Legislature(2013 - 2014)SENATE FINANCE 532

03/03/2014 09:00 AM FINANCE

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09:10:28 AM Start
09:12:13 AM SB138
10:38:58 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled 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."                                                                                                           
9:12:13 AM                                                                                                                    
Vice-Chair Fairclough looked  at slide 3 from  the Black and                                                                    
Veatch  presentation  from  February 19,  2014,  "Long  Term                                                                    
North Slope  and Gas Revenues  are Driven by AK  LNG Project                                                                    
Success" (copy  on file).  She noted that  there was  a flat                                                                    
line  that was  related to  oil  only, and  she wondered  if                                                                    
there were other oil revenues above that line.                                                                                  
BRUCE  CAMPBELL,  STAFF,  SENATOR   PETE  KELLY,  agreed  to                                                                    
provide that information.                                                                                                       
Co-Chair Meyer  referred to  a presentation  from enalytica,                                                                    
which  showed  gas  prices starting  at  $10.  He  requested                                                                    
scenarios about  gas prices below  $10.  Mr.  Campbell asked                                                                    
if the analysis should be as low as Henry Hub.                                                                                  
Co-Chair Meyer  asked for scenarios  with gas prices  in the                                                                    
range  of  $7   to  $10.  He  referred  to  slide   6  of  a                                                                    
presentation  from  enalytica  on  February  27,  2014.  Mr.                                                                    
Campbell agreed to provide that information.                                                                                    
Vice-Chair  Fairclough requested  a report  from the  Alaska                                                                    
Oil  and Gas  Conservation Commission  (AOGCC). She  queried                                                                    
that process that would be  used to determine when gas would                                                                    
be  available.  She  knew  that the  natural  gas  would  be                                                                    
reinjected  into the  Prudhoe Bay  field to  drive increased                                                                    
production in oil, which was  of highest value to the state.                                                                    
Mr. Campbell agreed to provide that information.                                                                                
Co-Chair  Meyer  asked  if  a   member  of  AOGCC  would  be                                                                    
testifying in front of  the committee. Vice-Chair Fairclough                                                                    
explained  that the  request was  directly from  one of  her                                                                    
constituents. She explained that  AOGCC announced that there                                                                    
was no gas available for the pipeline.                                                                                          
9:17:34 AM                                                                                                                    
Mr.  Campbell  explained  that  the  field  operators  would                                                                    
approach AGDC and explain how the gas would get online.                                                                         
Co-Chair  Meyer stressed  that he  would like  to hear  from                                                                    
AOGCC.  Mr.  Campbell  replied  that  AOGCC  was  regulatory                                                                    
structured  to  say that  there  was  no gas  available.  He                                                                    
stated that  there must be proof  that gas and oil  could be                                                                    
pulled from  the North Slope.  The petroleum  engineers were                                                                    
the only people that could provide that proof.                                                                                  
Vice-Chair  Fairclough  understood  that  there  may  be  an                                                                    
outlined process.  She knew that AOGCC  could not compromise                                                                    
its  regulatory  structure.  She  would like  to  hear  from                                                                    
someone  that the  gas  would be  available,  and ready  for                                                                    
market.  She  stressed  that the  industry  partners  had  a                                                                    
vested interest in  ensuring that the gas  was available for                                                                    
the project.                                                                                                                    
Co-Chair  Meyer  agreed   with  Vice-Chair  Fairclough,  and                                                                    
remarked  that there  were  constant  declarations that  gas                                                                    
would  not be  available, because  it was  more valuable  to                                                                    
reinject it for more oil.  He felt that there were different                                                                    
scenarios  that the  gas could  be best  used. He  felt that                                                                    
AOGCC should  comment on  the availability,  usefulness, and                                                                    
profitability of the natural gas.                                                                                               
Senator  Hoffman  requested a  timeframe  of  when the  bill                                                                    
would  possibly move  out  of committee.  He  referred to  a                                                                    
slide titled,  "When the state  is out of money",  which was                                                                    
presented  in the  Senate Resources  Committee. He  stressed                                                                    
that gas should be at the burner tip as soon as possible.                                                                       
Co-Chair  Meyer asked  for a  schedule  of the  week on  the                                                                    
legislation.  Mr. Campbell  explained that  there were  some                                                                    
requests  for  participation  from  various  municipalities.                                                                    
There were  efforts to schedule some  invited testimony, and                                                                    
stated  that  the  schedule  was  at  the  pleasure  of  the                                                                    
