWASAKI supported Amendment 20, saying he can
imagine a pipeline going from the North Slope to the Kenai area
with an offtake point at Fairbanks taking a significant amount
of gas, leaving empty capacity below Fairbanks that could be
filled. Below Fairbanks are the Nenana Basin and the Susitna
Basin. It is clear that expansion of the project would have to
have a benefit of cost savings for all parties. During most of
the discussions it was said that the transportation tariff is
something that is negotiated and that happens under commercial
agreements. Amendment 20 is necessary to potentially get small
players into the pipe.
4:20:48 PM
REPRESENTATIVE P. WILSON drew attention to the Heads of
Agreement, page 21, Appendix A, which explains the pro-expansion
principles. She noted [A.1.1] states that following the start-
up of the Alaska LNG Project, any Alaska LNG party may initiate
the process for an expansion in which the party has an interest
unless the expansion would result in any of the four events
listed in that section. [A.1.1] concludes with the statement
that expansions can proceed if they meet the criteria in Section
A.1.1. She further observed that A.1.2 states the expansion
parties will pay all of the costs. She asked whether there is
anything in the appendix that would help to better explain this.
COMMISSIONER BALASH responded these principles are just that --
principles. There needs to be much more detailed agreements to
further define and refine the ways in which costs will be
allocated and borne between and among the parties and from the
parties to their shippers. In the larger sense, what is had is
an agreement on how the capital costs are going to be split
between the parties. Each party is going to pay its share of
the project, which gets to the pipe and a pipe concept. The
things that are going to get tricky and require a lot more
detail are the operating costs that get borne by each party; in
all likelihood that is going to reflect the party's recalculated
equity interest in the project as expansions occur and as
capacity is increased. Those are going to be the kinds of
things that will be seen in subsequent rounds of agreements.
Many people are still struggling with the difference between
what is being talked about here and now in this body of
agreements compared to HB 4 and the ASAP line, and compared to
the AGIA and Denali [natural gas pipeline] efforts that were
looking at overland projects where there was a single project
with a single tariff. Because this project goes down an
undivided joint interest approach pathway, there is not a single
tariff that gets applied to all parties. Thus, the state will
be free to order its financing and its tariff the way it wants
to for the state's purposes on its segment of the pipe. But,
the other three sponsors - BP, Exxon, and ConocoPhillips - are
not necessarily going to have tariffs. There will be a division
of costs up front in the capital and there will be a division of
cost as things go forward in the operation of the facilities.
In regard to questions around the cost of transportation, the
language in Amendment 20 does not fit in this particular
commercial construct.
4:25:18 PM
COMMISSIONER BALASH continued, noting that there is some initial
understanding of what the capacity of the pipe is going to be at
the outset relative to the liquefaction capacity. Based on the
initial understandings, there is going to be sufficient capacity
in the pipe through its efficient expansions to increase the
capacity in the pipe enough to add at least one more train of
liquefaction in Nikiski. There would still be additional room
in the pipe for in-state deliveries, be it for a mine or some
other smaller industrial load. People need to keep mind that
the size of a train in this case is going to be on the order of
750-800 million cubic feet per day of gas. That is large. In
regard to making room for small players, small players like
Brooks Range Petroleum Corporation and Great Bear Petroleum LLC
on the North Slope are out of the game when it comes to adding
an entire train of liquefaction. A company like Anadarko
Petroleum Corporation, with a very large land position in "the
foothills," might find sufficient reserves. However, many of
Anadarko's leases are not on state land but on private or
federal land from which the state gets no royalty and no tax
gas. So, the way each circumstance and scenario is viewed is
going to vary.
