Legislature(2013 - 2014)BARNES 124

03/19/2014 01:00 PM RESOURCES


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01:06:49 PM Start
01:07:13 PM SB138
03:03:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Administration Presentation of the Bill TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
                                                                                                                                
1:07:13 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR  SENATE  BILL  NO.  138(FIN)  am, "An  Act  relating  to  the                                                               
purposes, powers,  and duties of  the Alaska  Gasline Development                                                               
Corporation;  relating to  an in-state  natural gas  pipeline, an                                                               
Alaska  liquefied  natural  gas project,  and  associated  funds;                                                               
requiring state  agencies and other entities  to expedite reviews                                                               
and  actions  related  to natural  gas  pipelines  and  projects;                                                               
relating to  the authorities  and duties  of the  commissioner of                                                               
natural resources relating to a  North Slope natural gas project,                                                               
oil and  gas and gas only  leases, and royalty gas  and other gas                                                               
received by the  state including gas received as  payment for the                                                               
production  tax on  gas;  relating  to the  tax  on  oil and  gas                                                               
production, on  oil production, and  on gas  production; relating                                                               
to the duties of the commissioner  of revenue relating to a North                                                               
Slope natural  gas project and  gas received as payment  for tax;                                                               
relating to confidential information  and public record status of                                                               
information provided  to or in  the custody of the  Department of                                                               
Natural  Resources and  the Department  of  Revenue; relating  to                                                               
apportionment factors of the Alaska  Net Income Tax Act; amending                                                               
the definition  of gross value  at the 'point of  production' for                                                               
gas for  purposes of the  oil and gas production  tax; clarifying                                                               
that the  exploration incentive credit,  the oil or  gas producer                                                               
education credit, and  the film production tax credit  may not be                                                               
taken against  the gas  production tax paid  in gas;  relating to                                                               
the  oil  or  gas  producer   education  credit;  requesting  the                                                               
governor to  establish an  interim advisory  board to  advise the                                                               
governor on  municipal involvement in  a North Slope  natural gas                                                               
project;  relating to  the development  of a  plan by  the Alaska                                                               
Energy  Authority   for  developing  infrastructure   to  deliver                                                               
affordable  energy to  areas  of  the state  that  will not  have                                                               
direct  access  to a  North  Slope  natural  gas pipeline  and  a                                                               
recommendation  of a  funding  source  for energy  infrastructure                                                               
development;  establishing  the  Alaska affordable  energy  fund;                                                               
requiring  the commissioner  of  revenue to  develop  a plan  and                                                               
suggest  legislation for  municipalities, regional  corporations,                                                               
and residents  of the state  to acquire ownership interests  in a                                                               
North  Slope  natural  gas pipeline  project;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
                                                                                                                                
1:07:23 PM                                                                                                                    
                                                                                                                                
MICHAEL   PAWLOWSKI,   Deputy   Commissioner,   Office   of   the                                                               
Commissioner,  Department  of Revenue  (DOR),  on  behalf of  the                                                               
administration,  began   a  section-by-section  review   of  CSSB                                                               
138(FIN)  am.   To  aid his  review he  began  with a  PowerPoint                                                               
presentation of four slides.   Displaying slide 2, he pointed out                                                               
that the  Alaska Liquefied  Natural Gas  (LNG) Project  is really                                                               
three  megaprojects  in  one:     the  gas  treatment  plant  and                                                               
transmission lines,  the pipeline, and  the LNG plant  and marine                                                               
terminal.  While the infrastructure  gets a lot of attention, the                                                               
$45-$65 billion-worth of infrastructure  is really a mechanism to                                                               
take gas  from the  North Slope, provide  opportunity for  gas to                                                               
Alaskans, and convert that gas to  LNG for export to markets.  As                                                               
he reviews the bill, he said,  he will be looking at places where                                                               
the  legislation differentiates  between  the  gas resource,  the                                                               
management  of   that  resource,   and  the  management   of  the                                                               
infrastructure.    The parties  listed  under  the gas  treatment                                                               
plant and  pipeline are without  the assumption that  the state's                                                               
equity  option  in  the  Memorandum  of  Understanding  (MOU)  is                                                               
exercised.   Thus, slide 2 depicts  day one after SB  138 passes,                                                               
should it  garner the  support of this  committee and  this body.                                                               
The parties in the gas treatment  plant and the pipeline would be                                                               
"ExxonMobil, BP,  ConocoPhillips, and TransCanada."   The parties                                                               
in the  LNG plant would  be "ExxonMobil, BP,  ConocoPhillips, and                                                               
the  Alaska Gasline  Development  Corporation [AGDC]."   The  gas                                                               
moves through this  infrastructure and is then  converted to LNG.                                                               
The parties in that gas  are "ExxonMobil, BP, ConocoPhillips, and                                                               
then the Department of Natural  Resources [DNR] and Department of                                                               
Revenue [DOR] on behalf of the  state."  The state's gas share is                                                               
the combination of the royalty gas plus the tax as gas.                                                                         
                                                                                                                                
1:10:50 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI, moving  to slide 3, stated CSSB  138(FIN) am poses                                                               
three  general questions  to  the legislature:    Will the  state                                                               
participate in  the Alaska  LNG Project  and, if  so, how?   What                                                               
will  be   the  process   for  developing   the  project-enabling                                                               
contracts that will let the  project progress through the phased,                                                               
stage-gated  approach?    What  will be  the  percentage  of  the                                                               
state's participation?                                                                                                          
                                                                                                                                
MR. PAWLOWSKI,  turning to  slide 4,  explained Sections  1-12 of                                                               
the bill  describe the  state's participation  and relate  to the                                                               
powers  and   authorities  of  the  Alaska   Gasline  Development                                                               
Corporation.  Sections 14-15 are  the primary sections related to                                                               
the  process the  state will  use  to develop  and negotiate  the                                                               
project-enabling  contracts that  will be  brought  back for  the                                                               
legislature to review and approve  or reject.  The reference seen                                                               
throughout the bill  is AS 38.05.020(b) and it  is referring back                                                               
to the DNR  powers granted in Sections 14 and  15.  Percentage is                                                               
the next major  concept that the legislation  is oriented around.                                                               
The statute for  tax taken as gas, AS 43.55.014,  is talked about                                                               
in Section 36 but is referenced throughout the bill.                                                                            
                                                                                                                                
1:12:56 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  began his review  of CSSB 138(FIN) am,  turning to                                                               
Section 1, page  2, line 16, through  page 3, line 29.   He noted                                                               
AS  31.25.005 was  passed last  year  in HB  4 and  is the  broad                                                               
purpose  section  that  gives   the  Alaska  Gasline  Development                                                               
Corporation  its  overarching  mission  as a  corporation.    The                                                               
proposed  bill would  amend  the purpose  of  the Alaska  Gasline                                                               
Development  Corporation  to  add   in  some  larger  overarching                                                               
directions -  these amendments are foundational  elements of this                                                               
legislation.    Paragraph  (1)  would  give  the  Alaska  Gasline                                                               
Development Corporation  the purpose to develop  and have primary                                                               
responsibility for  developing natural  gas pipelines,  an Alaska                                                               
liquefied natural  gas project,  and other mechanisms  to deliver                                                               
gas in the state.  Thus, AGDC  would be charged not just with the                                                               
advancement of  in-state natural gas pipelines  but actual direct                                                               
participation  in the  Alaska  LNG  Project.   Also  key in  this                                                               
language  is   "primary  responsibility  for   developing"  those                                                               
projects - AGDC  would lead the state's effort  in the commercial                                                               
relationship  in  the  development  of the  infrastructure.    He                                                               
reiterated  the importance  of  separating the  idea  of the  gas                                                               
moving through the project from  the actual infrastructure itself                                                               
and said this provision gives  AGDC the primary responsibility of                                                               
development of the infrastructure.                                                                                              
                                                                                                                                
1:15:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  the  language "other  transportation                                                               
mechanisms" in paragraph (1) appears  to be tied to just in-state                                                               
natural gas.  He surmised there  is no inclusion of ocean tankers                                                               
in the purpose here.                                                                                                            
                                                                                                                                
MR.  PAWLOWSKI responded  that could  be a  plain reading  of the                                                               
statute, adding  that the  limitations of  this section  have not                                                               
been discussed in detail.  Because  it is for delivery of gas in-                                                               
state,  he said  he  does not  believe it  would  apply to  ocean                                                               
tankers.                                                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON  clarified he  means ocean  export tankers,                                                               
as there has been discussion  of small coastal tankers delivering                                                               
to communities within the state.                                                                                                
                                                                                                                                
MR. PAWLOWSKI said he understood.                                                                                               
                                                                                                                                
1:16:08 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI returned to review  of the bill, saying addition of                                                               
[paragraph (2)],  on page  2, lines  23-25, provides  clarity and                                                               
direction to the Alaska Gasline  Development Corporation, in that                                                               
its  primary responsibility  to  develop  this infrastructure  is                                                               
done so  as "to  deliver natural  gas in-state,  provide economic                                                               
benefits in  the state,  and revenue to  the state",  which gives                                                               
AGDC a mission and a methodology to evaluate that mission.                                                                      
                                                                                                                                
MR. PAWLOWSKI  said the addition  of paragraph (3), page  2, line                                                               
26,  through page  3, line  3, provides  direction to  the Alaska                                                               
Gasline  Development Corporation  in  its purpose  to assist  the                                                               
Department  of Natural  Resources and  Department of  Revenue "to                                                               
maximize  the value  of  the state's  royalty,  natural gas,  and                                                               
natural gas delivered  to the state as payment of  tax, and other                                                               
gas  received by  the  state".   This  builds that  collaborative                                                               
relationship  between AGDC  and  the departments,  where AGDC  is                                                               
advancing  the infrastructure,  carrying the  commercial interest                                                               
of the  state, and  supporting the departments  in their  role as                                                               
the resource agencies  and custodians of that  resource on behalf                                                               
of Alaskans.                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI explained [paragraph (5)],  page 3, lines 12-19, is                                                               
the  inclusion  of  direction  for  AGDC  to  advance  an  Alaska                                                               
liquefied natural  gas project  by developing  the infrastructure                                                               
and  providing   related  services.     Those   services  include                                                               
transportation, liquefaction,  a marine terminal,  marketing, and                                                               
commercial support.   This puts AGDC clearly front  and center in                                                               
supporting  the  state's effort  and  providing  services to  the                                                               
state or other holders of gas  that would be interacting with the                                                               
state  in   that  infrastructure.    Line   15  gives  additional                                                               
direction  that if  AGDC provides  a service  to the  state under                                                               
this paragraph  it may  not charge  a fee for  the service  in an                                                               
amount greater  than the amount  necessary to reimburse  AGDC for                                                               
the cost  of the service.   This provision ensures that,  for the                                                               
state's gas, it is the lowest possible cost.                                                                                    
                                                                                                                                
