Legislature(2013 - 2014)SENATE FINANCE 532
02/25/2014 05:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Presentation: the Business Case Before the Legislature | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
SENATE BILL NO. 138
"An Act relating to the purposes of the Alaska Gasline
Development Corporation to advance to develop a large-
diameter natural gas pipeline project, including
treatment and liquefaction facilities; establishing
the large-diameter natural gas pipeline project fund;
creating a subsidiary related to a large-diameter
natural gas pipeline project, including treatment and
liquefaction facilities; relating to the authority of
the commissioner of natural resources to negotiate
contracts related to North Slope natural gas projects,
to enter into confidentiality agreements in support of
contract negotiations and implementation, and to take
custody of gas delivered to the state under an
election to pay the oil and gas production tax in
kind; relating to the sale, exchange, or disposal of
gas delivered to the state under an election to pay
the oil and gas production tax in kind; relating to
the duties of the commissioner of revenue to direct
the disposition of revenues received from gas
delivered to the state in kind and to consult with the
commissioner of natural resources on the custody and
disposition of gas delivered to the state in kind;
relating to the authority of the commissioner of
natural resources to propose modifications to existing
state oil and gas leases; making certain information
provided to the Department of Natural Resources and
the Department of Revenue exempt from inspection as a
public record; making certain tax information related
to an election to pay the oil and gas production tax
in kind exempt from tax confidentiality provisions;
relating to establishing under the oil and gas
production tax a gross tax rate for gas after 2021;
making the alternate minimum tax on oil and gas
produced north of 68 degrees North latitude after 2021
apply only to oil; relating to apportionment factors
of the Alaska Net Income Tax Act; authorizing a
producer's election to pay the oil and gas production
tax in kind for certain gas and relating to the
authorization; relating to monthly installment
payments of the oil and gas production tax; relating
to interest payments on monthly installment payments
of the oil and gas production tax; relating to
settlements between producers and royalty owners for
oil and gas production tax; relating to annual
statements by producers and explorers; relating to
annual production tax values; relating to lease
expenditures; amending the definition of gross value
at the 'point of production' for gas for purposes of
the oil and gas production tax; adding definitions
related to natural gas terms; clarifying that credit
may not be taken against the in-kind levy of the oil
and gas production tax for gas for purposes of the
exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit;
making conforming amendments; and providing for an
effective date."
5:07:36 PM
^PRESENTATION: THE BUSINESS CASE BEFORE THE LEGISLATURE
5:07:43 PM
BILL MCMAHON, SENIOR COMMERCIAL ADVISOR, EXXONMOBIL,
announced some history of liquid natural gas (LNG) as
produced by ExxonMobil.
Co-Chair Kelly announced that the testifiers represented
the signatories of the AK LNG agreement.
Mr. McMahon continued to discuss the history of LNG in
ExxonMobil. In the early 1990s there were conversations
regarding an LNG project in the Far East. He stressed that
the cost of transporting the LNG to the Far East was high
compared to its competitors, so they moved onto a different
effort. In the late 1990s, ExxonMobil was involved in a gas
to liquids project, where the North Slope natural gas would
be put in a chemical process with the hopes of moving down
the Trans-Alaska Pipeline System (TAPS). That project would
be very expensive, and the value of natural gas began to
rise by the end of that decade, which closed some of the
spread between liquids and natural gas. By 2000, the
attention turned to building a pipeline to Alberta to
access the North American markets. In 2009, ExxonMobil
partnered with TransCanada to form the Alaska Pipeline
Project (APP), to build a pipeline to Alberta under the
Alaska Gasline Inducement Act (AGIA) framework. He stated
that changes in the North American market made that project
impractical, as its competitors were successful at
exploiting unconventional gas. He stated that Governor
Parnell invited the three producers and TransCanada to come
together to consider an LNG project to the Far East, and
ExxonMobil willingly participated in that discussion. He
stated that there was good progress with AK LNG, and had
reached a consensus on selecting a concept. They had
selected a preferred location for the LNG plant in Nikiski,
and had advanced fieldwork.
