Legislature(2005 - 2006)SENATE FINANCE 532
07/26/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| SB3002 | |
| Jim Clark, Chief Negotiator, Office of the Governor | |
| Dr. Pedro Van Meurs, Consultant to the Governor | |
| Bob Loeffler, Morrison & Foerster, Counsel to the Governor | |
| Roger Marks, Economist, Department of Revenue | |
| Bill Corbus, Commissioner, Department of Revenue | |
| David Van Tuyl, Bp | |
| Wendy King, Conocophillips | |
| Bill Mcmahon, Exxonmobil | |
| Patrick Coughlin, Senior Counsel, Bp | |
| David W. Márquez, Attorney General | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | SB3002 | TELECONFERENCED | |
SB 3001-OIL/GAS PROD. TAX
SB 3002-STRANDED GAS AMENDMENTS
CHAIR SEEKINS opened the hearing on SB 3001 and SB 3002, noting
today's topic would be fiscal certainty.
9:24:11 AM
^Jim Clark, Chief Negotiator, Office of the Governor
JIM CLARK, Chief Negotiator, Office of the Governor, gave a
brief history. After the 2003 legislature amended the Alaska
Stranded Gas Development Act ("Stranded Gas Act"), the
administration began working on how to approach the producers
and structure the gas line agreement. In mid-2004, Dr. Pedro
van Meurs, longtime consultant to the state, met with the
governor to discuss the basic proposal, which was submitted to
the producers in October 2004. The state was to get a gas line,
with its economic benefits, and would: 1) take its gas in kind,
2) take ownership in the gas line and 3) grant fiscal certainty.
Mr. Clark emphasized the goal of making Alaska competitive
worldwide. He turned the discussion over to Dr. van Meurs.
SENATOR DYSON asked to hear, at some point, a summary of
yesterday's discussions in the House about the relative merits
of a gross tax versus a net-profits tax, in which Dr. van Meurs
had participated.
CHAIR SEEKINS agreed, noting Senator Wagoner had indicated his
own draft proposal would be ready today.
9:27:47 AM
SENATOR BUNDE highlighted conflicting legal opinions, and
reported that mail he has received indicates the issue of
certainty is the most difficult for the public. He asked
Mr. Clark whether any new information would raise the public's
comfort level or allay his concern that the supreme court will
reject this, making the legislature's efforts a waste of time.
MR. CLARK surmised two basic questions will appear before the
supreme court. First, what does Article IX, Section 4, of the
state constitution mean by granting exemptions to Section 1 of
that article, which says the taxing power cannot be alienated
except as provided in this article? Mr. Clark opined that
Section 4 provides a way to do that. Second, even if the power
exists, does exercising it for 30 years in the case of oil, or
45 years in the case of gas, go beyond a reasonable period to
exercise the power in Article IX, Section 4?
He indicated while the first issue is for the attorney general
(AG), Dr. van Meurs would explain what the administration has
done. Mr. Clark expressed openness and hope that there will be
dialogue with this committee and the Senate as a whole, with
this being a vehicle for reaching a satisfactory resolution.
SENATOR BUNDE acknowledged Mr. Clark's answer as one he'd been
looking for.
9:31:53 AM
^Dr. Pedro van Meurs, Consultant to the Governor
DR. PEDRO VAN MEURS, Consultant to the Governor, provided a
handout, "Aspects of Fiscal Certainty, May 16, 2006,
Presentation to The Alaska Legislature." He reminded members
that the legislature, with the Stranded Gas Act, had
crystallized the concept that perhaps Alaska's gas couldn't be
developed without providing a degree of fiscal certainty.
Having participated in developing that Act, he recalled
discussion of a liquefied natural gas (LNG) project to Asia,
where low gas prices and high costs would result in a marginal
project but the reverse would yield a highly profitable one;
investors would have to balance the downside with the certainty
that the balance would be maintained if there were an upside.
He explained that fiscal certainty wasn't put in the Stranded
Gas Act for this particular project, but was included because
Alaska's resource is so far from the market, with such high
transportation costs, that it is inherently risky; he still
thinks it was a good decision by the legislature. Dr. van Meurs
said when he went to the governor to propose the current
package, therefore, fiscal certainty was an essential component.