1:18:46 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI addressed Section 2,  page 3, line 30, through page                                                               
4, line 11, saying it is a  conforming section.  Page 4, lines 1-                                                               
2, add  the language "acting  in the  best interest of  the state                                                               
for the purposes required by  AS 31.25.005," which is the statute                                                               
that gives  those broader  purposes to  AGDC.   Page 4,  line 10,                                                               
adds the language  "or an Alaska liquefied  natural gas project."                                                               
The bill addresses  the question of the  state's participation by                                                               
giving  that primary  participation  role to  the Alaska  Gasline                                                               
Development Corporation.                                                                                                        
                                                                                                                                
MR. PAWLOWSKI  noted Section 3, page  4, lines 12-24, is  new law                                                               
adding a new  subsection that directs the AGDC  board to maximize                                                               
the  efficient  use  of state  resources,  establish  appropriate                                                               
separation  within   the  corporation,  and  appoint   a  program                                                               
director for  an Alaska  liquefied natural gas  project.   A bill                                                               
previously before  the committee,  HB 277, envisioned  a distinct                                                               
separation with  a complete statutory subsidiary  with a separate                                                               
board.  However,  that is eliminated under CSSB  138(FIN) am, and                                                               
an LNG project is brought in  under AGDC as a unified corporation                                                               
under the same board, in an  effort to maximize the efficient use                                                               
of resources and the appropriate separation.                                                                                    
                                                                                                                                
1:20:52 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  pointed out  Section 4, page  4, line  25, through                                                               
page 7, line 16, adds an  Alaska liquefied natural gas project to                                                               
the  powers   and  duties  of  the   Alaska  Gasline  Development                                                               
Corporation  that  were  granted  last   session  in  HB  4.    A                                                               
conforming section,  it simply adds  an Alaska  liquefied natural                                                               
gas  project  to  the  appropriate  places  within  the  statute.                                                               
However,  a substantive  change is  made on  page 7,  lines 5-16.                                                               
New  paragraph  (23)  provides  the  Alaska  Gasline  Development                                                               
Corporation with the power to  acquire ownership or participating                                                               
interest  in an  Alaska  liquefied natural  gas project,  thereby                                                               
providing AGDC  with the  power to  be involved  in liquefaction,                                                               
specifically when  it is related to  an Alaska LNG project.   New                                                               
paragraph  (24)  is  built   on  the  collaborative  relationship                                                               
between the  departments and  AGDC as the  lead developer  in the                                                               
infrastructure.    It  directs there  be  consultation  with  the                                                               
commissioners of revenue and natural  resources when contracts on                                                               
an Alaska LNG project are  entered into for the specific services                                                               
that AGDC is empowered to provide under AS 41.25.005.                                                                           
                                                                                                                                
MR.  PAWLOWSKI  explained Section  5,  page  7, lines  17-29,  is                                                               
clarifying language because there is no open season on a large-                                                                 
scale  LNG project.   Section  5 clarifies  that commitments  for                                                               
firm transportation  capacity, and the recording  required around                                                               
that, are related for the  in-state pipeline.  The Alaska Gasline                                                               
Development  Corporation is  given two  missions under  one roof:                                                               
to  advance  the  Alaska  Stand  Alone  Pipeline  (ASAP)  and  to                                                               
participate in and lead development of the Alaska LNG Project.                                                                  
                                                                                                                                
1:23:21 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI said  Section 6, page 7, lines  30-31, through page                                                               
8, line  2, is  conforming language to  the concept  described in                                                               
[Section 4], paragraph  (23).  Section 6 provides  that the power                                                               
to develop liquefaction  is only related to  advancing the Alaska                                                               
LNG Project.                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  stated Section 7,  page 8,  lines 3-7, adds  a new                                                               
subsection directing  the Alaska Gasline  Development Corporation                                                               
to  provide the  commissioners of  natural resources  and revenue                                                               
access  to information  that  is related  to  the development  of                                                               
contracts under  AS 38.05.020(b)(10) and  (11).  This  statute is                                                               
the process that  the commissioner of natural  resources with the                                                               
commissioner  of revenue  will  lead in  the  negotiation of  the                                                               
project-enabling  contracts  that  will   allow  the  Alaska  LNG                                                               
Project  to move  forward.   Under Section  7, AGDC  will provide                                                               
information,  and access  to  information,  to the  commissioners                                                               
when it is  under the confidentiality protections of  (g) and (h)                                                               
of this  [section].  In  the Heads  of Agreement (HOA)  the state                                                               
has access to  information in its proprietary  capacity and under                                                               
relevant confidentiality  protections.  The intent  is to capture                                                               
that  concept,  which  is that  the  departments  have  naturally                                                               
separate functions as the partners,  but when the departments are                                                               
wearing  their  "proprietary  hats"   managing  the  state's  gas                                                               
interest and with the appropriate  contracts, the state will have                                                               
access to the information.                                                                                                      
                                                                                                                                
1:25:43 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  noted  Section  8,  page  8,  lines  8-19,  is  a                                                               
clarifying amendment  made necessary  because of the  addition of                                                               
Section 9.   The language added  to this section on  lines 18 and                                                               
19 clarifies that the money  in the in-state natural gas pipeline                                                               
fund established under  HB 4 may be used to  advance the in-state                                                               
natural gas project  or the other projects in-state  that AGDC is                                                               
empowered to pursue.                                                                                                            
                                                                                                                                
MR. PAWLOWSKI  pointed out  Section 9, page  8, line  20, through                                                               
page 9, line 3, creates  a separate fund within AGDC specifically                                                               
directed to supporting the Alaska  Liquefied Natural Gas Project.                                                               
Before,  bright lines  and statutory  separation of  corporations                                                               
were  being looked  at.   Now, the  intent is  to retain  a clear                                                               
separation of  the financial resources  to advancing  the project                                                               
so that  the public and members  of the legislature can  see that                                                               
separation within  the structure  of AGDC  -- when  resources are                                                               
committed to  the Alaska LNG Project  they are in the  Alaska LNG                                                               
fund and  committed.   However, this  retains the  flexibility to                                                               
appropriately  share information  -  nonmonetary  resources -  to                                                               
maximize the efficient use of state resources.                                                                                  
                                                                                                                                
1:27:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE recalled  [HB 277]  separated out  two subsidiary                                                               
corporations.   He  asked whether  there  was a  question of  tax                                                               
liability.                                                                                                                      
                                                                                                                                
MR. PAWLOWSKI brought attention to  Section 10, page 9, lines 17-                                                               
18, which  deletes specific language  included in HB  4 regarding                                                               
AGDC's  powers to  create  subsidiaries.   That  language said  a                                                               
subsidiary corporation  may be incorporated under  AS 10.20.146 -                                                               
10.20.166, he explained.  Those  statutes are the nonprofit code,                                                               
so  there was  concern that  by implication  it meant  AGDC could                                                               
only use  the nonprofit code  to develop  a subsidiary.   If that                                                               
was the case, it potentially  could have tax implications for the                                                               
state.  Section 10 removes this  reference so as to allow AGDC to                                                               
use any corporate mechanism that  will maximize the efficient use                                                               
of state  resources.   It is a  clarifying amendment  because the                                                               
intent in  the drafting of HB  4 was to provide  that flexibility                                                               
with the  word "may."  However,  it could be construed  that that                                                               
was  a  limiting  section.    Continuing,  Mr.  Pawlowski  turned                                                               
attention to the  purpose section of AGDC, page  3, paragraph (5)                                                               
of Section 1.  He noted  lines 15-19 provide that when AGDC moves                                                               
gas  for an  instrumentality,  public  corporation, or  political                                                               
subdivision,  it may  not  charge a  fee for  the  service in  an                                                               
amount greater  than the  amount necessary.   The issue  of taxes                                                               
depends  on  the issue  of  profit  or  income and  this  section                                                               
attempts to  minimize the  income or  the opportunity  for income                                                               
when  related directly  to the  state.   Providing the  corporate                                                               
flexibility  for  AGDC to  develop  a  subsidiary using  whatever                                                               
corporate  mechanism   it  wants,  as  well   as  establishing  a                                                               
relationship when supporting the  state, addresses those problems                                                               
and enables both projects to come under one roof.                                                                               
                                                                                                                                
1:29:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON drew attention to Section 8, lines 16-                                                                 
17,  which  state  "appropriated  to  the  fund  without  further                                                               
appropriation  for the  cost  of  managing the  fund  ...."   She                                                               
inquired whether  there is money  in the  other fund now  and, if                                                               
so, how much.                                                                                                                   
                                                                                                                                
MR. PAWLOWSKI  confirmed there is  money in the  in-state natural                                                               
gas pipeline fund,  but deferred to AGDC to  answer the question.                                                               
He added that there is no money in the new fund under Section 9.                                                                
                                                                                                                                
1:30:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  requested clarification of  paragraphs (5)                                                               
and (6) on  page 3.  He offered his  understanding that paragraph                                                               
(5) would be limited to providing  only gas because it applies to                                                               
a political subdivision, whereas  paragraph (6) does not restrict                                                               
it  to  just  gas  because   it  applies  to  municipalities  and                                                               
industrial customers.                                                                                                           
                                                                                                                                
MR. PAWLOWSKI noted  paragraphs (6) and (7) are  language in HB 4                                                               
that  was renumbered  as new  [paragraphs] were  added.   Concern                                                               
about the additional level for  the Alaska LNG Project comes from                                                               
the  issue  that  providing  gas in-state  is  clearly  a  public                                                               
purpose that benefits Alaskans, but  supporting gas for export to                                                               
foreign markets  runs into  a different  level of  corporate law.                                                               
The  relationship between  the two  must be  looked at  under the                                                               
corporation's broader purpose  for the benefit of  Alaskans.  How                                                               
AGDC  would   structure  that  is,   in  his  opinion,   open  to                                                               
interpretation in the way this language is drafted.                                                                             
                                                                                                                                