5:11:48 PM
Mr. McMahon stated that he had worked for six months on the
Heads of Agreement (HOA) (copy on file). The HOA laid out
the principles and the roadmap under which all of the
parties represented believed that the project could be
successful. He stressed that SB 138 was based on the
accomplishments of the HOA. He announced that ExxonMobil
supports SB 138. ExxonMobil was committed to pursuing
commercialization of AK LNG, and were committed to be a
part of the AK LNG project. He stated that SB 138 would
allow the three producers, Alaska Gasline Development
Corporation (AGDC), and TransCanada to work together to
progress the project; and to develop a fiscal and project
framework that was essential for advancing the project to
completion. He announced that SB 138 authorized three
things that were critical to the success of the project:
participation, percentage, and project. He felt that SB 138
would authorize the state to participate in the project,
which would increase the alignment of the actors in the
project to improve success. He explained that the
legislation would outline the Alaska's percentage take on
the natural gas, which would be in royalty gas and gross
production tax. He believed that the legislation provided a
robust process that would allow development for project
enabling contracts. If consensus were made on the
contracts, they would be presented to the legislature for
approval. If SB 138 were enacted, ExxonMobil was staged for
the Preliminary Frontend Engineering and Design (Pre FEED).
He explained that Pre FEED was a phase of project
development that would take the project from the concept
and move it forward. The concept that was agreed upon was
to build a gas treatment plant on the North Slope to remove
impurities from the gas; to build a pipeline across the
state to Nikiski; and build an LNG plant in Nikiski to
liquefy gaseous natural gas. In Pre FEED the concept would
be considered while conducting additional engineering and
design to have the information necessary to file for
permits to construct the project. He stressed that the Pre
FEED was essential, because the environmental impacts must
be studied in order to complete the necessary federal
permit applications. He shared some various examples of Pre
FEED work.
5:17:42 PM
Senator Dunleavy understood that profitability was based on
the spread between the oil price and gas. He wondered why a
gas to liquids (GTL) plant was not built on the North
Slope, and the existing pipeline was not used in the
proposal. Mr. McMahon responded that a GTL plant necessary
to convert the gas would be massive and be a logistical
challenge to build on the North Slope. He stressed that the
process for converting gas to liquid consumed about one-
third of the gas. The resulting product was very high
quality, and could be used to sulfur-free diesel, blending
stocks for motor oil, and other products. Furthermore, TAPS
must be modified to keep the gas separate from the crude
oil. He stated that ExxonMobil had reassessed gas to liquid
in 2011, and they felt that an LNG was a superior value to
the gas.
5:20:31 PM
DAVE VAN TUYL, REGIONAL MANAGER, BP EXPLORATION ALASKA,
read from a prepared statement:
I've been working in Alaska for BP for almost 30
years. For more than half that time I have been
working to get Alaska's gas to market, first in a
previous LNG effort in the late '90's, then as part of
the Alaska Gas Producers Pipeline Team in 2000-2002,
next with the Stranded Gas Act effort and AGIA, then
as a member of the Management Committee of the Denali
pipeline effort, and now today in my current role on
the Fiscal Team who worked on the Heads of Agreement
and the Management Committee of the Alaska LNG project
Working with all the parties here.
Executing the HOA was an important step for BP. My
boss, Janet Weiss, President of BP Alaska was very
pleased to be able to sign it because of what this HOA
means - an aligned way forward to get Alaska's gas to
market.
Importantly, there are signatures for six other
parties on the HOA along with Janet's, one for each of
the entities represented here on the panel, along with
the commissioners of DNR and DOR.
We are all aligned on the roadmap outlined on the HOA
which provides the way forward for the legislature to
consider and enact enabling legislation to advance the
Alaska LNG Project. And that's one of the things
that's really pretty exciting.