He noted two things are a little unusual here. First, fiscal
certainty through a contractual relationship is rare in
Organisation for Economic Co-operation and Development (OECD)
nations, though common in developing countries, and applied by
OECD nations in the past and when there are large infrastructure
projects. Dr. van Meurs cited the example of Hudson's Bay
Company, where contractual certainty was beneficial when Canada
wanted to develop its frontier and granted extensive resource
and transit rights. He acknowledged the concern of providing
fiscal certainty in Alaska when Britain and Norway don't have
it. Second, it is unusual to start with fiscal certainty for
gas and then add it for oil, where it hasn't existed. Dr. van
Meurs indicated he hoped to address these concerns.
9:38:00 AM
DR. VAN MEURS specified that fiscal-certainty contractual
arrangements typically occur in the world if: 1) investors
don't trust the political stability of the governments involved,
as seen in Angola, or 2) the risk profile of the investment is
so dramatic that there must be absolute certainty when weighing
positive conditions against negative ones, as illustrated by the
aforementioned Hudson's Bay Company example.
He pointed out that the contemplated project has an immensely
unusual risk profile: If costs were high and prices low, it
would be the worst in the world in terms of net present value;
if the reverse were true, however, the net present value would
be more than for any other project in the world. Dr. van Meurs
emphasized the difficulty for an investor to weigh now whether
to actually start construction in a few years. Because the
outcome is unknown, the justification for putting so much on the
line is to really benefit from a positive scenario.
He highlighted cost escalation, noting Alberta, Canada, is under
enormous stress from this. Dr. van Meurs said Shell announced a
week ago that it is postponing its oil-sands project because
costs have risen 50 percent in just one year, and cost estimates
for the Mackenzie Valley project have gone up 50 percent over
the last three years. This escalation poses a huge risk.
9:44:01 AM
DR. VAN MEURS pointed out changes in oil and gas prices since
his presentation two months ago. He said gas prices in relation
to oil are lower today than ever in the U.S. However, oil
prices on an energy-equivalent basis are 14 times the price of
gas; typically, they're 6 times higher because, on an energy-
equivalent basis, they compete. If gas prices stay low in North
America relative to oil, it makes this project highly
unattractive on an international scale, since gas prices in
Europe and the Far East are holding up far better in the last
few months.
He told members that the volatility of these factors is an
immense risk to investment. If investors can benefit from large
profits, however, they are willing to risk escalating costs and
prices that continue to slip relative to crude oil. This
project will go forward only if investors can positively
evaluate this balance, Dr. van Meurs predicted.
He noted reasonable legislators could differ by as much as
10 percent on what the government take should be. Without
fiscal stability, a future legislature could decide to add 10
percent to the government take, another billion dollars a year.
If oil prices then collapsed and costs increased, the project
would be a disaster. Dr. van Meurs said these are reasons for
fiscal stability.
9:51:51 AM
DR. VAN MEURS explained four methods for providing fiscal
stability around the world: 1) an exemption system such as in
Malaysia or Egypt, where a law exempts the investor from certain
taxes and then other taxes are agreed to contractually; 2) a
guarantee system in which a nation passes a law guaranteeing the
terms of the contract; 3) the "pay on behalf" system in which a
national oil company and a private oil company do a deal
together, with the former agreeing to pay taxes on behalf of the
latter if conditions change, and guaranteeing the fiscal
structure will stay the same; and 4) the fiscal balance system
wherein a country says, in the contract, that the deal is based
on today's conditions for oil and gas, and if any condition
changes, there will be renegotiation.
He pointed out that Alaska's proposed contract combines the
exemption system with a "pay on behalf" system. If there are
tax overpayments, there will be a refund to investors.
9:55:37 AM
DR. VAN MEURS asked: If the investment is in gas, why is fiscal
stability needed for oil? He answered that, first, the
legislature could decide to take another billion dollars on oil
because of being unhappy with the gas contract, for example. In
response, companies likely would refuse to reinvest; because
there is no work commitment for oil, they'd be free to do so in
order to minimize the extra government take on oil, as they'd
perceive it. Second, oil and gas are found together in most new
exploration. If terms aren't known for both, it isn't possible
to make an investment. If there is a guarantee on the fiscal
system for gas but not oil, then the economics of that
exploration venture are discounted because of the risk on oil.
10:00:52 AM
DR. VAN MEURS asked: Why is it so beneficial for Alaska that
companies have the maximum incentive to explore for gas? He
answered that gas almost invariably contains condensates and
large volumes of liquids at the same time; typically, 50 barrels
of condensates occur with every million cubic feet of gas. So
far, there is only enough gas to fill this line for 18-20 years.
If the line can be filled for 40 or 50 years instead, Alaskans
will be the big beneficiaries, along with the investors.
