Legislature(2005 - 2006)
04/25/2005 08:39 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HJR1 | |
| HJR2 | |
| HB223 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX 9:49:36 AM CHAIR WEYHRAUCH announced that the final order of business would be HOUSE BILL NO. 223 "An Act levying a tax on certain known resources of natural gas, conditionally repealing the levy of that tax, and authorizing a credit for payments of that tax against amounts due under the oil and gas properties production (severance) tax if requirements relating to the sale and delivery of the natural gas are met; and providing for an effective date." 9:50:09 AM REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor, testifying via teleconference, stated that HJR 2 details the expectation of gas to be online in 2012, and therefore many residents and those in state government are gearing up in anticipation of those revenues. State government is hoping to address how to save and spend the anticipated revenues from a gasline. He opined that there's a significant probability that the major gas producers, the lease holders on the North Slope, are interested in producing other gas fields before ANS gas; perhaps because the internal rate of return is higher in other gas fields such as Qatar, Russia, and Indonesia. Furthermore, the aforementioned countries might be "less subtle" regarding the decision of whether to develop. He related his belief that if the major oil companies told the Indonesian government they plan to delay development for 10 to 15 years, the Indonesian government would cut the project and allow another producer to develop. Countries unconstrained by constitutions can be more direct about preserving their interests and assuring their sovereign interests are protected. He explained that through a combination of internal rates of returns and other pressures, other sovereign nations are putting their gas reserves ahead of Alaska's. He highlighted that although Australia and New Zealand have constitutions, they require the oil companies to develop the resource leased within 10 years, or else it becomes the property of the state and is leased out to another company. He expressed concern that Alaska has let itself be placed on the "back burner" for too long. He recalled that after the oil pipeline was built the citizens of Alaska expected a gas line, and since then the state has been in a frustrating cycle for nearly 25 years. REPRESENTATIVE CROFT recalled that the legislature has heard much testimony on the duty to produce under the leases. The oil companies do not, as a matter of law, have the ability to deny a "reasonably profitable" gasline project in order to develop a more profitable project in a Third World country. If Alaska doesn't do something to assert its sovereignty, then Representative Hawker's aforementioned chart is going to be off by at least 10 and probably more like 15 to 20 years, he suggested. The legislature holds these resources in trust for the people of the State of Alaska, he noted. Although every state legislature holds something in trust, Alaska is somewhat unique because it holds the major income producing property of the state, the subsurface resources, in trust to manage in the best interest of the people. This legislature has done a good job of that management, but a rather poor job with regard to seeing that the gas is developed. If this project is delayed for a substantial period of time, Alaskan's lose another increment in the notion that it's the state's resource, choice, and decision. He said he doesn't want Alaska to defer to outside powers when it comes to resource decisions. REPRESENTATIVE CROFT informed the committee that HB 223 was modeled after the Kentucky Stranded Coal Act, which resulted after the West Virginia coal companies bought-up Kentucky leases in order to prevent competition with other coal ventures. Kentucky decided that if the coal companies weren't going to develop the coal, the state would tax the companies for the resource in the ground. This legislation specifies that starting in 2007 there would be a tax on gas reserves. However, that tax would stop once the line is built and oil companies agree to sell or commit the gas to a bona fide project and from that point forward the oil companies would receive credit for future severance taxes paid. 9:58:58 AM REPRESENTATIVE GRUENBERG recalled that most mid-continent oil leases have a clause requiring production or the lease is lost. REPRESENTATIVE CROFT recalled that according to Spencer Hosie, an oil and gas attorney on contract with the Legislative Budget and Audit Committee, and representatives from a firm in Houston, Texas, it's a clear principle of law that there is an implied duty to produce and market in every lease. A leaseholder does not have the right to take an otherwise viable project, which is one with a reasonable rate of return, and not develop it because it would make more money elsewhere; there is a legal obligation to develop. The only defense is impossibility or commercial impractibility in that the project doesn't make a reasonable rate of return. For instance, if Exxon wants all of its project to have an internal rate of return of 25 to 30 percent and Alaska's project only makes 18 percent, Alaska's project is reasonably profitable and they have to develop it despite other attractive prospects worldwide, he concluded. 10:01:08 AM REPRESENTATIVE WILSON inquired as to why the fee only applies to gas in units leased before 2002 that have more than more then 1 trillion cubic feet (tcf) of known gas. REPRESENTATIVE CROFT responded this legislation didn't want to discourage any exploration on the North Slope, and therefore [HB 223] concentrates on the reserves that have remained undeveloped for decades. This legislation doesn't penalize a company for discovering a new field. The point, he clarified, is to identify the known fields that have not been sufficiently acted upon by the leaseholders. 