1:32:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said he  is pointing  out issues  that the                                                               
committee might  look at and  resolve.  Paragraph (5)  relates to                                                               
pipeline gas that must be delivered  at the cost of providing the                                                               
service.     Paragraph   (6)  relates   to   propane  and   other                                                               
hydrocarbons  associated with  natural  gas other  than oil,  and                                                               
these products  can be delivered  to communities  at commercially                                                               
reasonable  rates,  meaning  above  the  cost  of  providing  the                                                               
service.   He  said  he  wants to  ensure  that  natural gas  and                                                               
propane are  dealt with on the  same terms for people  in coastal                                                               
villages and along the rivers  as for people in Fairbanks, Homer,                                                               
or elsewhere.                                                                                                                   
                                                                                                                                
MR. PAWLOWSKI  urged caution.   Noting that he wears  another hat                                                               
as DOR's representative on the  Alaska Industrial Development and                                                               
Export  Authority   (AIDEA)  board,  he  said   AIDEA  is  always                                                               
conscious of  creating competition with  the private sector.   He                                                               
said [AIDEA] was  comfortable with the language  in paragraph (5)                                                               
because  it specifically  relates to  activity within  the Alaska                                                               
LNG Project  by the private sector  that is directly part  of the                                                               
project.   For  the next  step of  moving beyond  the Alaska  LNG                                                               
Project, there will  be an amendment to  provide opportunities to                                                               
deliver low-cost energy to Alaskans when  it is the state that is                                                               
doing  it.    However,  he  advised, members  will  want  to  pay                                                               
attention to how  that might impact competition  with the private                                                               
sector  to move  with AGDC.    The aforementioned  is the  reason                                                               
paragraph  (5) was  done the  way it  is, and,  he believed,  the                                                               
reason why  previous paragraphs  (3) and  (4) were  structured in                                                               
AGDC's original purpose.                                                                                                        
                                                                                                                                
1:35:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI, regarding the  topic of nonprofit versus                                                               
commercially reasonable  rates, requested there be  discussion at                                                               
some point  on how the language  would be interpreted on  page 3,                                                               
line 11, which states "at the lowest rates possible."                                                                           
                                                                                                                                
CO-CHAIR SADDLER  pointed out  the language on  page 3,  line 15,                                                               
says "the corporation provides a  service" to the state, not that                                                               
the corporation is providing gas to the state.                                                                                  
                                                                                                                                
MR. PAWLOWSKI  confirmed Co-Chair Saddler is  correct, explaining                                                               
that that is  for AGDC as a  part owner in a project  in which 75                                                               
percent, as the bill is currently  written, is owned by the three                                                               
producers.   The  intent of  this  section is  setting up  AGDC's                                                               
relationship to  the state as  a shipper  on the main  project in                                                               
relationship to the state's gas.                                                                                                
                                                                                                                                
1:37:02 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI resumed  his review of CSSB 138(FIN)  am, moving to                                                               
Section 10, page 9, lines 4-24,  which relates to AGDC's power to                                                               
create  subsidiaries,  which, he  said,  is  now a  broad  power.                                                               
Drawing  attention to  lines 9-10,  which delete  the words  "the                                                               
state's  royalty share  of natural  gas," he  noted AGDC  has the                                                               
power to  acquire natural gas from  the North Slope.   As part of                                                               
the structure of bringing the  Alaska LNG Project and making AGDC                                                               
the primary  developer of the  project, the intent is  to provide                                                               
separation between  AGDC as the  developer of  the infrastructure                                                               
and the  agencies as the  custodians of  the gas resource.   This                                                               
provides  separation  between  the commercial  activity  and  the                                                               
management of  the gas resource on  behalf of the people.   Lines                                                               
14-17  direct that  when the  subsidiaries are  created there  is                                                               
still protection  of the money between  one fund or the  other to                                                               
retain  that bright  line of  the resources  appropriated by  the                                                               
legislature to  either the  in-state ASAP  project or  the larger                                                               
Alaska LNG Project.                                                                                                             
                                                                                                                                
MR. PAWLOWSKI said Section 11, page  9, line 25, through page 10,                                                               
line  16,  requires  AGDC  to   provide  annual  reviews  of  the                                                               
corporation's assets to the legislature.   Creation of the Alaska                                                               
liquefied natural  gas project  fund adds  another fund  on which                                                               
AGDC must report to the legislature,  so the changes made in this                                                               
section are conforming changes.                                                                                                 
                                                                                                                                
MR. PAWLOWSKI  addressed Section 12,  page 10, lines  17, through                                                               
page 11, line 19,  which is the last of the  AGDC sections.  This                                                               
section defines  an Alaska  liquefied natural  gas project  as it                                                               
has been  used through the previous  sections, he said.   It is a                                                               
very detailed definition of  the project-specific components that                                                               
are discussed  in the  Heads of Agreement  and the  Memorandum of                                                               
Understanding.   While things are  quite different than  what was                                                               
introduced  at the  outset in  HB 277,  he continued,  on balance                                                               
they bring together  a rational level of separation  while at the                                                               
same time  maximizing efficiency  and bringing  to bear  the full                                                               
expertise  of  the  Alaska  Gasline  Development  Corporation  in                                                               
developing  the  infrastructure  in  the LNG  components  of  the                                                               
project on behalf of the state.                                                                                                 
                                                                                                                                
1:40:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER said  reading Sections 1-12 reminded  him of the                                                               
significant  powers  that were  granted  to  AGDC, including  the                                                               
issuance  of bonds,  and that  he had  thought the  role for  the                                                               
subsidiary  was going  to be  taking management  of all  of those                                                               
powers.   He asked what  other kinds of  need there might  be for                                                               
subsidiaries  that  would  have  the   powers  laid  out  in  the                                                               
legislation that was passed last  year.  He further asked whether                                                               
other subsidiaries will be proposed.                                                                                            
                                                                                                                                
MR.  PAWLOWSKI responded  he  does not  see  the state  directing                                                               
creation of subsidiaries unless there  is a compelling reason for                                                               
policy  implications.   Current structure  of the  bill puts  the                                                               
impetus on the  AGDC board and executive team to  use the tool of                                                               
subsidiaries  to manage  what may  become  multiple projects  and                                                               
multiple  efforts  under  AGDC.    Giving  AGDC  the  purpose  of                                                               
advancing the  in-state line  has moved the  state forward.   Now                                                               
the state  has an opportunity  to participate in a  large project                                                               
and AGDC would do  that as well.  The broad powers  in HB 4 allow                                                               
AGDC to  step beyond the  core infrastructure and really  work on                                                               
delivering gas  to Alaskans.  Subsidiaries  are typically created                                                               
to protect  assets and provide  separation, and CSSB  138(FIN) am                                                               
contemplates  that this  will be  done by  the AGDC  board rather                                                               
than being  directed by the state.   That is consistent  with the                                                               
Heads  of Agreement,  which envisions  that AGDC  may or  may not                                                               
create a subsidiary to carry the  interest, and the board and the                                                               
executive team are the best equipped to manage that.                                                                            
                                                                                                                                
1:42:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  inquired what  the definition is  of "off-                                                               
loading" liquefied  natural gas as  used in the language  on page                                                               
11, line 8.  He surmised the definition is not foreign ports.                                                                   
                                                                                                                                
MR. PAWLOWSKI  responded he  will get  back with  the definition,                                                               
but offered  his belief that  it is  in reference to  moving from                                                               
storage and from the plant on  to the ships that would then carry                                                               
it to market.                                                                                                                   
                                                                                                                                
1:43:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  asked about  the language that  would change                                                               
the nonprofit status.                                                                                                           
                                                                                                                                
MR. PAWLOWSKI  replied the  language is on  page 9,  lines 17-18.                                                               
He said  it is not  really a change in  the status, but  rather a                                                               
clarification.   Deleting  that  language  removes the  ambiguity                                                               
that by  specifically calling out  a type of  corporate structure                                                               
it is implied that that may  be the only corporate structure that                                                               
can be used.  He offered  his belief that the original intent was                                                               
for  AGDC  to  have  the  maximum  flexibility  to  use  whatever                                                               
corporate structure  is available  under any  law to  benefit the                                                               
people and be efficient in the use of state resources.                                                                          
                                                                                                                                
REPRESENTATIVE  TARR  said  she   is  trying  to  understand  the                                                               
relationship between  AGDC as a  nonprofit corporation  that then                                                               
would  have a  subsidiary  with some  other corporate  structure.                                                               
She asked  how the relationship  would work between AGDC  and the                                                               
subsidiary and how the relationship  of those two entities to the                                                               
state would work as it pertains to tax payments.                                                                                
                                                                                                                                
MR. PAWLOWSKI answered  he will find someone to bring  in to talk                                                               
about  corporate structure.   However,  he explained,  AGDC is  a                                                               
public  corporation,  an  instrumentality  of the  state,  not  a                                                               
nonprofit.   The reference here  is the nonprofit code,  which is                                                               
separate from being a public  instrumentality that was created by                                                               
and empowered by the legislature.   The relationship between AGDC                                                               
and a  subsidiary would  depend on  the corporate  structure, and                                                               
AGDC has  a direct  relationship to the  state through  the board                                                               
and as a statutorily created entity.                                                                                            
                                                                                                                                
1:45:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER understood the  project definition goes from the                                                               
outlet of  Point Thomsen  and Prudhoe Bay  gas treatment  down to                                                               
the terminal  in Nikiski  and stops there.   He  inquired whether                                                               
consideration was ever given to  expanding the project definition                                                               
to include  the tanker  ships that would  deliver the  product to                                                               
Asian markets  or to small  tankers that could re-gasify  LNG for                                                               
delivery to rural Alaska.                                                                                                       
                                                                                                                                
MR.  PAWLOWSKI  responded  the broader  AGDC  retains  powers  to                                                               
develop transportation  mechanisms to deliver gas  in-state.  So,                                                               
small LNG barges used today in  countries such as Norway are in a                                                               
separate  part.   The  aforementioned is  the  definition of  the                                                               
Alaska LNG  Project specifically  and it  is consistent  with the                                                               
Heads of  Agreement (HOA) and Memorandum  of Understanding (MOU).                                                               
The  state  is  extremely  hesitant to  step  into  transnational                                                               
shipping arrangements directly.                                                                                                 
                                                                                                                                