9:23:23 AM                                                                                                                    
Co-Chair  Meyer  surmised   that  the  municipalities  would                                                                    
present their  perspectives from a taxation  standpoint, and                                                                    
the public testimony would be held the following day.                                                                           
Vice-Chair  Fairclough requested  an analysis  of cash  flow                                                                    
and impacts of that to the state.                                                                                               
MICHAEL PAWLOWSKI,  DEPUTY COMMISSIONER,  STRATEGIC FINANCE,                                                                    
DEPARTMENT OF REVENUE, (DOR) explained  that there were some                                                                    
drafts  that   were  currently  under  review,   that  would                                                                    
eventually be posted online.                                                                                                    
Co-Chair Meyer  wondered how the  project would  provide gas                                                                    
to  Alaskans.  He  stressed  that, if  gas  prices  were  to                                                                    
skyrocket, his  constituents would  still desire gas  at the                                                                    
burner tip.                                                                                                                     
9:27:09 AM                                                                                                                    
JOE BALASH,  COMMISSIONER, DEPARTMENT OF  NATURAL RESOURCES,                                                                    
(DNR) explained  that the Heads of  Agreement (HOA) outlined                                                                    
the opportunity  to deliver gas  to at least  offtake points                                                                    
in Alaska.  He stated that  there would be an  initial state                                                                    
share.  He stressed  that there  would be  a continual  work                                                                    
with industry partners.  He pointed out that  there would be                                                                    
long  term  contracts that  will  be  drafted, in  order  to                                                                    
enhance a guarantee for Liquid Natural Gas (LNG).                                                                               
Co-Chair  Meyer  surmised  that Alaskans  would  not  get  a                                                                    
discounted rate.  Commissioner Balash replied how  gas would                                                                    
be  disposed would  be a  collective decision  between state                                                                    
and industry partners.                                                                                                          
Mr.   Pawlowski  explained   that   there   is  possibly   a                                                                    
misperception. He  referred to Exhibit  C, Page 5,  Point 17                                                                    
of the Memorandum of Understanding (MOU).                                                                                       
9:32:14 AM                                                                                                                    
Vice-Chair Fairclough  wondered if the rate  would equal the                                                                    
tariff for  the producers. She  wondered if it  was presumed                                                                    
that the 25  percent of the state share would  mean that the                                                                    
state  would  sell  the  gas   to  Alaskans.  Mr.  Pawlowski                                                                    
referred to page  14 of the HOA. He stressed  that there was                                                                    
a  statement  that was  consistent  with  language from  the                                                                    
anti-trust council. He  stressed that it was  not a resolved                                                                    
Vice-Chair Fairclough  hoped that  there was  a preservation                                                                    
of the revenue stream, because  keeping the product in state                                                                    
would forgo  revenue for  the state.  If the  molecules were                                                                    
owned  by a  different  entity, it  may  be regulated  under                                                                    
different laws.                                                                                                                 
Co-Chair Meyer  wondered why  the tax rate  was so  low. Mr.                                                                    
Pawlowski responded  that there  was an  outline in  the HOA                                                                    
that   explained   how   the  breakdown   of   revenue   was                                                                    
distributed, and  furthered that the DNR  website showed the                                                                    
specifics of the state's revenue share.                                                                                         
9:38:19 AM                                                                                                                    
Vice-Chair Fairclough  requested an analysis  from enalytica                                                                    
that showed how  Alaska lined up against  other tax regimes.                                                                    
She  felt that  the tax  rate should  be increased,  because                                                                    
Alaska had oil  that was the foundation in  the credits. She                                                                    
wanted  to see  the limit  on the  credits, because  oil was                                                                    
still  underpinning the  frontend  of the  project for  cost                                                                    
recoveries.  She  suggested  an  analysis  of  where  Alaska                                                                    
compared  was  compared to  others  who  were attempting  to                                                                    
bring gas to  market. She would also like to  the income tax                                                                    
with the overall government take.                                                                                               
Co-Chair Meyer  wondered how much  say the state had  in the                                                                    
operations of the project, with  only a 25 percent interest.                                                                    
He wondered  if all  involvement would  only be  25 percent.                                                                    
Commissioner  Balash  responded  that  the  percent  of  the                                                                    
equity is  typically the same  as the vote on  the projects.                                                                    
He stressed  that there were  some circumstances  that would                                                                    