He noted the current sponsors might not even be the owners of
the extra gas. Dr. van Meurs said fiscal stability for oil
isn't a one-way street, given to satisfy investors. It is also
fundamental to an exploration strategy to fill this line with
gas for decades to come - for two generations of Alaskans.
He discussed how long fiscal stability is needed. Looking at
international exploration contracts that have fiscal stability,
and having analyzed about 46 countries that do that, Dr. van
Meurs reported that 35 years is the average or typical time that
companies receive fiscal stability for oil and gas. Why 45
years for gas? In many countries it is customary to give a
longer period of fiscal stability for gas than oil, by 5, 10 or
15 years. Even if gas is found, governments realize that an
infrastructure must be put in place, that customers must be
found and that the gas must be marketed. This can take 10 or
15 years.
10:06:35 AM
DR. VAN MEURS addressed why this is essential for Alaska.
Emphasizing the desire to have the pipeline full for 50 years,
he suggested thinking of a new explorer that must find gas
before the first open season or first expansion. This could be
soon. He asked whether someone would commit tens of millions of
dollars to explore without knowing whether it is possible to get
in the pipeline, or with a concern that fiscal stability will be
taken away before first gas.
He offered that the least the state can do, for new explorers
for gas, is to say if they take a double risk - exploration risk
plus the chance the pipe might not be available if gas is found
- then they'll get the same fiscal stability as those that built
the gas line. Dr. van Meurs suggested this shows appreciation
for new explorers, who'll fill that line if Alaska is fortunate.
The periods exist to satisfy basic concerns about risk and
reward, but the concepts are also good for Alaska. Thus fiscal-
stability provisions are in the contract.
10:09:16 AM
SENATOR BUNDE agreed that encouraging exploration and more
investment is essential for Alaska's economic well-being.
Acknowledging the need of investors and the corporations for
fiscal certainty, he requested a reaction from Dr. van Meurs and
Mr. Clark about a notion discussed in the House: indexing taxes
to investment so the state can have some certainty as well.
MR. CLARK responded that if there is no decision to invest,
there won't be 30 years of fiscal certainty on oil, and thus
there is a linkage between investment and the fiscal-certainty
period. The contemplated contract has two periods of fiscal
certainty. The first, about 4 years, is from the date of
signing the proposed gas contract until project sanctioning. If
the decision is not to build the project, there'd no longer be a
contract or fiscal certainty on oil. When talking about 30
years or 45 years, it assumes success in moving forward.
DR. VAN MEURS added that international governments typically
don't link fiscal systems to levels of investment. They focus
more on the level of production of oil and gas. Some
differentiate between base production and incremental
production, and some have sliding scales and better deals for
marginal fields.
SENATOR BUNDE said he'd been led to believe there is a
relationship between investment and production. He asked:
Because of the 45-year certainty for gas, would the state
benefit with respect to certainty if there were a index on gas
taxes that had an escalator as prices rose?
DR. VAN MEURS replied that, internationally, there typically
isn't indexing of gas fiscal terms to oil prices or vice versa;
he couldn't think of any such example. The prices themselves
seem to accommodate for escalation and inflation over time.
Today's higher prices for oil and gas, for the most part, are
due to escalation and inflation; for instance, gas prices today
aren't much higher than in 1922 if looked at in 1922 dollars.
He added although some governments link gas prices to oil prices
in order to establish a local market price, the fiscal system
isn't indexed, but the gas price itself is; this occurs in
nations where prices are controlled. Dr. van Meurs referred to
previous discussion of progressive and regressive systems,
noting that the indexing of systems to a number of variables can
occur in that way.
10:21:01 AM
SENATOR BUNDE clarified that he wants to ensure for the state
that there will be some progressivity for gas through the period
of tax certainty, much as progressivity is being discussed for
oil. He suggested he'd perhaps used the term "indexing"
inaccurately.
MR. CLARK pointed out that oil is treated differently than gas
in the proposed contract. The state is taking its gas in kind.
Thus the contract specifies the split, which is what continues
for 45 years. As the value of gas escalates, the state will get
increased value in the marketplace. For oil, there will be a
tax. There are two different systems, though interrelated.
10:23:02 AM
DR. VAN MEURS emphasized that progressivity for gas and oil
internationally are entirely different. For oil, it means
grabbing an extra share for the state if conditions are better
than expected. For gas, it means lowering the government take
if conditions are less than expected. He referred to his
previous comments on this matter, reminding members that he is a
proponent of progressive systems and had advocated for such in
the original Stranded Gas Act.