1:47:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON understood that,  at this point in time,                                                               
AGDC's  responsibility  is  to  the state  to  find  an  in-state                                                               
gasline.    She  further  understood  [CSSB  138(FIN)  am]  would                                                               
provide AGDC the power to  create subsidiaries and a subsidiary's                                                               
authority  would  be directed  by  the  AGDC  board.   She  asked                                                               
whether AGDC would still be under the legislature's authority.                                                                  
                                                                                                                                
MR. PAWLOWSKI  replied a subsidiary  is a tool in  AGDC's toolbox                                                               
that can be  used to advance the different projects  that AGDC is                                                               
charged with.   The board and executives will  figure out whether                                                               
a subsidiary offers opportunities  or inefficiencies.  Currently,                                                               
AGDC is charged with delivering  gas in-state through ASAP.  Once                                                               
that gasline  is developed, AGDC  is charged with looking  at the                                                               
opportunity to move  gas around the state.   Under [CSSB 138(FIN)                                                               
am], AGDC  would also be  given the task  of taking the  lead for                                                               
the state  in developing  the Alaska LNG  Project at  the project                                                               
level.  How  to do that will be  up to the AGDC board.   The bill                                                               
directs for  a separate program  director, but would leave  it up                                                               
to  AGDC to  set the  appropriate separation  needed to  do these                                                               
things,  which, commercially,  have a  tendency to  get more  and                                                               
more  complex  as  they  move   forward.    [The  administration]                                                               
believes it is important to  leave the maximum flexibility in the                                                               
board to be able to manage those issues as they come up.                                                                        
                                                                                                                                
REPRESENTATIVE P. WILSON surmised that,  in the process, AGDC may                                                               
decide to join everything into one line.                                                                                        
                                                                                                                                
MR. PAWLOWSKI answered the time  at which the broader state would                                                               
make a decision to advance either  the ASAP Project or the Alaska                                                               
LNG Project  is in the  future and will  happen as more  is known                                                               
about both  projects.  That  is not  a blanket decision  given to                                                               
AGDC; AGDC has  powers to advance projects.  In  the future there                                                               
are agreements and  additional steps that will be  coming back to                                                               
the legislature,  but today it  is to continue advancing  the two                                                               
projects to maximize the opportunity for Alaskans.                                                                              
                                                                                                                                
REPRESENTATIVE P.  WILSON asked whether joining  the two projects                                                               
could happen.                                                                                                                   
                                                                                                                                
MR.  PAWLOWSKI responded  [the administration]  does not  believe                                                               
that two projects would be advanced for very long.                                                                              
                                                                                                                                
1:51:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR, in regard  to public corporations, requested                                                               
someone  be   made  available  to  answer   questions  about  tax                                                               
liability to  the state, how those  financial relationships would                                                               
work, and what  the state's financial outlook would  look like in                                                               
a stress-case scenario.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  agreed to  do so.   He added  [the administration]                                                               
had been finalizing answers to  questions from committee members,                                                               
but  is now  revising those  answers  to be  appropriate to  this                                                               
bill, CSSB 138(FIN) am, rather than HB 277.                                                                                     
                                                                                                                                
1:52:23 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI returned to his  review of CSSB 138(FIN) am, noting                                                               
Section 13, page 11, line 20,  through page 12, line 8, would add                                                               
a new  section to law  that creates the Alaska  affordable energy                                                               
fund.   The purpose  of the  fund, page 11,  lines 24-25,  is "to                                                               
provide  a  source from  which  the  legislature may  appropriate                                                               
money to  develop infrastructure  to deliver  energy to  areas of                                                               
the state  that are not  expected to have  or do not  have direct                                                               
access to a  North Slope natural gas pipeline."   It would be the                                                               
source  of  funding  for  opportunities  that  are  not  directly                                                               
related  or expected  to have  direct  access to  the main  trunk                                                               
line,  such as  those described  by Representative  Seaton.   The                                                               
amount of  money to be deposited  into this fund, page  11, lines                                                               
28-31, is  10 percent  of the revenue  received from  the state's                                                               
royalty gas  after payment to  the Alaska permanent fund.   While                                                               
money is deposited in this fund,  page 12, lines 1-2, direct that                                                               
it is the legislature that makes appropriations from the fund.                                                                  
                                                                                                                                
1:54:06 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  requested elaboration  on how  the calculations                                                               
would be done to arrive at the 10 percent.                                                                                      
                                                                                                                                
MR. PAWLOWSKI  replied it  is known a  certain percentage  of the                                                               
gas moved through the Alaska LNG  Project will be royalty gas.  A                                                               
certain amount  of the LNG  will be sold  on behalf of  the state                                                               
either  directly or  through an  arrangement for  joint marketing                                                               
with an individual  producer.  To demonstrate  the calculation he                                                               
worked  backwards, starting  with an  LNG price  of $15,  a price                                                               
that  he picked  solely for  the convenience  of showing  how the                                                               
math would  work.  If  the cost of shipping  the LNG in  a tanker                                                               
is, say,  $1; and AGDC's charge  to move the gas  through the LNG                                                               
plant is,  say, $4; and  the cost of  moving the gas  through the                                                               
pipe and gas treatment plant is, say,  $6 - then a balance of $4,                                                               
would be  left, which,  in essence,  is the  wellhead value.   Of                                                               
that  $4  remaining,  25  percent,  or  $1,  would  go  into  the                                                               
permanent fund, leaving a balance of  $3.  Under the proposal, 10                                                               
percent of  that $3, or  30 cents,  would be deposited  [into the                                                               
Alaska affordable  energy fund].   The  remaining $2.70  would go                                                               
into the general fund, although,  he believed, a small portion of                                                               
that $2.70  would go into the  public school trust fund  since it                                                               
is the sale of royalty.                                                                                                         
                                                                                                                                
1:56:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  surmised the  amount  of  LNG being  sold                                                               
would be royalty gas plus tax gas.                                                                                              
                                                                                                                                
MR. PAWLOWSKI answered correct.                                                                                                 
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether in  his calculation  Mr.                                                               
Pawlowski  was backing  both  the  royalty gas  and  the tax  gas                                                               
through the formula,  such that 25 percent of  the wellhead value                                                               
of all of the gas sold is being considered as royalty gas.                                                                      
                                                                                                                                
MR. PAWLOWSKI  responded no, the  deposits to the  permanent fund                                                               
are based on the  sale of the royalty gas.  The  tax gas would be                                                               
sold separately and  the Department of Revenue  would direct that                                                               
back to the general fund, which he will explain later.                                                                          
                                                                                                                                
1:57:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE,  regarding use of  the affordable energy  fund to                                                               
develop  infrastructure,   asked  what  would  happen   when  all                                                               
infrastructure is in place.                                                                                                     
                                                                                                                                
MR. PAWLOWSKI replied  he does not believe  that is contemplated.                                                               
However, he  pointed out, the fund  is a repository of  money and                                                               
the legislature retains the power  of appropriation and it is not                                                               
a dedicated fund.                                                                                                               
                                                                                                                                
REPRESENTATIVE  TARR said  the language  reads to  her as  if the                                                               
affordable energy  fund is  a dedicated fund.   She  requested an                                                               
explanation for why it is not considered a dedicated fund.                                                                      
                                                                                                                                
MR.  PAWLOWSKI deferred  to the  Department  of Law  for a  legal                                                               
interpretation of  why it is  not a  dedicated fund.   He offered                                                               
his  belief  that it  is  similar  to  other  funds where  it  is                                                               
designated  that  revenues  go  into   the  fund  but  the  state                                                               
maintains the power to appropriate from the fund.                                                                               
                                                                                                                                
CO-CHAIR FEIGE  pointed out that  page 12,  line 3, states  it is                                                               
not a dedicated fund.                                                                                                           
                                                                                                                                
1:59:25 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  observed there  are no  provisions for  how the                                                               
proceeds  of the  affordable energy  fund are  to be  invested or                                                               
reinvested,  as is  often the  case for  other state  funds.   He                                                               
inquired whether this is something that needs to be considered.                                                                 
                                                                                                                                
MR.  PAWLOWSKI concurred  the state  has other  funds similar  to                                                               
this.   He explained that  in its  fiscal note for  CSSB 138(FIN)                                                               
am, DOR  recognizes the  affordable energy fund  would be  a fund                                                               
within  the general  fund and  would  therefore be  managed on  a                                                               
blended  basis  with  the  other  funds, so  there  would  be  no                                                               
management cost to DOR.                                                                                                         
                                                                                                                                
REPRESENTATIVE TARR surmised  the idea is that  these funds would                                                               
be a  supplement to existing  state funds that would  continue on                                                               
in the future.                                                                                                                  
                                                                                                                                
MR.  PAWLOWSKI answered  he thinks  that is  true, but  commented                                                               
that without  the large  project there is  no revenue  going into                                                               
this fund.   The fund is created but the  funding source does not                                                               
happen until royalty gas is produced,  which is expected to be in                                                               
the mid-2020s  for the Alaska  LNG Project.  What  other programs                                                               
remain in place in the mid-2020s is hard to presume.                                                                            
                                                                                                                                