require different forms of voting.                                                                                              
9:42:29 AM                                                                                                                    
Senator  Hoffman  understood  that  the  administration  was                                                                    
focused  on  building  the  gas line.  He  wondered  if  the                                                                    
administration felt that there  were legislators that wanted                                                                    
more than  the proposed take  off plans, and wanted  an AGDC                                                                    
plan. He stressed that Alaska  was an energy state, and many                                                                    
people  felt that  Alaska  should have  some  of the  lowest                                                                    
energy costs in the nation.  He specifically wondered if the                                                                    
administration  felt  that  this  proposal  was  enough  and                                                                    
satisfactory   for    affordable   energy    for   Alaskans.                                                                    
Commissioner Balash  stressed that the proposal  was not the                                                                    
last  of the  work that  would occur.  He stressed  that the                                                                    
legislation  was an  "opportunity." He  remarked that  there                                                                    
was still work on finding  every opportunity to bring gas to                                                                    
Senator Hoffman  felt that at  every phase the  state should                                                                    
be taking  positive and additional steps  to reduce tariffs.                                                                    
He wondered  if there would  be specific directions  to make                                                                    
Alaskans  feel  like  they can  get  affordable  energy.  He                                                                    
pointed out  that some people  feel like the project  is the                                                                    
state's  last   change  to  obtain  affordable   energy.  He                                                                    
believed  that there  should be  some  direction beyond  the                                                                    
five take-off  points. He  stressed that  there should  be a                                                                    
mandate to expand the project.  Mr. Pawlowski responded that                                                                    
he was  hesitant to provide specific  estimates, because the                                                                    
project  had a  range of  $45 to  $65 billion,  which was  a                                                                    
great deal of uncertainty. He  felt that all of the partners                                                                    
needed to  embark on  Pre FEED to  refine the  estimates, so                                                                    
that the anchor of the project can move forward.                                                                                
9:50:00 AM                                                                                                                    
Senator Hoffman remarked that he  will work on what he feels                                                                    
should be  the enhancements  and eventual expansions  to the                                                                    
projects.  He  urged the  administration  to  go beyond  the                                                                    
proposed  take-off  points   of  the  project.  Commissioner                                                                    
Balash welcomed  the opportunity  to fashion  something that                                                                    
would fit into the phased approach within the proposal.                                                                         
Senator Bishop  echoed Senator  Hoffman's comments.  He felt                                                                    
that the agreement should include  some certainty that would                                                                    
not hinder  the rural Alaskans.  He pointed out  that diesel                                                                    
fuel was less expensive in Juneau that it was in Fairbanks.                                                                     
Vice-Chair Fairclough  stated that the legislature  often is                                                                    
very transparent with the  estimates, budgets, and revenues.                                                                    
She felt  that it may  be a  disadvantage to the  state. She                                                                    
suggested  that there  should be  collaboration with  AEA to                                                                    
form a  more confidential approach to  sharing its financial                                                                    
9:55:28 AM                                                                                                                    
Vice-Chair Fairclough looked  at page 5, Article  1.6 of the                                                                    
HOA.   She  wondered   what   contracts   were  subject   to                                                                    
legislative  ratification. She  looked  at  page 9,  section                                                                    
4.4,  and  stated  that  there   needed  to  be  fiscal  and                                                                    
commercial  terms; those  must have  approval; and  the size                                                                    
needed  to be  determined. She  expressed concern  regarding                                                                    
the value  of instate  energy, because it  could show  up in                                                                    
many forms.  Commissioner Balash replied that  the interplay                                                                    
between the  development of the  agreements and  the various                                                                    
parties, there were agreements that  would go upstream which                                                                    
would  be discussed  in the  legislature. He  furthered that                                                                    
there   would   be   negotiated  on   downstream   providing                                                                    
transportation  and liquefaction  agreements  that would  be                                                                    
discussed  in the  legislature. The  sale of  the state  gas                                                                    
share would also be approved by the legislature.                                                                                
Vice-Chair Fairclough looked  at page 5, Article  1.6 (b) of                                                                    
the HOA,  and wondered what would  be considered "periodic."                                                                    
Commissioner  Balash  replied  that the  probable  pace  was                                                                    
approximately quarterly.                                                                                                        