He acknowledged some countries have "take/take" systems.
Dr. van Meurs cited Canada's Mackenzie Valley pipeline as an
example where there is a progressive system based on profit.
However, the purpose there isn't to grab an additional share of
gas revenues if conditions are favorable; rather, it is to
ensure that the government take is less if conditions are worse.
Australia and Russia did likewise. For large-distance exporters
of gas, analyzing the contracts on a price-sensitive basis as
he'd shown previously in graphs, Dr. van Meurs said all these
systems go pretty flat when the price goes over a certain
minimum price of $2 per million Btu at the wellhead; he cited
Qatar as a further example.
He highlighted the difference between the bargaining power the
State of Alaska has for oil versus gas. Dr. van Meurs said oil
is becoming scarce, as reflected in the prices; hence Alaska is
establishing strong incentives for new development and a
progressive system. For gas, however, there are 150 "North
Slopes" and people willing to sell at a discount, either in
price or in fiscal terms; thus the state is securing a massive
new development that will have only very slight progressivity -
not doing what Canada and Australia did, but saying that if the
price of gas goes down, there won't be a better deal.
He explained that Alaska's system will be flat if the gas price
goes either down or up. The state benefits when there are low
prices, although the companies have a tough time. But under
high prices there will be an attractive profit for the
companies. Dr. van Meurs concluded by saying Alaska is
maximizing its bargaining power, being somewhat careful with gas
and somewhat more progressive on oil; this is the best
combination for Alaska's future.
10:28:37 AM
SENATOR ELTON asked how many countries provide fiscal certainty
on oil for a gas project, or vice versa.
DR. VAN MEURS replied that the normal practice internationally,
in all 46 contracts he'd analyzed, is that fiscal stability is
granted for oil and gas together. He cited Qatar as the best
example of a country that successfully exports massive
quantities of gas, with a "pay on behalf" system to guarantee
tax stability on oil as well as gas for a typical gas-export
deal; the 50 barrels a day of condensates make the projects
attractive, and Qatar is becoming an important oil exporter
because of them. He reiterated that Alaska is somewhat unusual
in granting stability on oil where none existed before, for the
reasons he'd explained.
10:31:14 AM
SENATOR STEDMAN asked about pages 16 and 17 of the handout,
relating to how net present value changes over time as a project
nears development. Comparing it with the fiscal interest
findings on page 73 of the proposed contract, he said it shows
there is more value to the state in oil than in gas. He also
said tax policies in the state haven't been erratic, changing
every few years. He asked: With the value to the state being
in oil in today's dollars, especially at higher prices, why give
away the sovereign right to modify the oil tax for such an
extended period, instead of keeping some flexibility?
DR. VAN MEURS acknowledged the validity of that concern, but
explained that states which enter into fiscal-stability
contracts don't perceive it as giving away sovereignty; rather,
they see it as exercising sovereignty to achieve the best
benefit.
He noted the graphs in his handout show that the fundamentals of
the proposed project are extremely sensitive to the timeline.
Dr. van Meurs said the profitability increases enormously after
this contract is begun and the first couple of billion dollars
are spent, providing more certainty of moving forward. Without
fiscal stability, however, reasonable legislators in 10 years
would more likely want to increase taxes if prices were high;
this is the concern of investors. If only gas were locked up,
the tendency would be to take an extra billion from oil. And
while the legislature has been equally stable in its handling of
taxes when compared with Western countries, the opinions of
legislators differ as to what is reasonable, justifiably so.
10:36:23 AM
SENATOR STEDMAN asked: If fiscal certainty is given for both
oil and gas, how does the state protect itself from negative
economic changes in 15-25 years, until there is an "opener"? He
suggested the state would go to the aid of the industry in that
instance, since the state depends on its revenues.
DR. VAN MEURS acknowledged that concern, noting similar ones are
expressed worldwide when a contract of this nature is entered
into. As mentioned previously and in his petroleum production
tax (PPT) report, Dr. van Meurs said he sees the government take
rising worldwide for oil. Companies are increasingly concerned
about booking reserves. With the change in oil prices, many
governments are reassessing their rightful share from their
resources, which he reported as one consideration in designing
the PPT. Whether there is a similar trend for gas isn't so
clear, however.
He surmised 20-30 years from now there'll be a very different
oil and gas industry. Giving some personal history, Dr. van
Meurs noted he began as a geologist in 1970, when theories and
technology were quite different.