As you know, these parties in front of you haven't
always been aligned. BP was involved from 2000-2006
working with the other major producers to get a
pipeline built. TransCanada pursued their own effort
independently. Some of you will remember that in 2007
and 2008 BP testified robustly about AGIA. We wanted
to involved with building the gas pipeline, but had
some real concerns with AGIA. After the license was
awarded to TransCanada, we still wanted to
commercialize our North Slope gas, so we partnered
with ConocoPhillips on the Denali project in 2008.
When the Denali open season in late 2010 failed to
garner enough interest to warrant continuing with the
project, we shut it down the following year. But we
didn't stop looking for ways to commercialize Alaska
gas.
Following the Point Thomson settlement, we internally
came to the conclusion that the best way forward was
to combine efforts with all the relevant parties, just
as the Governor had suggested in late 2011.
We agreed that it was time to stop fighting
yesterday's battle. It was time to find a way to work
together on a new project.
That's what the HOA represents to BP. That's why we're
excited about it.
BP believes the HOA is critical to successfully
advancing the Alaska LNG project.
Therefore, the key question for examining SB 138 is
simple. "Is SB 138 faithful to the HOA?"
For BP the answer is "YES." Sb 138 moves all parties
forward, together, as envisioned in the HOA.
SB 138 enables unprecedented commercial alignment
among the parties by providing for State
participation thru AGDC, and authorizes the State
to negotiate contracts.
The bill establishes a percentage for tax as gas
that, when added to the State's royalty-in-kind
share puts the State at the table with a
participation of 20-25 percent as referenced in
the HOA.
Finally, the bill lays out a process for
negotiations to occur, providing transparency
through access by the Legislature which BP
believes is the winning way.
While we're generally pleased with SB 138, there are a
couple of areas of particular interest to BP in the
way the bill has been drafted, areas that might be
improved a bit.
One area of interest is ensuring that the newly formed
subsidiary of AGDC is established in an efficient
manner. BP has formed subsidiaries in the past and we
know about the due diligence required by tax, legal
and finance professionals. It's effort well spent, but
we also want to ensure the new subsidiary is
established in a timely manner so pre-FEED can start
ramping one the bill is enacted. This included clearly
defining authorities and empowering the new subsidiary
to efficiently carry out its role, as well as allowing
for appropriate sharing of staff between the new
subsidiary and the AGDC parent. Looking at successful
LNG projects around the world confirms the importance
of having a well-resourced, independent host
government commercial entity - and AGDC can provide
that.
5:29:53 PM
PAT FLOOD, SUPERVISOR, NORTH SLOPE GAS DEVELOPMENT,
CONOCOPHILLIPS, stated that his entire career in the oil
and gas industry was devoted to economic development of
Alaska's oil and gas resources. He had been a resident of
Alaska for over thirty years. He testified in support of SB
138. ConocoPhilips believed that there were several key
areas that must be addressed in order to advance the
project, and were outlined in the HOA: 1) the state must
decide to participate in the project; 2) the legislature
must define a production share that would be taken as gas
molecules, which, along with the existing state royalty
also taken as gas molecules defines the state overall gas
share; and 3) the legislature must give the administration
the tools to work through the arrangements and contracts
required to move the project ahead with the consultation
and ultimate ratification by the legislature. He recognized
that state participation and the state's share was a
significant policy decision, and ConocoPhilips welcomed the
legislative input as a necessary step to continue advancing
the project.