2:01:38 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI resumed his review  of the bill, bringing attention                                                               
to Section 14,  page 12, line 9,  through page 15, line  30.  The                                                               
changes  on page  13 are  the core  for how  the project-enabling                                                               
contracts will  be developed, he  explained.  Section  14 revises                                                               
AS 38.05.020(b),  the reference used  in the AGDC  statutes about                                                               
the sharing of information.   The substantive provisions start on                                                               
page 13,  line 12, [paragraph  (10)], which states that  power is                                                               
granted to the  commissioner of natural resources  to "enter into                                                               
commercial agreements with a duration  of not more than two years                                                               
for  project  services  related  to a  North  Slope  natural  gas                                                               
project."   Page  20, lines  9-11, define  "project services"  as                                                               
"services   provided  by   a  gas   treatment  plant,   pipeline,                                                               
liquefaction facility, or  marine terminal, marine transportation                                                               
services, or  other services necessary  to transport  natural gas                                                               
to  market."   These  services  are  related  to a  "North  Slope                                                               
natural gas project" which is defined  on page 20, lines 6-11, as                                                               
"a project to produce natural gas  from state oil and gas and gas                                                               
only leases that include land  north of 68 degrees North latitude                                                               
for transport  in a gaseous  state from  the North Slope."   This                                                               
language,  he  said,  means  that  the  commissioner  of  natural                                                               
resources  will  be  able  to  negotiate with  a  provider  of  a                                                               
service, such as  in the gas treatment plant.   Under the concept                                                               
put forth  by the MOU  that would  be TransCanada; so,  the state                                                               
would  enter  into  an  interim  agreement  with  TransCanada  to                                                               
provide treatment  services for gas  moving through on  behalf of                                                               
the  state.   Similarly,  AGDC in  the  liquefaction plant  would                                                               
provide services in the liquefaction  plant for state gas.  Those                                                               
interim  agreements would  have  duration of  not  more than  two                                                               
years.  Moving back to page  13, line 14, he read from [paragraph                                                               
(11)]  which states,  "in consultation  with the  commissioner of                                                               
revenue,  participate  in  the  negotiation  of  agreements  that                                                               
include  balancing, marketing,  disposition of  natural gas,  and                                                               
offtake and contracts  associated with a North  Slope natural gas                                                               
project."   He reminded members  that when the word  including is                                                               
used in statute  it means including but not limited  to.  This is                                                               
the large project-enabling contracts which,  as seen on lines 18-                                                               
19,  are  not effective  unless  the  legislature authorizes  the                                                               
governor to  execute the agreement or  contract.  In the  MOU the                                                               
state would  enter into a Firm  Transportation Services Agreement                                                               
with TransCanada to provide transportation  services to the state                                                               
for a tariff.  That  Firm Transportation Services Agreement would                                                               
be developed  under AS 38.05.020(b)(11)  and brought back  to the                                                               
legislature to  authorize the governor to  execute that contract.                                                               
Similarly, in  the Heads of  Agreement, an  offer is made  by the                                                               
producers to  enter into  individual marketing  arrangements with                                                               
the  state  to  dispose  of  the state's  share  of  LNG.    That                                                               
disposition agreement  would be negotiated under  AS 38.05.020(b)                                                               
and returned to the legislature for approval.                                                                                   
                                                                                                                                
2:06:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON requested an  explanation of the context of                                                               
a  project services  contract of  not  more than  two years  when                                                               
talking  about  a  liquefaction  facility,  pipeline,  or  marine                                                               
terminal.  He presumed that going  forward there is going to be a                                                               
longer term secure contract that is not renewed every two years.                                                                
                                                                                                                                
MR.  PAWLOWSKI   concurred,  saying  the  long   term  commercial                                                               
arrangements will be done under  long-term contracts, both in the                                                               
project itself  and throughout the  daisy chain  of relationships                                                               
that get developed.  Often  a Precedent Agreement or some interim                                                               
agreement is  there prior to  the firm agreement that  comes back                                                               
[to the legislature].  The timesheet  in the MOU will need to get                                                               
turned into  a Precedent Agreement  that can be a  foundation for                                                               
the more detailed agreement that comes back to the legislature.                                                                 
                                                                                                                                
REPRESENTATIVE SEATON surmised these  agreements are in place but                                                               
not really operating a liquefaction  plant or anything else; they                                                               
are just for  going through the process  while getting everything                                                               
aligned.                                                                                                                        
                                                                                                                                
MR. PAWLOWSKI agreed,  saying it is a process of  taking what are                                                               
very short documents and making  them bigger and then making them                                                               
much bigger to come back to the legislature and the public.                                                                     
                                                                                                                                
2:08:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  understood that  effective with passage  of the                                                               
bill the commissioner can make  commercial agreements of not more                                                               
than  two  years,  so  therefore  not  for  services  that  would                                                               
continue through the duration of  the entire project. He inquired                                                               
what those services might be.                                                                                                   
                                                                                                                                
MR.  PAWLOWSKI replied  it might  be  for two  years because  the                                                               
parties are  coming back with  the contracts that are  needed for                                                               
operating over  the long term.   The timeline for  the Pre-Front-                                                               
End  Engineering and  Design (Pre-FEED)  stage  is 18-24  months.                                                               
The  state   needs  flexibility  to  enter   into  these  interim                                                               
agreements, but  those are not  binding in the way  the long-term                                                               
contracts  are.   In further  response, he  said it  is Precedent                                                               
Agreements for those  services that are envisioned  for those two                                                               
years,  not that  those services  are  actually there  yet.   The                                                               
Precedent Agreement  phase occurs before the  Firm Transportation                                                               
Services Agreement, which would govern the full operation.                                                                      
                                                                                                                                
2:09:36 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  recommenced his presentation of  CSSB 138(FIN) am,                                                               
noting the  next addition made  in Section 14 is  paragraph (12),                                                               
page  13, lines  21-31.   This provision,  he said,  empowers the                                                               
commissioner   to  enter   into  confidentiality   agreements  to                                                               
maintain  the confidentiality  of  information  related to  these                                                               
contract negotiations.                                                                                                          
                                                                                                                                
2:09:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked how  binding the  two-year contracts                                                               
would be, given  that the long-term contracts coming  back to the                                                               
legislature  for approval  may include  elements the  legislature                                                               
does not agree to.                                                                                                              
                                                                                                                                
MR. PAWLOWSKI  responded the interim  agreements are  not binding                                                               
in the  way the full contracts  are binding.  The  full contracts                                                               
will  be  binding  with the  legislature's  authorization.    For                                                               
example, under a  Precedent Agreement the state  will be entering                                                               
into  a  relationship  per  the  MOU  with  TransCanada  to  have                                                               
offerings, and with those  offerings associated development cost.                                                               
Those agreements are  binding in that the state  is committing to                                                               
something within those two years,  but they are not the long-term                                                               
agreements that then are precursors  for the legislature's up-or-                                                               
down approval.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether the  two-year commercial                                                               
contracts made by AGDC will  have provisions that allow things to                                                               
be cancelled without  obligations if the legislature  does not go                                                               
with a longer term contract.                                                                                                    
                                                                                                                                
MR. PAWLOWSKI replied  this section relates to  the Department of                                                               
Natural Resources and the commissioner  of natural resources, not                                                               
AGDC, entering into the resource  agreements.  It would piggyback                                                               
on the royalty process the department goes through.                                                                             
                                                                                                                                
REPRESENTATIVE SEATON rephrased his  question, asking whether the                                                               
two-year  commercial agreements  that the  Department of  Natural                                                               
Resources would  be allowed to  enter into could  have provisions                                                               
that bind  the legislature or  that commit to reparations  if the                                                               
legislature disapproves  of the long-term contract.   He presumed                                                               
that agreements and contracts are viewed as the same thing.                                                                     
                                                                                                                                
MR. PAWLOWSKI answered he will  look at the various possibilities                                                               
and get back to  the committee.  He said the  way the language is                                                               
crafted,  agreements  are  viewed   as  slightly  different  from                                                               
contracts;  it   provides  flexibility  to  enter   into  interim                                                               
agreements  and move  things  off  the list  prior  to the  large                                                               
contracts that will come back [to the legislature].                                                                             
                                                                                                                                
2:14:33 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  returned to  his review  of Section  14, paragraph                                                               
(12),  drawing  attention  to  lines   29-31,  which  state  "the                                                               
commissioner  may share  confidential information  obtained under                                                               
this paragraph  with the legislature  only in committees  held in                                                               
executive  session or  under  confidentiality  agreements."   The                                                               
goal, he  said, is  to work  with the  legislative body  over the                                                               
period the contracts are developed  so that a suite of agreements                                                               
is created  that will  meet with  success, rather  than something                                                               
the public and  the legislature cannot support.   Just as parties                                                               
were  brought together  in the  Heads  of Agreement  to move  the                                                               
project in Alaska  forward, the idea is to now  expand the circle                                                               
to include the legislature to keep moving this project forward.                                                                 
                                                                                                                                
2:16:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR inquired  whether  the commissioner  "shall"                                                               
share  confidential  information  would be  stronger  than  "may"                                                               
share.  She said "may" might  leave it open to the commissioner's                                                               
discretion  as to  whether that  information is  shared with  the                                                               
legislature.   If  the  intent  is for  the  legislature to  have                                                               
access to that  information, the language needs to  be clear that                                                               
that is the case.                                                                                                               
                                                                                                                                
MR. PAWLOWSKI offered  his belief that this was a  change made in                                                               
the  other  body  at  the  direction  of  Legislative  Legal  and                                                               
Research Services.  He said  the committee and the administration                                                               
can look back through the record to get an answer.                                                                              
                                                                                                                                
2:16:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  said  the  intent  is  clearly  there  that  the                                                               
legislature  should participate  with the  department.   Although                                                               
not   necessarily   participating   in  the   negotiations,   the                                                               
legislature  would be  aware  of the  process  and would  perhaps                                                               
provide advice to the administration.   If somebody starts down a                                                               
path that legislators know is not  going to fly, it is better for                                                               
the  administration to  know that  up  front and  not waste  time                                                               
going down what the legislature would know  to be a dead end.  He                                                               
said his  reading of  this language  is that  legislative members                                                               
would  have   to  sign  confidentiality  agreements   and  anyone                                                               
uncomfortable with signing a  confidentiality agreement would not                                                               
be allowed to participate in those sessions.                                                                                    
                                                                                                                                
MR.  PAWLOWSKI  concurred.    Stating   that  this  is  a  really                                                               
important topic, he brought attention  to the Heads of Agreement,                                                               
page  14, Article  8.3.3.   During the  Pre-FEED stage,  he said,                                                               
individually  the  companies  and  the state  are  talking  about                                                               
initiating  the process  of assessing  the LNG  market to  see if                                                               
there really are opportunities for  Alaska gas to compete. At the                                                               
same  time,  the state  will  be  working disposition  agreements                                                               
potentially, or preliminary disposition  agreements, with each of                                                               
the three producers  individually or other parties  that might be                                                               
interested in  managing LNG on  behalf of  the state.   The state                                                               
could be  negotiating with,  say, ExxonMobil,  while at  the same                                                               
time   negotiating  a   separate  agreement   with  BP   for  the                                                               
disposition  of  LNG, and  one  with  ConocoPhillips.   Under  no                                                               
circumstances  would   [the  administration]  want  to   put  the                                                               
legislature in a position of  telegraphing the different terms in                                                               
those agreements  to the detriment  of the state or  allowing the                                                               
parties   to  see   what  is   going  on   between  them.     The                                                               
confidentiality  provisions   are  critical  to   protecting  the                                                               
state's   interest   as   it    steps   into   these   commercial                                                               
relationships.   This can  be seen today  with the  Department of                                                               
Natural  Resources and  the disposition  of royalty-in-kind  oil.                                                               
This is  a key piece  of the legislation that  the administration                                                               
looks forward to discussing with the committee.                                                                                 
                                                                                                                                