10:41:04 AM
DR. VAN MEURS stressed how critical it is that Alaska put
everything in place to have the gas project go forward this
time. He emphasized immense resources of stranded gas around
the world. Small political changes could unlock massive
resources. For example, Russia appears to be sitting on
40 percent of the world's gas resources, perhaps equal to 40 or
50 North Slopes, although the world has room for only 1 more a
year. He gave other examples. Predicting a 30 percent chance
that this gas project might not go forward, even with a
contract, he suggested focusing unconditionally on getting this
project. Otherwise, it could be lost for a long time.
He reiterated concern about the low price of gas relative to oil
today, warning that Alaska could be in dire straits without a
gas project for the next decade. Dr. van Meurs acknowledged
that hindsight in the future may show there could have been a
better deal, but highlighted the need to put an extra $2 billion
to $6 billion a year into Alaska's economy and to secure it now,
while companies are interested in developing gas in Alaska.
10:45:07 AM
SENATOR STEDMAN requested further discussion of Alberta, where
he recalled incentives for the industry were followed by an
economic boom, which the government wants to slow because of
housing and labor challenges and so forth. He asked whether it
is overstimulated there.
DR. VAN MEURS explained that Alberta did what is proposed for
the PPT. Alberta's oil sands and heavy oil deposits were
developed using a profit-based system. Over the last 20 years -
particularly the last 3 or 4, with high oil prices - success has
led to an immense escalation of costs. They cannot get the
workers, and municipalities cannot accommodate more people. He
agreed it is a sign of overstimulation. The hope had been to go
to $2.5 million barrels a day 10 years from now, and to add the
Mackenzie line. Now it is all in doubt. If costs increase so
much with this overstimulation of the economy, then everybody
starts to reassess investments, Dr. van Meurs noted.
He pointed out that what makes this proposed gas project so
risky is its target market, Alberta, which is almost out of
control economically now. Dr. van Meurs said Alberta is
pleading with Canada's federal government to allow more
immigration so that more people coming to the province can
develop the resources. Agreeing that these are serious
problems, Dr. van Meurs suggested this could well be the
Achilles' heel of the Alaska gas project.
10:48:52 AM
SENATOR STEDMAN remarked that he hopes to see the day when
Alaska has an overheated economy and the problems Alberta has,
trying to help communities expand their infrastructure.
SENATOR DYSON offered his sense that people are concerned that
the State of Alaska will perhaps enter into a suboptimal
agreement, with no chance to fix it later. He recalled the
perception in the 1970s with the Trans-Alaska Pipeline System
(TAPS) that the state, in its inexperience, got the short end of
the stick and could have done much better if advice had been
received from experts like Dr. van Meurs.
He surmised fiscal certainty will be a major concern of
investors. Senator Dyson asked if there is some way to have
certainty for a significant period that gets investors past the
permitting process and politically affected issues, including
those in Canada, and through the construction period and some
time during which there could be a good shot at recovering major
portions of the investment, thereby diminishing risk without
going all the way out to 45 years.
10:52:05 AM
DR. VAN MEURS replied that the international practice is to have
fiscal stability for the term of the contract. That is also how
the stranded gas contract is being structured. As for doing a
suboptimal deal, Dr. van Meurs said he has the same concern
whenever there is a deal, and also understands concern about the
duration of fiscal certainty. He pointed out that the longer
there is fiscal certainty, the more secure investors feel and
vice versa.
He explained that fiscal certainty is about ensuring extra
profits - well over a reasonable rate of return - to compensate
for the enormous risk. Dr. van Meurs noted it is a difficult
equation and agreed, from an Alaskan point of view, that it
would be more desirable to shorten that period, creating more
flexibility for the future. The problem is, it doesn't address
the risk issue. For that reason, contracts that have fiscal
stability always do it for the term of the contract.
10:56:20 AM
SENATOR DYSON said that was a helpful and frank response. He
asked Mr. Clark what the administration is considering to
mitigate concerns about locking in the tax structure.
MR. CLARK called it a work in progress. He said the risks are
asymmetrical: the downside risk of high costs/low prices is
much bigger on the downside for these companies than the
benefits of low costs/high prices, which gives the extra profits
Dr. van Meurs discussed. Mr. Clark indicated the desire to find
a way to attend to Alaskans' concerns about this issue and still
address the risk, dealt with in the contract by giving 30 years
of certainty for oil and 45 years for gas. "We know we need to
do something," he added.
10:58:52 AM
SENATOR DYSON asked whether, once the capital risk has been
recovered, this will give a guaranteed cash return for
investors.