Vice-Chair Fairclough looked  at page 5, Article  1.7 (a) of                                                                    
the HOA, and  wondered if the intent of that  section was to                                                                    
keep  the project  cost under  control. Commissioner  Balash                                                                    
replied that the issue was  related to the limited number of                                                                    
EPC firms  available to  do the  proposed work.  He stressed                                                                    
that the focus was on  the lowest reasonable bids to execute                                                                    
the project in a cost-efficient manner.                                                                                         
Senator  Bishop wondered  if he  would have  the ability  to                                                                    
defend his legislative  vote, because there may  be an issue                                                                    
of  confidentiality.  Commissioner  Balash replied  that  he                                                                    
could  defend his  vote, because  the access  to information                                                                    
would  be  confidential.  Once   the  agreements  were  made                                                                    
public, the legislature would vote on the agreements.                                                                           
10:02:57 AM                                                                                                                   
Senator  Bishop surmised  that the  state would  be able  to                                                                    
argue  for  or against  the  agreement  in the  confidential                                                                    
meetings. Commissioner Balash explained  that page 13, lines                                                                    
20 through 30 of the bill outlined that issue.                                                                                  
Vice-Chair Fairclough  looked at  page 7, Article  1.17, and                                                                    
wondered if  the state would  partake in  equity investments                                                                    
including terminal facilities  and auxiliary marine vessels.                                                                    
Mr.  Pawlowski   responded  that   the  vessels   were  just                                                                    
necessary at  the actual terminals, which  were specifically                                                                    
determined  to the  operations of  the  terminal. They  were                                                                    
only support vessels.                                                                                                           
Vice-Chair  Fairclough  stated  that those  vessels  may  be                                                                    
considered  a  guaranteed  source of  revenue.  Commissioner                                                                    
Balash explained that the responsibility  of the ships would                                                                    
be negotiated in outlining the agreements.                                                                                      
10:07:05 AM                                                                                                                   
Vice-Chair  Fairclough looked  at page  9, Article  4.5. She                                                                    
wondered if  TransCanada would function  as a  marketing arm                                                                    
for the state during Pre  FEED. Mr. Pawlowski responded that                                                                    
there was  no intent to  have TransCanada to be  the state's                                                                    
marketing entity.                                                                                                               
Vice-Chair Fairclough  wanted to see the  agreement, because                                                                    
she wanted the highest value  for Alaskans, and it should be                                                                    
resolved in  Pre FEED. Commissioner Balash  replied that the                                                                    
process  for selling  LNG  was very  similar  to the  phased                                                                    
approach   for  development   of  the   infrastructure.  The                                                                    
contacts with  buyers would agree  during Pre FEED,  but the                                                                    
execution  of  the sales  agreement  would  not occur  until                                                                    
close to the final investment decision.                                                                                         
Mr.  Pawlowski looked  at  page 9,  Article  4.5. He  stated                                                                    
that, during  the development  of the  HOA, the  interest of                                                                    
the producer parties was an  indication of a difference from                                                                    
previous efforts.                                                                                                               
Senator Bishop commented  that instate use may  be of better                                                                    
value to  Alaskans. Commissioner Balash imagined  a scenario                                                                    
where  the  state may  not  want  to  take  on the  risk  of                                                                    
liquefaction and its services. He  stressed that there was a                                                                    
trade-off,  if  a price  mechanism  could  be determined  to                                                                    
deliver  the  same  net-back  value   to  the  treasury.  He                                                                    
stressed, however, that it would limit the state's options.                                                                     
10:15:22 AM                                                                                                                   
Vice-Chair Fairclough looked at article  4.2 of the HOA. She                                                                    
noted  that   the  second   line  addressed   other  support                                                                    
references  in article  10 in  maintaining  progress of  the                                                                    
project.  Article  10  addresses  the Alaska  Right  of  Way                                                                    
Leasing Act,  and the use  of imminent domain.  She wondered                                                                    
what kind of  amendments should be made to  the Alaska Right                                                                    
of Way Leasing Act. Commissioner  Balash replied that he was                                                                    
not  aware of  any changes  that should  be made.  He stated                                                                    
that  there  were  provisions which  were  outlined  in  the                                                                    
common  carrier  section  of   the  Act,  and  the  contract                                                                    