10:02:33 AM REPRESENTATIVE SAMUELS turned attention to page 2, lines 6-7, which read: "gas to be consumed as fuel in its state-approved oil and gas unit of origin within five years of January 1 of the tax year". He asked if "gas to be consumed as fuel" refers to gas burned as fuel on the North Slope and not being reinjected. REPRESENTATIVE CROFT related his understanding that some of the gas is being used for the producers' fuel needs in order to heat and power the facilities, so the aforementioned language addresses that. In further response to Representative Samuels, Representative Croft replied that reinjecting gas can produce more oil but that determination is made on each individual field by the Alaska Oil and Gas Conservation Commission (AOGCC), the state, and leaseholders. However, at some point if there aren't gas handling facilities or places to store it, a field can't be marketed. He highlighted that Prudhoe Bay is reaching it's gas- handling capacity because as a field matures there tends to be more gas than oil. Therefore, this legislation is intended to motivate gas production and develop a place to store it, preferably a gas pipeline that brings gas to market, he noted. After the pipeline [is in use], the tax goes away and the AOGCC can balance field-by-field decisions regarding [reinjection, etcetera]. He then mentioned the need to clarify whether, under the language on page 2, lines 6-7, that fuel could be consumed for reinjection and power [for the maintenance of oil and gas facilities] because the intent was to provide an exemption for both. 10:07:46 AM MARK GNADT, Staff to Representative Eric Croft, Alaska State Legislature, explained that the list of [hydrocarbon] exemptions for taxation is based on a 1997 letter from ExxonMobil Corporation to the AOGCC, which related their methodology for determining what gas is available to market. 10:08:47 AM REPRESENTATIVE SAMUELS requested a copy of that letter. He then requested clarification as to what other "nonconventional gas resources" would be. MR. GNADT said he would research that and provide an answer. 10:09:46 AM MICHAEL HURLEY, Director of State Government Relations, ConocoPhillips Alaska, Inc., related that ConocoPhillips Alaska, Inc. strongly opposes the gas reserves tax. The producers have been diligently working with the administration to "hammer out a fiscal contract which would provide the certainty to move the project forward," and that effort would be severely disrupted by enactment of this kind of punitive tax, he said. He opined that a project can't be taxed into existence. A tax of this sort doesn't act as any kind of incentive, but rather increases the uncertainty surrounding gas development in Alaska. Furthermore, it removes resources and efforts from the critical negotiations producers are trying to pursue, he opined. He relayed that progress is being made in the discussions with the administration and he urged not to add to the distractions which have already "plagued these efforts." 10:11:10 AM CHAIR WEYHRAUCH inquired as to Mr. Hurley's thoughts regarding land that is leased for resource development that isn't developed and whether that land should revert back to the state or should the company pay taxes on the resources in the ground. 10:11:46 AM MR. HURLEY stated that all of Alaska's oil and gas leases have a set term [for development]. He recalled that most of the North Slope leases are set at 7 to 10 years depending on the particular vintage of the leases. The primary term details that if an explorer does not find commercial quantities of hydrocarbons, the leases revert back to the state, he added. In response to Representative Samuels, Mr. Hurley clarified that the language used [in the leases] was "wells capable of producing paying quantities of oil and gas". 10:13:01 AM REPRESENTATIVE SAMUELS inquired as to when Point Thompson's term expires. MR. HURLEY said that he doesn't know, but recalled that the Point Thomson wells are relatively old vintage leases and had wells capable of paying quantities. He related that discussions with the Department of Natural Resources, the administrator of those leases, have occurred for many years. REPRESENTATIVE SAMUELS then posed a scenario in which there are paying quantities of oil and gas, although only the oil is being developed. He asked if Mr. Hurley would interpret there to be development because the oil is being developed. MR. HURLEY replied yes. 10:14:34 AM REPRESENTATIVE CROFT commented that Representative Samuels has identified the problem in that the leases have provisions, but those [provisions] can be extended if oil and gas has been found but not yet developed. In fact, Point Thomson is on its 21st plan of development extension, which has resulted in penalties for failing to meet benchmarks on development of that project. If both oil and gas are in paying quantities and both are reasonably profitable, he questioned whether it would be sufficient to produce the oil and warehouse the gas under the terms of the lease. Although he didn't know, he opined that he would hope not because he believes there is an independent obligation to produce each if it's reasonably profitable. However, if the oil can be produced and the gas warehoused, then the gas could be put on hold for decades with no consequence to the producers. Allowing the aforementioned, he opined, places Alaska's interests second and means the legislature isn't doing its job. This legislation offers another way to address the concern by saying that although [the producers] may be violating their legal obligations, there would be consequences, other than going to court, for not developing Alaska's gas. [HB 223 was held over.]
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