DR. VAN MEURS answered that there is an immense difference
between the midstream and upstream. As soon as the industry
makes the shipping commitments - the core risk element - a
pipeline company can construct a line and have a relatively low-
risk, long-term, regulated existence. However, these pipelines
cannot be built without a $60 billion or $40 billion shipping
commitment, which "upstreamers" must make to ship their gas
through a pipeline. The extra reward is not for constructing
the pipeline and getting a reasonable rate of return; once the
shipping commitment is in place, many parties could do that if
they offered the lowest-cost-possible transportation system.
Instead, the risk is in making that immense shipping commitment.
He noted this risk goes against the upstream, not the pipeline.
The producer, which has ship-or-pay commitments, is immensely
exposed if gas prices fall and regulated pipeline tariff costs
rise. Dr. van Meurs agreed with Mr. Clark that it is an
asymmetrical risk. If everything is negative, the company would
be stuck, performing badly in terms of the typical earning power
of an international company; this would be received poorly by
shareholders. On the other hand, this must be balanced against
the extra profits discussed previously. Dr. van Meurs said
guaranteeing the shipping commitments for a midstream project
isn't a regulated activity; it is a high-risk venture.
11:02:50 AM
SENATOR DYSON requested confirmation that once those firm
transportation (FT) commitments are obtained, the risk for the
upstream folks, the producers, is that prices will fall or
transportation costs will go up. He surmised there is also some
risk of not having the anticipated volume that was committed to,
as well as risk related to market prices.
DR. VAN MEURS affirmed that.
MR. CLARK added that a tremendous upside potential could be
captured after the period of the contract if the infrastructure
exists. The key is getting the infrastructure in place, because
information indicates there could be 100-200 trillion cubic feet
(Tcf) of gas on the North Slope, not counting potential gas
hydrates. Currently, there is 36 Tcf of gas, with the
expectation of more. He stated the desire to run the pipeline
at 6 billion cubic feet (Bcf) a day, which means finding another
35 Tcf to put in the line, and then to go beyond the life of
this contract. He likened it to the 1862 Pacific Railway Act in
its effect.
11:05:16 AM
CHAIR SEEKINS brought attention to Alberta's high real estate
prices and manpower problems, including that they are looking to
immigration to fill positions during peak construction of the
Mackenzie Valley pipeline, which anticipates first gas down the
pipeline in perhaps 2012.
SENATOR BUNDE remarked that what goes up must come down.
Referring to Senator Stedman's previous comment, he told how in
1985, in Anchorage, neighbors lost businesses and homes because
of the overheated economy there.
CHAIR SEEKINS recalled that after the oil pipeline was built,
Fairbanks had more than 30 percent unemployment.
SENATOR STEDMAN clarified that the issue isn't to overheat the
economy and then tank it, but to have an "earnings trap" on the
oil revenue to stimulate exploration and growth; this will put
the state in the position of managing a growing economy.
Alluding to SB 3001, he suggested that is the purpose of the
20 percent credit in the proposed oil tax.
The committee took an at-ease from 11:10:19 AM to 11:30:21 AM.
SENATOR WILKEN reported hearing from hundreds of people over the
last few months who are concerned there will be a 30-year lock
on oil prices, with a gas pipeline in return, through a "trust
me" model. While recognizing the work of Dr. van Meurs and
Mr. Clark, he emphasized the need to avoid having a reserves tax
rammed down people's throats, in particular. He urged the
administration, with its consultants; the legislature, with its
consultants; and the producers to come together to figure out
how to answer the question, "How do you know?" He expressed his
belief that it will be such a team that fixes this.
11:35:30 AM
MR. CLARK accepted the challenge on behalf of the
administration, relating his opinion that the producers would
agree as well. However, he emphasized that this is in two
parts. The "how do you know" question isn't for 30 years, but 4
or 5 years, the time to get to project sanction and make a yes-
or-no decision. Any certainty for that period is a putative 20
percent split if the gas pipeline is built. If the investment
decision is affirmative, it continues through the remaining
period. If not, nothing has been done with respect to gas.
With respect to oil, under what the administration has proposed,
for 4 or 5 years there'd be a locked-in rate, whatever the
legislature decides is an appropriate tax.
Mr. Clark acknowledged that the administration hasn't clearly
communicated to the public why the contract doesn't contain a
firm schedule. He clarified that this contract is a step, not
the whole project. Just as fiscal and administrative terms were
worked out at the federal level, this contract works out fiscal
terms. There is still a need to go before federal agencies for
permitting to see what additions will affect the economics;
other items affecting the project include the Canadian link.