4:27:25 PM
COMMISSIONER BALASH continued further, pointing out that in this
next phase DNR will be very diligent in understanding and
obtaining from the other sponsors the kind of representations
and warranties that can be counted on in terms of what the
capacities are expected to be. That way it will be known how
many efficient expansions and how much capacity there will be in
the pipe before starting to run into these per-unit increases in
cost that might burden the economics relative to the day-one
rates or costs. He sympathized with the sponsor's intention in
Amendment 20, but said at this particular point in time it must
be kept in mind that there is pipe, a gas treatment plant, and
liquefaction, and all three are going to have somewhat different
costs and may or may not be needed for a given commercial player
down the road. Some players might only need pipe room and no
treatment, others might need treatment and pipe, and some might
not need liquefaction service at all. Amendment 20's language
raises many questions with regard to how this would actually
play out. The agreement or contract under AS 38.05.020(b)(11)
is an agreement negotiated by DNR, so that is going to be
midstream services agreements with TransCanada and/or AGDC for
treatment, pipeline, and liquefaction services, and maybe marine
or marketing services, but that does not necessarily make [DNR]
a party to agreements in that case for the equity and the cost
structure of the project itself. [The department] will not
necessarily be signing agreements with the producers, so
Amendment 20 does not actually get to where folks want to go
from this policy perspective. The amendment has references to
the project, but does not distinguish between the components of
the project. It may be that one component or another is
actually the bottleneck. He said he is left in an awkward place
here because he believes that the policy principle is already
reflected in the Heads of Agreement in terms of ensuring an
accessible and expandable pipe that will encourage and
incentivize additional exploration. Getting into a particular
conversation at this juncture is a struggle because right now it
is unknown as to the circumstances under which costs will or
will not go up, or how much they will or will not go up.
4:31:26 PM
REPRESENTATIVE P. WILSON understood Commissioner Balash to be
saying that Amendment 20 would severely constrain what is going
to be happening in the next 18 months because those types of
things will be talked about in all different kinds of ways.
COMMISSIONER BALASH replied correct, a number of questions are
going to be faced and they are going to be iterative policy
developments as the base project is examined in regard to what
it looks like and what those capacities are. There has been
discussion with the other project sponsors about, for example,
if the pipe is 42 inches whether another train of liquefaction
could be added in Nikiski and are the sponsors sure. What if
the sponsors are not sure? What would be the incremental cost
of going to 44 inches or all the way to 48 inches? Roughly
speaking, it is thought that that is a difference in cost of
about $600 million. Nobody wants to overpay for pipe and pipe
capacity that is not needed, but maybe there is a scenario where
it makes sense for the state to do that. And that invites all
kinds of questions as to how many people make 48 inch pipe.
Will this drive costs in a different way? These considerations
and questions will be looked at very hard. How those
considerations are ultimately weighed will be one of the things
discussed with legislators in these executive sessions as the
project goes forward to ensure that things are appropriately
balanced for the long term. This will get to be clearer and
there will be a better understanding of what the opportunity and
what the costs are for a given expansion policy depending upon
the size and depending upon the nature of those more detailed
operating agreements as they get refined in the next two years.
4:34:02 PM
MR. PAWLOWSKI added he sits as the Department of Revenue's
designee on the board of the Alaska Industrial Development and
Export Authority (AIDEA). This means he gets to work with the
other LNG project that was authorized by this committee last
year. To provide context to the previously mentioned 750-800
million cubic feet a day for an LNG train, he pointed out that
the expansion being talked about for serving customers in the
core community of Fairbanks is - per year - 500 million cubic
feet. Thus, the daily throughput in that expansion is bigger
than the entire annual use. He said he is pointing this out to
help people realize the scale of difference when talking about
in-state demand and in-state work versus the larger, export-
driven project that is being described here today.
4:35:05 PM
CO-CHAIR SADDLER noted that both the Heads of Agreement and
Amendment 20 agree in principle and in the statute that all
parties can benefit from expansion. But at the heart of
Amendment 20 seems to be the expansion that increases the cost
and that the cost of that expansion can be shared with the non-
expansion parties only up to their highest level. He asked why
somebody would make an investment in expansion that raises their
transportation costs.
MR. PAWLOWSKI replied the person may look at the value received
for the sale of the commodity. Having a larger volume of that
commodity may exceed the incremental increase in the expansion
cost across all units that are being sold. So, the volume in
the market goes up higher than the cost in midstream. Amendment
20 would prohibit the negotiating of a contract that on page 22
of the Heads of Agreement provides that non-expansion parties
will be kept whole and will not bear any costs related to the
expansion. So, the principal disconnect is in the sentence that
the administration could not move forward with agreements
relating to the principles in the Heads of Agreement.