5:32:22 PM
Mr. Flood shared some history as to how ConocoPhilips had
embarked to their current situation. One of the
ConocoPhilips heritage companies pioneered the LNG business
in Cook Inlet and to Asia, both in terms of the technology
in the markets during the 1960s. He stressed that
ConocoPhilips had been involved in the LNG business in
Alaska since the 1960s. He stated that at that time,
ConocoPhilips and other ConocoPhilips heritage companies
were beginning steps to develop the North Slope. He pointed
out that, since the beginning of production from Prudhoe
Bay, the producers had looked at options to bring the North
Slope to market including LNG, pipelines to North America,
and GTL. During the consideration of the Denali Project, it
was determined that the supply situation in those markets
no longer supported the project. The international LNG
market had remained stronger than the North American gas
market, so at the urging of the governor, the industry
partners and the state were working to taking the next
steps to the large scale LNG project. This would build on
more than $500 million of work since 2000 in efforts to
commercialize Alaska North Slope (ANS). The working
relationship between the ConocoPhilips, BP, ExxonMobil,
TransCanada, the state, and AGDC was historic, in that the
parties were more aligned than ever in history. With that
alignment, the HOA provided the road map to moving the
project forward. One of the key steps in the HOA was
enabling legislation that addressed the three key points
previously mentioned. He stated that SB 138 effectively
addressed the three key areas of the HOA, and was the first
step in following the HOA road map. In order for the state
to effectively participate in the project, it needed a
vehicle to represent and manage the state's interest, and
the bill gave AGDC that role in participation. He stated
that ConocoPhilips supported the provision that gave AGDC
management authority. He stated that the bill gave the DNR
commissioner flexibility with respect to negotiating
royalty in oil and gas leases, to provide gas that could be
committed to a North Slope gas project as well as other
required agreements. The commissioners of both DNR and DOR
must confidentially negotiate the details of many
agreements that would not compromise commercial positions
of either the state or the private parties. The
commissioners must have that authority in order for the
state to effectively participate in the project. The bill
also dealt with the tax statutes in Title 43, which set the
production tax at 10.5 percent, with the ability for the
state to take its tax as gas molecules. Effectively, the
tax rate combined with the existing royalty percentage
would set the state's gas share for participation in the
project. He stated that ConocoPhilips supported the bill's
provisions, because they allowed for a fixed gross
production tax payable in gas. The 10.5 percent rate that
the administration proposed yielded a combined royalty plus
production in the range of 20 to 25 percent that was agreed
in the HOA.
5:38:44 PM
DAN FAUSKE, PRESIDENT ALASKA GASLINE DEVELOPMENT
CORPORATION, (AGDC) expressed pleasure in working with the
other participants in the HOA. He stressed that AGDC was
very limited in the bill, but remarked that most of the
language was statutory. He stressed that AGDC was compelled
to deliver LNG to Alaskans at an affordable rate.
5:43:43 PM
TONY PALMER, VICE-PRESIDENT, TRANSCANADA ALASKA INTERESTS,
testified in support of SB 138. He stated that there had
been 40 years of effort by TransCanada to commercialize
Alaskan LNG. He stressed that it was very significant that
there were companies that were convinced that LNG could be
commercialized. He remarked that any project at this scale
needed permission and customers. He stated that there were
companies that had the marketing skills and experience that
were able to bring LNG to market.
5:48:11 PM
Mr. Palmer remarked that there was no guaranty for success,
but felt that once the components were in place, the
project had a high quality initiative to succeed in the
marketplace.
Senator Dunleavy surmised that once the Pre-FEED element
was complete and the project was deemed profitable, they
would proceed with the project. Mr. Van Tuyl agreed. He
stated that the mega-projects were typically conducted
through a phased-gate decision making project.
Senator Dunleavy wondered what would occur if one of the
partners decided at a certain point to not continue in the
project. He assumed that the millions of state investment
would not be recovered. Mr. Van Tuyl replied that the
determination would rely on the facts that exist at the
time. He remarked that the other parties were free to
advance the project.
Senator Dunleavy wondered if there were "off-ramps" for
each of the industry partners. Mr. Van Tuyl responded in
the affirmative.