While $4 billion has been talked about as the state's 20 percent
interest, it is based on data several years old and will change.
Acknowledging that the legislature won't want to go forward
without knowing details, Mr. Clark emphasized that what is being
discussed is a progression leading to an answer in 4 or 5 years.
He opined that the contract will move this forward significantly
because the economics are nailed down. Fiscal certainty will
attract capital and make the leases held by the producers more
valuable, giving them incentive to invest. As to whether this
deal is suboptimal, Mr. Clark said they all wondered whether it
was the best deal they could have gotten for the state. Calling
these fair questions, Mr. Clark reiterated the administration's
preparedness to sit down with the legislature and the producers.
11:40:36 AM
SENATOR WILKEN related his belief that Alaskans aren't looking
for finite, discrete steps, but are looking for broad benchmarks
that show the state, with its resources, is holding the
producers to their promise, given a signed contract, to build a
gas pipeline. He suggested the need to provide some comfort
level for the voters. Senator Wilken added that he would do
what he could to help move it along.
SENATOR DYSON said he shared that concern. Although
acknowledging the difficulty of firm deadlines, he reported that
some people with vast experience in the pipeline business have
suggested there could be fairly firm deadlines in the work
commitment, including filing of the application and submitting
the environmental impact statement (EIS), and a firm date on the
open season and Federal Energy Regulatory Commission (FERC)
certificate. He noted that this is provided that the
commissioner of the Department of Natural Resources (DNR), or
whoever is appropriate, could allow relief based upon a
presentation of cause.
He suggested those firm dates could be included with somewhat
draconian "clubs" in the contract - losing protection from the
reserves tax, for instance, or losing Point Thomson or fiscal
certainty. Senator Dyson requested a response on the merits of
the aforementioned strategy.
11:43:28 AM
MR. CLARK replied that what exists isn't dissimilar. In the
summary of the Qualified Project Plan is a Gantt chart setting
out a time period for each item mentioned by Senator Dyson. The
producers can change that chart by changing "x" to "y" in terms
of time. The state can file a notice of dispute and terminate
the contract if something doesn't wash, based on a two-part
standard: Advance the project diligently, as is prudent under
the circumstances. Mr. Clark noted the latter part relates to
the prudent man rule, which ties in with the two-phase FERC
process, presenting a tariff in order to get into the open
season and doing standardized preapplication work with FERC.
He emphasized this is a clear, step-by-step process. The state
will know whether it is being advanced as is prudent under the
circumstances, using the prudent man rule, which is akin to
common law. Mr. Clark explained that an arbitrator would apply
those standards to the facts and circumstances that exist when a
notice of dispute is brought because of dissatisfaction. When
the pieces are put together with respect to what will be
confronted on the ground, he said it is tighter than the
administration has been able to communicate well to the public.
11:46:35 AM
SENATOR DYSON asked: If the state files a notice of dispute,
with whom would it be filed?
MR. CLARK answered that under the system put together, it would
be with the arbitration tribunal. During the preapplication
phase, for example, when there should be advancement to the open
season, the producers might stop their progress. The state
would file a notice of dispute. The arbitrator could agree that
the project wasn't being advanced as diligently as prudent under
the circumstances, and the contract would terminate. There
would be $1 billion of project-design and permitting work into
it, and the producers would lose that and the fiscal certainty.
If a reserves tax has been passed in November, that would enter
into it. There would be a lot to lose.
11:48:11 AM
SENATOR DYSON asked about having firm dates that "x" will get
filed 24 months after the contract is signed by all parties, for
instance, making it incumbent upon the producers to explain why
they cannot reasonably do it if the deadline isn't met. He
agreed with Senator Wilken that having something firm will give
Alaskans more comfort. Senator Dyson noted it has been
represented to him that this arbitration process is a bit
unusual, weighted against the state. He asked Dr. van Meurs how
other sovereign entities deal with such issues.
DR. VAN MEURS answered that internationally there is an enormous
distinction between upstream contracts and mega-projects of this
type. The former involve a contract just to explore, develop
and produce, whereas the latter have both upstream and midstream
components. It is a normal practice in production-sharing
contracts or concession contracts to have firm periods for
exploration, and they often include certain minimum work
obligations with deadlines.
SENATOR DYSON asked about the midstream.