2:20:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  said  he  is unsure  whether  under  the                                                               
legislature's uniform  rules a  legislator could  be kept  out of                                                               
executive  committee, plus  it is  possible for  a legislator  to                                                               
come  in who  is not  a member  of the  committee.   He therefore                                                               
suggested that "or"  may need to be changed to  "and" on page 13,                                                               
line  31.   He  requested  that  Legislative Legal  and  Research                                                               
Services explore  this as well  as whether a legislator  who does                                                               
not  sign  a  confidentiality  agreement could  be  kept  out  of                                                               
executive committee even if "or" is changed to "and" on line 31.                                                                
                                                                                                                                
REPRESENTATIVE  SEATON  recalled  that when  doing  this  before,                                                               
people  individually signed  confidentiality agreements  and went                                                               
to meetings,  although meetings were not  necessarily established                                                               
legislative meetings.                                                                                                           
                                                                                                                                
REPRESENTATIVE  JOHNSON  said  that   is  his  point  about  "any                                                               
committee or" and  if a committee is convened, he  does not think                                                               
it has the  right to restrict.   While there may be  a way around                                                               
that he is unsure that this is the right answer.                                                                                
                                                                                                                                
2:22:29 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI resumed  his review  of CSSB  138(FIN) am,  noting                                                               
Section  15, page  14, line  3, through  page 15,  line 30,  is a                                                               
repeat of Section 14.   Throughout the legislation, he explained,                                                               
a  section is  amended  that  was just  amended.    The bill  has                                                               
different  effective dates  for  different  provisions.   Several                                                               
years ago it  was learned that having tax  provisions take effect                                                               
halfway through a tax year  causes disaster for the Department of                                                               
Revenue because taxes  are paid on an annual basis,  not a fiscal                                                               
year basis.   Thus, annualizing the tax laws is  looked for.  The                                                               
tax  provisions in  the bill  take  effect 1/1/15  and the  other                                                               
provisions take  effect immediately.   The  purpose of  a section                                                               
that is amending  the section just amended is  to incorporate the                                                               
change in  tax law  that is happening  later in  the legislation.                                                               
This  is seen  on page  15, where  all of  the language  from the                                                               
previous section is  repeated, but a new paragraph  (13) is added                                                               
to reference  AS 43.55.014, which is  the concept of tax  as gas.                                                               
Tax as  gas does  not become an  opportunity until  the provision                                                               
that enables tax as gas happens,  which is 1/1/15.  There are two                                                               
sections because the commissioner  of natural resources cannot be                                                               
given direction to consult with  the commissioner of revenue in a                                                               
provision that  does not exist  yet.   Paragraph (13) sets  up in                                                               
the  powers   of  the  commissioner  of   natural  resources  the                                                               
direction  to  manage  tax  gas  but  in  consultation  with  the                                                               
Department  of Revenue.   Currently,  the  Department of  Natural                                                               
Resources  (DNR)  manages  royalty-in-kind.     A  royalty  board                                                               
composed  of commercial  analysts  and  knowledgeable staff  uses                                                               
process,  statute,  and  precedent   to  enter  into  disposition                                                               
agreements and  to manage oil  and gas.  However,  the Department                                                               
of Revenue  (DOR) does not  have this.   When considering  tax as                                                               
gas,  the  administration  looked  at  having  DNR  leverage  its                                                               
expertise to manage  that on a day-in-day-out basis  on behalf of                                                               
DOR so that the  tax gas would be disposed of in  the same way as                                                               
for royalty gas.   This allows the state to  be efficient and not                                                               
bulk up  two organizations when DNR  can be relied upon  to do it                                                               
and to do it in consultation with  DOR since it is DOR that takes                                                               
proceeds  from the  sale  of tax  gas and  designates  it to  the                                                               
general fund or wherever else the legislature has directed.                                                                     
                                                                                                                                
2:27:02 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  said Section  16, page 15,  line 13,  through page                                                               
16, line 15,  is a conforming amendment to  an exploration credit                                                               
already on  DNR's books.   The  amendment, which  is on  page 16,                                                               
line  12, changes  the statute  from  AS 43.55  to AS  43.55.011,                                                               
which  is  the  state's  production tax.    This  change  happens                                                               
throughout the  bill and relates  to credits and  the application                                                               
of tax  credits and this  is the  first instance of  that change.                                                               
Under this  bill, a taxpayer,  under specific  circumstances, can                                                               
pay tax obligations  with molecules, just like what  is done when                                                               
the state takes  royalty-in-kind.  However, tax  credit cannot be                                                               
applied against a payment in  molecules, so, wherever AS 43.55 is                                                               
referenced, a  conforming amendment must  be made by  changing it                                                               
to AS  43.55.011, which is the  regular payment in cash  that the                                                               
state receives from the taxpayer.                                                                                               
                                                                                                                                
2:29:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON inquired  whether it  is being  said that                                                               
the state would be able to take gas in lieu of taxes.                                                                           
                                                                                                                                
MR. PAWLOWSKI replied  yes.  Instead of a tax  payment, the state                                                               
under CSSB 138(FIN) am has an  opportunity to take a larger share                                                               
of the gas from certain leases and under certain circumstances.                                                                 
                                                                                                                                
REPRESENTATIVE JOHNSON  posed a  future scenario of  the pipeline                                                               
at 100 percent capacity and  the three producers saying they want                                                               
to pay their tax in gas.   He posited that what the producers pay                                                               
the state they would take up  by selling their own, and therefore                                                               
the state would have no way to transport that tax payment.                                                                      
                                                                                                                                
MR. PAWLOWSKI responded Section 17  is a precursor for the option                                                               
to do tax  as gas.  The  opportunity for a taxpayer to  do tax as                                                               
gas depends  upon the Department  of Natural  Resources modifying                                                               
the lease.   If the  lease is not  modified, the option  will not                                                               
exist.   State  control is  built in  this way  because, per  the                                                               
Heads of Agreement,  the state sees a real  opportunity in taking                                                               
the  molecules and  maximizing  that resource  on  behalf of  the                                                               
people of Alaska.   At the same time, the  opportunity for tax as                                                               
gas  is  subject  to  certain  agreements  being  struck  to  the                                                               
satisfaction  of the  state.   This  provides a  process and  the                                                               
mechanism to  set that up because  it is correct to  be concerned                                                               
about what happens to the state  in a situation where it receives                                                               
molecules but has  no capacity to place them.   The state must be                                                               
careful and  set up  mechanisms that prevent  that, which  is why                                                               
the state  is being put into  the driver's seat for  enabling the                                                               
option to begin with.                                                                                                           
                                                                                                                                
2:31:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON observed Section  16 deals with exploration                                                               
incentive tax credit  credits that may not exceed  50 percent [of                                                               
the payment toward which it is  being applied].  He asked whether                                                               
these credits are being applied against oil taxes or gas taxes.                                                                 
                                                                                                                                
MR. PAWLOWSKI  answered this  is a legacy  credit which  has only                                                               
been used a  few times.  It is a  credit against royalty payments                                                               
or  production  tax  payments,  and is  production  tax  on  gas,                                                               
royalty on gas, royalty on oil.   This is a legacy power that the                                                               
commissioner of  natural resources has  in statute and this  is a                                                               
conforming amendment to how that credit could be applied.                                                                       
                                                                                                                                
REPRESENTATIVE  SEATON  understood  a  new credit  is  not  being                                                               
created here.   He said  his question  comes down to  the problem                                                               
that the  state changed its  tax system last year,  especially in                                                               
relationship to high  amounts of credits that the  state would be                                                               
liable  for,  particularly  at  low prices.    He  expressed  his                                                               
concern that going forward the state  does not have a system that                                                               
relates  to expenses  in gas  that  then get  applied to  further                                                               
reduce the state's  oil revenue at low prices.   If this is being                                                               
revamped, he said,  members need to understand  how these credits                                                               
are going to  implicate the state's future  liabilities if things                                                               
do not go the way the state wants them to go.                                                                                   
                                                                                                                                
CO-CHAIR FEIGE  stated it would be  useful, to that end,  to know                                                               
what the historical utilization of those credits is.                                                                            
                                                                                                                                
MR.  PAWLOWSKI offered  his belief  that as  this bill  has moved                                                               
through the process,  the administration has answered  and done a                                                               
history on this  particular credit, which he will  provide to the                                                               
committee.    He  added  he  knows  that  there  has  been  other                                                               
discussion of credits.                                                                                                          
                                                                                                                                
REPRESENTATIVE SEATON said  his concern is that now  the state is                                                               
entering a  phase not of  history of  where the credit  was used,                                                               
but of trying to make  gas production accentuated.  Therefore, he                                                               
is worried  more about the  possibility of what the  credit could                                                               
do if  left in place  in the future than  whether it was  used in                                                               
the past.                                                                                                                       
                                                                                                                                
2:34:32 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI, returning  to  his review  of  CSSB 138(FIN)  am,                                                               
explained Section  17, page  16, line 16,  through page  17, line                                                               
23, amends the power of  the commissioner of natural resources to                                                               
modify leases.   Amendment of  AS 38.05.180(hh) is a  key section                                                               
of the bill,  he said, and is a precursor  to the availability of                                                               
the  option  for  a taxpayer  to  pay  its  tax  with gas.    The                                                               
commissioner   has  an   opportunity  after   making  a   written                                                               
determination   to   modify   leases;  leases   are   contractual                                                               
relationships  between  the state  and  the  lessor that  may  be                                                               
modified.  A key  change that must be done to  move a gas project                                                               
forward is  on page 16, lines  25-29.  Under the  current leases,                                                               
the state has the right to  switch from taking in-value to taking                                                               
in-kind.   This  creates significant  problems in  a gas  project                                                               
because a  gas project depends  on capacity being  subscribed for                                                               
long periods  of time  and fully  utilized.   For example,  say a                                                               
producer  enters into  a  long-term contract  to  sell a  certain                                                               
amount of LNG to  a buyer for the next 25  years and the producer                                                               
has made  that decision with the  state taking in-value.   If six                                                               
months later  the state says it  wants to take its  gas molecules                                                               
as molecules, that  producer is now short molecules  to turn into                                                               
LNG to  meet its contract.   Under oil, this power  to switch the                                                               
state's lease terms  makes a lot of sense;  however, in long-term                                                               
gas  commitments  it  creates  real   instability  for  both  the                                                               
producer  and  the  state.    Likewise,  if  the  state  makes  a                                                               
commitment to provide  LNG and there is the ability  to move back                                                               
and forth between in-value and  in-kind, the state could be short                                                               
the gas  it has committed to  those contracts.  This  would allow                                                               
the commissioner to  modify the leases to put  limitations on the                                                               
right to switch between in-value and  in-kind so that they do not                                                               
unreasonably interfere  with the  long-term marketing  of natural                                                               
gas by  the lessee of the  state or another person.   It supports                                                               
the long-term  marketing of that  natural gas and  fulfillment of                                                               
the contract.                                                                                                                   
                                                                                                                                