5:52:05 PM
Senator Dunleavy queried the nature of AGDC's role, because
he felt that AGDC was already perusing an instate gas line
concept. Mr. Fauske replied that the role was beneficial,
because the work aligned with future work of AGDC. He
understood that the concept would seem confusing. He stated
that the sharing of data, alignment, and environmental work
coincided with other projects. He stressed that the focus
was on not duplicating work or wasting money. He announced
that the standalone cost would be $7.5 to $8 billion. He
stated that the proposed project would be the largest
project in the world. He felt comfortable with the
partnership, and was confident that the project would move
forward. He stated that AGDC would keep with the mandate of
HB 4, as directed by the legislature, to supply gas to
Alaskans and help facilitate the development of a larger
diameter pipe. He stated that it was most probable that
AGDC's smaller pipe plan ideas would merge into the
development of a larger pipe project. He stressed that a
larger line, with a huge commercial application by selling
a product from Alaska overseas was an ideal situation. The
smaller line was always intended, and would be commercially
appealing. Most people agreed that a larger pipeline was
better than a small line. He pointed out that it was
important for AGDC to continue with their smaller line
plans, but it could merge with a larger project in the
future.
Senator Bishop wondered if the focus was for Alaskans to
receive the most inexpensive gas. Mr. Fauske replied in the
affirmative.
Vice-Chair Fairclough remarked that the administration had
proposed that Alaska could take its gas in value or in
kind. She wondered if the intent was to only take the gas
in molecules. She pointed out that the HOA outlined in AS
38.05.182(a) provided that royalties on oil and gas shall
be taken in kind, unless the commissioner determines that
taking in money would be in the best interest of the state.
Mr. Flood responded that the HOA outlined that the state
participation was an integral part of the project. In order
to facilitate the state participation and cause the equity
and gas share to align, the state would take its royalty in
kind, and tax as gas was an important element of the
proposal.
5:59:28 PM
Vice-Chair Fairclough surmised that the taking the royalty
in kind, which could be fixed at different numbers,
depending on the lease. She wondered if the tax would be in
value, or was it yet to be determined. Mr. Flood responded
that the tax would also be in molecules.
Vice-Chair Fairclough recommended that future models should
be tax in molecules. She relayed that there was
conversation regarding the pressurization in the pipe,
which was not yet determined. She stated that they looked
at the five off-takes for Alaskan's energy security.
Depending on the pressure in the pipe, there would be a
cost for straddle plans. She queried the cost of taking the
pipe offline. Mr. Van Tuyl replied that a straddle plant
was a complex kit, designed to take a range of liquids to
convert into other substances. He understood that the gas
offtakes for moving gas in-state would be a substantially
simpler process for conditioning downstream of the offtake
point to make it suitable for a burner-tip specification.
He remarked that there could be some conditioning, because
the heat content may be slightly higher than the typical
burner tip spec. He stressed that the facilities were
fairly routine items.
6:02:20 PM
Vice-Chair Fairclough stressed that her topic was a current
discussion point. She asked two more questions that she
would hear responses at a later date: 1) she wondered at
what point an export permit will allow or hold up the
project; and 2) she noted that Congress established dollars
that financed a pipeline, so she wondered the interplay
between access of the federal funds, and whether it
advantages or disadvantages the project.
Co-Chair Meyer suggested that the testifiers return for
additional questions.
6:06:43 PM
RECESSED UNTIL 9:00 A.M. FEBRUARY 26, 2014
SB 138 was HEARD and HELD in committee for further
consideration.
[Note: The meeting was recessed until 9:00 a.m. on
February 26, 2014 and SB 138 was HEARD and HELD in
committee for further consideration at that time. See
February 26, 2014 minutes for detail.] You could also
include a note after the presentation title as follows
[Note: The presentation continued and concluded on
February 26, 2014. See February 26, 2014 minutes for
detail.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB138 HOA.pdf |
SFIN 2/25/2014 5:00:00 PM |
SB 138 |
| SB138 MOU.PDF |
SFIN 2/25/2014 5:00:00 PM |
SB 138 |