4:36:42 PM
REPRESENTATIVE TARR said the concern is that the words can be
there, but can be constructed in such a way that expansion is
discouraged, in which case the words are meaningless. Unclear
to her in the HOA is why it was not enough in A.1.2 [pages 21-
22, Appendix A] to say that only expansion parties will pay for
the cost. It seems that would be sufficient to protect the non-
expansion parties. She inquired why it was also necessary to
say that the non-expansion parties will share in the benefits.
MR. PAWLOWSKI answered from the state's perspective, noting the
state is a participant and is co-investing in the project. By
building the project an opportunity is created for an expansion
to happen. If there is no pipe, no LNG plant, there is never an
expansion. So, an opportunity is created for another party to
come in and benefit from the initial installation of the
infrastructure. The state looks at that as well and says if
there is an investment by another party that would bring gas
through the project that the state may not have an interest in,
should the state not benefit simply because that is a policy
call? [The administration] looked at it and said there are many
instances where the state may not be involved at all in an
expansion, but the state through its co-investment, created the
opportunity for that expansion to happen. To the extent that
in-state demand can benefit, to the extent that state revenues,
state royalty revenues, all benefit, that opportunity was
created by this body and subsequent bodies' decisions to take
that step and enable that infrastructure. So, that is the
underlying principle that was part of the give and take with the
other side of that, which is if a party is willing to pay the
cost the other parties are not going to fight over whether the
expansion can proceed. The expansion can proceed in that
unadulterated opportunity to expand the infrastructure; this is
a powerful tool for the state in enabling access. He pointed
out that there is an interesting division in Appendix A between
A.1 and A.3. Section A.3 talks about a new liquefaction train,
he said, because this is not just about the pipe. The
opportunity for any party, which in this instance would be AGDC,
to initiate the process of installing a new train is not
actually an expansion. But, it is a very powerful tool to
enable either one producer or a consortium of producers on the
North Slope to have an opportunity for an outlet to serve
foreign markets with that gas. It is the totality that led to
the policy call, in addition with looking at the different
scenarios where there is private land or offshore. The state
does not have the same fiscal interest in every instance in this
project the way the state may have had going to a deeply liquid
market with just one simple piece of infrastructure, which is
complicated in its own right but not to the degree that the LNG
project is.
4:40:32 PM
REPRESENTATIVE SEATON pointed out the project has been brought
to legislators with the idea that the state and TransCanada are
going to be the primary expansion parties for new players on the
North Slope. That is one of the underlying principles with all
the trillions of cubic feet of gas that are out there for
development on state and other land. The question is whether
the expansion costs will be [high] enough that the expansion
does not take place. The principle of not raising costs above
what was initially agreed on in the initial project makes a lot
of sense. The theory behind Amendment 20 is to ensure the
expansion will work. A big element behind why TransCanada
should be involved is because TransCanada, like the state, is
interested in expansions. Yet, if we are under the circumstance
that the expansions are constrained because all the costs, if
they are costs for a secondary expansion, are going to have a
high economic cost and make it unprofitable, then the expansion
would not happen. There are private and federal lands, but what
is mostly being looked at is the probability on state lands from
which the state receives royalty and taxes. Representative
Seaton said he is very interested in staying with the principles
under which this project has been brought to the legislature.
There are many different issues, he allowed, and maybe it is not
the right time for making this decision. However, he is glad
for having this conversation and that DOR and DNR are well aware
that it is something that legislators want to have front and
center as things go forward. He withdrew Amendment 20.
4:43:17 PM
[CSSB 138(FIN) am was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| I.A.67Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.68Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.69Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.70Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.71Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.72Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.73Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.74Feige-Admin.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.79.Feige.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.80.Feige.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.81.Feige.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.85.Seaton.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.86.Feige.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.87 Tarr.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.83.Saddler.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |
| I.A.84.Saddler.pdf |
HRES 4/5/2014 10:00:00 AM |
SB 138 |