2:37:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE agreed the term  is important and inquired whether                                                               
it is  worth putting into  statute here limitations on  the terms                                                               
or a minimum term period.                                                                                                       
                                                                                                                                
MR.  PAWLOWSKI replied  page  16, lines  21-23,  state that  "the                                                               
modification shall be  in effect during the  initial project term                                                               
that has  acquired the major  permits required for the  work plan                                                               
and budget  ...."  So, it  is contemplated to be  limited to that                                                               
period of the initial contract.                                                                                                 
                                                                                                                                
CO-CHAIR FEIGE surmised the first 25 years.                                                                                     
                                                                                                                                
MR. PAWLOWSKI agreed that would be about right.                                                                                 
                                                                                                                                
2:38:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  understood the modification being  made is                                                               
just switching  an in-kind  and is  not a  percentage of  the bid                                                               
amount.                                                                                                                         
                                                                                                                                
MR. PAWLOWSKI replied correct, adding  that he will be discussing                                                               
the number in a few minutes.                                                                                                    
                                                                                                                                
2:38:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  drew attention  to  page  16, lines  28-29,                                                               
which  say, "the  state's actions  do not  unreasonably interfere                                                               
with  long-term  marketing of  natural  gas  by the  lessee,  the                                                               
state,  or  another  person"   and  inquired  how  "unreasonably"                                                               
interferes would be determined.                                                                                                 
                                                                                                                                
MR. PAWLOWSKI  answered he will  have to  see whether there  is a                                                               
distinct legal standard around unreasonably  and will get back to                                                               
the committee in this regard.                                                                                                   
                                                                                                                                
2:39:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  noted that  historically LNG  exported from                                                               
Alaska has been  sold on a British Thermal Unit  (BTU) basis.  He                                                               
asked what unit was used for a tax base.                                                                                        
                                                                                                                                
MR. PAWLOWSKI  responded he cannot  remember whether it is  a BTU                                                               
or a volumetric  thousand cubic feet (MCF).  He  said he will get                                                               
back to  the committee with  an answer,  but added he  knows that                                                               
DOR  takes  a number  and  back  calculates  for the  purpose  of                                                               
calculating a tax.                                                                                                              
                                                                                                                                
REPRESENTATIVE OLSON  added that historically the  state adjusted                                                               
the BTU  content due  to the fluctuations  and supply  during the                                                               
middle of  winter.  He said  he is therefore confused  on whether                                                               
the state was doing  it on volume for taxes and  doing it on BTUs                                                               
when  there might  not  be correlation  because  the BTU  content                                                               
would change  per load.  He  believed it was measured  in Nikiski                                                               
and again at "Tokyo Electric" when the delivery arrived.                                                                        
                                                                                                                                
MR.  PAWLOWSKI  replied  he  will   get  back  to  the  committee                                                               
regarding the  way that that  gets levied by  DOR as well  as how                                                               
DNR  does the  royalty calculations.   The  predominant value  in                                                               
that exchange  comes through the  royalty, he added,  which often                                                               
uses a  different number than  the tax  number.  He  believed the                                                               
production tax under  the carve-out for Cook Inlet is  based on a                                                               
volumetric.                                                                                                                     
                                                                                                                                
2:41:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  brought attention  to  page  16, lines  21-22,                                                               
which state that the modification  shall be in effect "during the                                                               
initial project  term" and inquired  whether the  language should                                                               
instead read "during the initial term of a project."                                                                            
                                                                                                                                
MR. PAWLOWSKI agreed to look  at the suggestion, but advised that                                                               
"initial project term" is a defined term.                                                                                       
                                                                                                                                
CO-CHAIR SADDLER  pointed out  that the  "term" does  not require                                                               
permits; the "project" requires permits.                                                                                        
                                                                                                                                
MR. PAWLOWSKI agreed.                                                                                                           
                                                                                                                                
2:42:44 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI returned  to his review of Section  17, noting page                                                               
17,  lines  5-8, address  setting  an  appropriate fixed  royalty                                                               
share.  A dilemma in places  like Point Thomson, he said, is that                                                               
there are  many royalties with  a fixed  share and some  that are                                                               
net profit  share or  sliding scale.   This provision  allows the                                                               
Department  of Natural  Resources to  move to  a fixed  value for                                                               
that lease.   After much  discussion, this provision  has evolved                                                               
to require  that the fixed  royalty rate  must "yield a  value to                                                               
the state  that the commissioner  determines to be not  less than                                                               
the value  the state would have  received under the terms  of the                                                               
lease before a modification under this subsection."                                                                             
                                                                                                                                
2:44:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked  whether it is a general intent  to make all                                                               
gas leases  across the North Slope  the same, or fairly  close to                                                               
the same, royalty share.                                                                                                        
                                                                                                                                
MR. PAWLOWSKI answered it is not  the intent to do that on leases                                                               
across the North Slope, but  rather to rationalize numbers within                                                               
a  unit.   A unit  will be  made  up of  a suite  of leases  with                                                               
different terms, he explained, and  a blended number is needed to                                                               
calculate the  state's gas  share for  royalty purposes  that, in                                                               
conjunction with  the production tax,  creates the volume  of gas                                                               
that the state has to support its share in the project.                                                                         
                                                                                                                                
2:44:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER, regarding page 17,  line 7, understood that the                                                               
lease modification  would not take  place without both  parties -                                                               
the state and the producer -  agreeing.  He observed the proposed                                                               
language of  "not less than  the value"  does not include  a cap.                                                               
He inquired  whether this means  there is no  prohibition against                                                               
it being adjusted such that it is a higher value to the state.                                                                  
                                                                                                                                
MR. PAWLOWSKI replied he will discuss  this with DNR and get back                                                               
to  the  committee  with  an   answer,  but  said  that  that  is                                                               
absolutely not  the intent here.   The intent  is to arrive  at a                                                               
fixed  percentage  for variable  leases  that  does not  transfer                                                               
value between  the parties  but sets a  fixed percentage  for the                                                               
state to be able to move forward.                                                                                               
                                                                                                                                
2:45:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON, regarding  page 17, line 5,  asked why oil                                                               
is  included in  the provision  for modifying  net profit  shares                                                               
rather than only gas.                                                                                                           
                                                                                                                                
MR.  PAWLOWSKI understood  it is  because those  are oil  and gas                                                               
leases; the leases may not be gas only leases.                                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON said  he  wants to  make  sure apples  and                                                               
oranges are not being mixed  when talking about royalty shares on                                                               
gas and  royalty shares on oil,  and he wants to  ensure that oil                                                               
is segregated from gas.                                                                                                         
                                                                                                                                
MR. PAWLOWSKI  responded that, given  the length of the  bill, he                                                               
may not be  able to get to  this today, but he will  come back to                                                               
discuss it in a future conversation  because there very much is a                                                               
connection between  oil and gas.   Under the Heads  of Agreement,                                                               
he continued, Point Thomson is one  of the anchor fields for this                                                               
project  and the  production  of oil  is  actually production  of                                                               
associated liquids  that comes directly from  the gas production.                                                               
The relationship of lease expenditures  being applied against the                                                               
regular production tax  will be discussed later.   The ability to                                                               
separate is a very difficult one, he said.                                                                                      
                                                                                                                                
2:48:08 PM                                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  resumed his review  of CSSB 138(FIN)  am, pointing                                                               
out Section  18, page 17, line  24, through page 18,  line 17, is                                                               
another  section   that  is   being  amended   immediately  after                                                               
previously being amended,  so it is a repeat of  Section 17.  The                                                               
change on  page 18, line 5,  says that this also  can include gas                                                               
delivered  to  the  state  under   AS  43.55.014,  which  is  the                                                               
reference  to tax  as gas;  thus, it  is a  conforming change  to                                                               
account for establishment of the tax-as-gas option.                                                                             
                                                                                                                                
MR.  PAWLOWSKI  explained  Sections  19-22,  page  18,  line  18,                                                               
through page 19, line 30, are  conforming changes for tax as gas.                                                               
These sections  are statutes governing the  Department of Natural                                                               
Resources' disposition  of royalty-in-kind.  It  is existing law,                                                               
existing practice, for how DNR  does the sale, exchange, or other                                                               
disposal  that comes  as a  royalty; it  adds the  tax as  gas to                                                               
these  sections  to  give  consistent treatment.    It  would  go                                                               
through  the   same  process,   leveraging  the   royalty  board,                                                               
providing  the  same  side  bars,   just  in  the  management  of                                                               
Department  of  Revenue's tax  gas  because  these would  already                                                               
apply  to  the Department  of  Natural  Resources' management  of                                                               
royalty  oil.   [The administration]  wants the  same custom  and                                                               
practice to apply to Department of Revenue tax gas.                                                                             
                                                                                                                                
MR. PAWLOWSKI  addressed Section  23, page  19, line  31, through                                                               
page  20,  line   11,  reminding  members  that   these  are  the                                                               
definitions reviewed  earlier for  the initial project  term, the                                                               
North Slope natural gas project, and project services.                                                                          
                                                                                                                                