carriage amendments that  were enacted the year  prior in HB                                                                    
Vice-Chair  Fairclough requested  an answer  in writing,  to                                                                    
ensure that  what is said  is what is  actually anticipated.                                                                    
She looked at  page 16, which addressed a  possibility of an                                                                    
amendment of the Alaska Right of Way Leasing Act.                                                                               
10:18:29 AM                                                                                                                   
Vice-Chair  Fairclough  stressed   that  Alaskans  had  been                                                                    
waiting for a  natural gas pipeline. She  wondered if AGDC's                                                                    
efforts and focus  should be amended to focus  on the larger                                                                    
pipeline and bring gas to  Alaskans. She remarked that there                                                                    
was  already an  appropriation  for the  Alaska Stand  Alone                                                                    
Pipeline (ASAP).  She felt that  there may be  a duplication                                                                    
of  services. Commissioner  Balash replied  that this  issue                                                                    
was difficult,  and DNR did  not want to interfere  with the                                                                    
intention  of  AGDC.  He stated  that  the  legislature  had                                                                    
directed AGDC to continue with ASAP through HB 4.                                                                               
Vice-Chair Fairclough stressed that  there was not an option                                                                    
of a  commercial partnership  when the  mission of  AGDC was                                                                    
outlined.  She  felt  that  there  should  be  an  expedited                                                                    
project.  Mr. Pawlowski  replied  that the  administration's                                                                    
position was outlined on page 3 of the HOA.                                                                                     
10:27:06 AM                                                                                                                   
Commissioner Balash  encouraged that  committee to  seek out                                                                    
the  council of  AGDC regarding  the cost  of delay  for the                                                                    
efforts that AGDC has undertaken.  He stressed that AGDC has                                                                    
moved forward  on ASAP, and did  not feel that any  of their                                                                    
efforts should be stalled.                                                                                                      
Senator  Bishop  looked  at the  expansion  principles,  and                                                                    
requested  an  explanation  of  the  possibility  of  future                                                                    
expansion. Commissioner  Balash shared that  the opportunity                                                                    
for  expansion was  very important  for a  state that  had a                                                                    
mineral  interest in  the  gas beyond  Prudhoe  Bay and  Pt.                                                                    
Thompson.  He  shared  that  there   was  a  challenge  when                                                                    
considering the  shift from  a North  American focus  to and                                                                    
LNG focus. The  realization for DNR was about  access to the                                                                    
liquefaction plant  to the marketplace.  He stated  that the                                                                    
pipeline  provisions   had  been  shifted  in   the  current                                                                    
proposal, which  would marry  the liquefaction  terminal and                                                                    
the liquefaction trains.                                                                                                        
Mr.  Pawlowski stated  that an  LNG  project was  different,                                                                    
because it was sold under  long-term contract, and the terms                                                                    
of the  sales were  complete when  the project  went online.                                                                    
The  rolled-in  concept  showed scenarios  where  the  state                                                                    
would lose, when all of the terms were committed.                                                                               
10:33:51 AM                                                                                                                   
Co-Chair  Meyer looked  at page  19 of  a presentation  from                                                                    
Black and Veatch.  He remarked that there  were some numbers                                                                    
on  the slide  that  outlined  the cost  at  each state.  He                                                                    
wondered how it would work within the fiscal notes.                                                                             
Vice-Chair Fairclough  looked at  page 16, Article  10.1 (c)                                                                    
of the  HOA, and  requested information about  the partners'                                                                    
financial contribution to constructing infrastructure.                                                                          
Senator Hoffman  looked at page  3, item (i)  delineated how                                                                    
the  different  projects  under   AGDC  would  interact.  He                                                                    
wondered if there would be  a fiscal note that would address                                                                    
that  statement.  Commissioner  Balash  responded  that  the                                                                    
point was to ensure that  the funds already committed by the                                                                    
legislature  that  were  sufficient to  carry  AGDC  through                                                                    
their open  season would be unaffected.  The current project                                                                    
would be considered a separate commitment.                                                                                      
Senator Hoffman  wondered if it  was the full intent  of the                                                                    
language within  the fiscal note  was intended only  for the                                                                    
one  fiscal note.  Mr. Pawlowski  replied that  the language                                                                    
was specific to the fiscal note.                                                                                                
SB  138  was  HEARD  and   HELD  in  committee  for  further                                                                    

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