2:51:08 PM                                                                                                                    
                                                                                                                                
MR.  PAWLOWSKI said  Sections 24-26,  page 20,  line 12,  through                                                               
page  21, line  1, are  an  amendment that  attempts to  conform.                                                               
Provisions in HB  4 directed the Department  of Natural Resources                                                               
to give  priority to  the in-state  natural gas  pipeline project                                                               
when doing  permitting.  These  sections delete the  reference to                                                               
the in-state  natural gas pipeline  project and insert  a project                                                               
under AS 31.25, the Alaska  Gasline Development Corporation.  So,                                                               
rather than  a narrow prioritization  for AGDC in  the permitting                                                               
project  process, it  is  given an  expansive  definition so  the                                                               
projects that  AGDC is pursuing  on behalf  of the state  get the                                                               
same benefit  whether it is  an in-state project, the  Alaska LNG                                                               
Project,  or a  project  to  deliver gas  to  Alaskans under  any                                                               
circumstance.                                                                                                                   
                                                                                                                                
MR. PAWLOWSKI  noted Section  27 is the  beginning of  the bill's                                                               
tax sections.  He ended his  review of the legislation, saying he                                                               
would continue  his review  at the  committee's next  meeting [on                                                               
3/21/14].                                                                                                                       
                                                                                                                                
2:53:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON inquired where the  tax is assessed on the                                                               
gas.                                                                                                                            
                                                                                                                                
MR.  PAWLOWSKI  responded the  point  of  production for  tax  is                                                               
modified in  this legislation  to provide  clarity of  where that                                                               
happens.  For the Alaska LNG  Project, the point of production is                                                               
the inlet  of the transmission lines.   For Point Thomson,  it is                                                               
the  pipeline  that takes  the  gas  from  Point Thomson  to  the                                                               
treatment plant.   For  Prudhoe Bay it  is the  transmission line                                                               
that takes the  gas from Prudhoe Bay to the  treatment plant even                                                               
though the  treatment plant is  actually likely to be  within the                                                               
Prudhoe Bay unit.                                                                                                               
                                                                                                                                
REPRESENTATIVE  JOHNSON understood  the  point  of production  is                                                               
basically where the  gas enters the treatment plant,  or where it                                                               
enters the pipeline to the treatment plant.                                                                                     
                                                                                                                                
MR. PAWLOWSKI replied correct.                                                                                                  
                                                                                                                                
REPRESENTATIVE JOHNSON commented that that is almost wellhead.                                                                  
                                                                                                                                
MR. PAWLOWSKI answered it is very close to wellhead.                                                                            
                                                                                                                                
REPRESENTATIVE JOHNSON surmised  if the state takes  gas in taxes                                                               
it will be on the hook for transportation.                                                                                      
                                                                                                                                
MR. PAWLOWSKI responded correct.                                                                                                
                                                                                                                                
REPRESENTATIVE JOHNSON  asked whether the state  is figuring that                                                               
in.   For example,  the state is  owed $1, it  takes the  state 2                                                               
cents to [transport  it], and so the state gives  the producer 98                                                               
cents in  credit; or,  the state  gives full  value and  eats the                                                               
transportation.   While  the state  gets  to market  the gas,  he                                                               
continued,  it is  also taking  the risk  of anything  that might                                                               
happen downstream from that opening.                                                                                            
                                                                                                                                
MR. PAWLOWSKI  concurred, saying the  agreements in the  Heads of                                                               
Agreement to  enable that are  twofold.  The  upstream agreements                                                               
guarantee  delivery, the  offtake  for the  state, and  balancing                                                               
between the two  fields to provide the gas for  the project.  The                                                               
disposition  agreements allow  the state  to cover  that cost  in                                                               
between,  so it  is correct  that, in-kind,  the state  is taking                                                               
that transportation  responsibility.  Whether that  is shifted in                                                               
the future is open for  debate, but in today's circumstances that                                                               
is what would be happening.                                                                                                     
                                                                                                                                
2:55:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  inquired whether  it is a  one-way street                                                               
in that  only the producers can  come to the state  or whether it                                                               
is a  two-way street in  that the state  can go to  the producers                                                               
saying it wants gas in lieu of taxes.                                                                                           
                                                                                                                                
MR. PAWLOWSKI  replied that under the  provision for modification                                                               
of leases, the producers and the  state will have to sit down and                                                               
modify  leases, particularly  around the  question of  switching,                                                               
and make  a decision of in-kind  or in-value.  Once  those leases                                                               
are modified,  a producer will  have the  right to choose  to pay                                                               
[indisc.--microphone  bumped].   "So, it  is the  state election,                                                               
collaboratively  with the  producers in  the modification  of the                                                               
leases that enables the opportunity for tax as gas," he said.                                                                   
                                                                                                                                
REPRESENTATIVE JOHNSON  remarked he still  does not know  that he                                                               
has an  answer to his  one-quarter of the  pipeline.  He  posed a                                                               
scenario in  which there  is agreement to  modify the  leases and                                                               
the state  has 27  percent of  the gas,  but the  producers still                                                               
want their 25  percent, resulting in the state  stranding its tax                                                               
payment.   It is taxed  before it goes in  the pipe, he  said, so                                                               
the state is stranding that payment.                                                                                            
                                                                                                                                
MR.  PAWLOWSKI  responded that  is  why  the state  ownership  of                                                               
capacity must  match up  with the state  opportunity for  the gas                                                               
payment.   It is  why those offtake  agreements are  so important                                                               
and it is  why the balancing agreements are so  important.  Those                                                               
agreements clarify how  the gas is delivered, how  much the state                                                               
has so it can  match it up with the capacity  and can manage that                                                               
question.  If one of those  does not work, the opportunity itself                                                               
will not  work.  So,  all of those  are negotiated in  tandem and                                                               
moved forward through  this process as the  project moves through                                                               
the Pre-FEED stage and into the FEED stage.                                                                                     
                                                                                                                                
2:58:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON said  he needs more clarity  and still has                                                               
questions because  he can already see  a way to game  the system.                                                               
The  state  is taking  responsibility  for  that payment  of  the                                                               
state's 25  percent; the  state is  taking the  gas in-kind.   He                                                               
asked whether the state would  be sacrificing some of its revenue                                                               
to its partner if the gas is  taken in-kind.  The state is paying                                                               
to have that gas moved, he  continued, so the state would not get                                                               
full benefit  for that if  it is taken  as gas because  the state                                                               
must share it with somebody.                                                                                                    
                                                                                                                                
MR. PAWLOWSKI  confirmed there  is an obligation,  a cost  to the                                                               
state, of that fixed tariff from  having a partner in any element                                                               
of the  midstream.   However, that  comes at  the benefit  of the                                                               
investment up front.                                                                                                            
                                                                                                                                
REPRESENTATIVE  JOHNSON,  qualifying  that for  purposes  of  his                                                               
question it  be ignored that  the state  has an investment  and a                                                               
partner,  inquired why  the  state, knowing  it  must share  that                                                               
portion of the revenue it is  taking in taxes, would ever take it                                                               
in gas.   He further inquired  under what scenario would  it make                                                               
sense for  the state to  take any gas  when the state  must share                                                               
it, be  responsible, and market  it.  He  said he cannot  see why                                                               
this is needed because he cannot  see a situation where the state                                                               
would ever want to take revenue for gas.                                                                                        
                                                                                                                                
MR. PAWLOWSKI answered the  opportunity [the administration] sees                                                               
in taking tax as gas is  the same opportunity the state sees with                                                               
royalty-in-kind.   The  combination of  the two,  plus the  state                                                               
investment,  allows the  state  to move  the  Alaska LNG  Project                                                               
forward  with the  partners in  a way  that allows  the state  to                                                               
maximize  value.     [The  administration]   does  not   see  the                                                               
alternatives of  reducing tax rates  and royalty rates  to enable                                                               
the project  as being in the  long-term interest of the  state or                                                               
one that  would move a project  forward with the partners.   [The                                                               
administration] believes the state's  co-investment and the state                                                               
taking  a   larger  share  of   the  gas  provides   the  maximum                                                               
opportunity for making a project actually happen.                                                                               
                                                                                                                                
3:01:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON opined that  legislators are wasting their                                                               
time  if  the  profitability  of a  $40-$80  billion  project  is                                                               
dependent upon  the state  taking gas instead  of taxes;  that is                                                               
such a  small number in the  overall.  He said  he questions this                                                               
incentive  and  does not  know  why  it  is needed,  although  he                                                               
understands  why  the  producers  would  want it.    "If  we  are                                                               
depending on that, this project is in trouble," he said.                                                                        
                                                                                                                                
MR.  PAWLOWSKI   responded  he  will  bring   the  committee  the                                                               
economics for  why it benefits the  project.  It is  important to                                                               
remember, he said,  that in a traditional tax  role the deduction                                                               
for transportation, whether for royalty or  for tax, is to get to                                                               
the wellhead.   The state is paying for  transportation costs and                                                               
the state  does not  have control  over those  costs and  that is                                                               
part of the litigation and  valuation disputes that the state has                                                               
had  over  the  last  30-40   years  regarding  the  Trans-Alaska                                                               
Pipeline System  (TAPS) tariffs.   They come out in  the in-value                                                               
equation in the  same way they would if the  state was paying the                                                               
in-kind  equation.    He  offered   his  belief  that  the  state                                                               
typically achieves  a higher value  in the in-kind  scenario than                                                               
it does in the in-value scenario.                                                                                               
                                                                                                                                
REPRESENTATIVE JOHNSON said the difference between TAPS and what                                                                
was just stated is that there is no partner with whom the state                                                                 
must share profits.                                                                                                             

Document Name Date/Time Subjects
HRES SB 138 3.19.14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES CSSB138(FIN)am 3.19.14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB 138 Introduction 3.19.14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB 138 Transmittal Letter 3.19.14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB138CS(FIN)-DCCED-AEA-03-19-14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB138CS(FIN)-DCCED-AGDC-03-19-14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB138CS(FIN)-DNR-NSG-3-19-14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB138CS(FIN)-DOR-TAX-03-19-14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB138CS(FIN)-DOR-TRS-03-19-14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES SB138CS(FIN)-FUNDCAP- LDNGPF-03-17-14.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES 3.19.14 CSSB138(FIN)am Sectional.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES CS SB138 Letter of Intent 3.19.14 - Bishop.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES 3.19.14 CSSB138(FIN)am Summary of Changes.pdf HRES 3/19/2014 1:00:00 PM
SB 138
HRES CS SB 138 FIN am Sectional Presentation to House Resources 3.9.14.pdf HRES 3/19/2014 1:00:00 PM
SB 138