DR. VAN MEURS clarified that he agreed with testimony that these
deadlines and work commitments are common internationally, but
only if restricted to exploration, development and production.
For comprehensive international projects that include upstream
and midstream components - all of which he'd looked at - that
philosophy isn't found. Rather, there is a far more flexible
approach because governments realize these projects are too
complex, with too many facets, to guarantee deadlines.
He opined that Alaska's proposed contract is quite good compared
with other large upstream-midstream contracts. Dr. van Meurs
cited examples such as Sakhalin, noting there are firm
commitments for certain upstream components, but no firm
commitments for the large projects. For instance, Sakhalin has
no Qualified Project Plan to move it forward, and the large
projects don't have a 10-year schedule or a diligence
requirement, with termination ability if there is no diligence.
11:54:33 AM
SENATOR DYSON asked whether there is a provision for incremental
penalties that don't throw the producers off the playing field.
MR. CLARK asked Mr. Loeffler to join in with respect to
arbitration. Mr. Clark then emphasized the desire for good
progress. If there is termination, the contract gives an
ability to cure it; this is for the time up until it is built.
The state will look at facts and circumstances, wanting to
resolve problems and not rush to judgment because of a timeline.
Although it isn't a penalty for failure to perform, it is a
wake-up call, and the producers would have to explain to their
board of directors and, he surmised, would want to come back in.
He elaborated, suggesting it is perhaps equivalent to, though
not the same as, what Senator Dyson was talking about.
SENATOR DYSON expressed doubt that it is equivalent in any way.
He asked Dr. van Meurs whether any North Sea midstream
development rises to the level of a mega-project.
DR. VAN MEURS replied some do; he mentioned Ormen Lange. In
further response, he explained that all North Sea developments
aren't contractual. There are licenses whereby producers can
have a large amount of freedom to go forward. From an upstream
perspective, there are certain deadlines in these licenses. As
in Alaska, if oil or gas isn't discovered in 10 years, the lease
expires. Similar provisions are in the British and North Sea
licenses. However, Norway won't put a firm deadline on building
the gas line from Ormen Lange to Great Britain. So there are
restrictions on the upstream side, but not on the total project.
11:59:05 AM
^Bob Loeffler, Morrison & Foerster, Counsel to the Governor
BOB LOEFFLER, Morrison & Foerster LLP, Counsel to the Governor,
recalled a fair amount of commentary that the state should have
applied a prudent operator standard. Reporting that he'd looked
at that standard, Mr. Loeffler read from Williams and Meyers,
calling it perhaps the leading treatise on oil and gas, and
saying what he would read, from the U.S. Supreme Court, is
similar to what was adopted. He related it as follows:
No breach of the prudent operator standard can occur
save where the absence of such diligence ... is both
certain and substantial - clear and convincing - in
view of the actual circumstances at the time, as
distinguished from mere expectations on the part of
the lessor and conjecture on the part of mining
enthusiasts.
He explained that the prudent operator standard typically is
applied to leases, and this is midstream. Mr. Loeffler said,
"We were aware of this when we constructed the diligence
language that Jim [Clark] has read." He added that the tests
are remarkably similar, but the prudent operator standard looks
a lot at what a hypothetical person would have done, whereas
this looks at what actually happened and also what didn't
happen. Noting that elsewhere the treatise says one looks at a
wide variety of factors, Mr. Loeffler remarked, "We think we've
got language which is tantamount to the prudent operator
standard."
He offered to provide the quotations he'd referenced. "It works
very, very well," Mr. Loeffler added. He recalled under then-
President Carter, in about 1977, a deadline for TAPS was
included: winter season 1982, in operation. From 1980 to 1982,
a collaborative design-and-engineering board involving perhaps
eight or nine pipelines, the three largest producers and the
State of Alaska met monthly to review progress; however, the
deadline proved meaningless. Noting this current project is
complex, passing through two countries and requiring much
coordination, Mr. Loeffler concluded, "You just can't fix it
into, we believe, any better mode than what we have in the work
commitments clause of the contract."
MR. CLARK suggested it would be useful for Dr. van Meurs and
Mr. Loeffler to talk about arbitration in this context, to
address the point raised by Senator Dyson.
SENATOR DYSON replied it wasn't necessary.
12:03:29 PM
SENATOR BEN STEVENS referred to comments by Senators Wilken and
Dyson with respect to what the public needs to know, as well as
the timing requirements in place. He emphasized that the
certificate of public convenience - the authority to build and
finance the pipeline, as well as authorization for expenditures
by the sponsors - is issued by FERC. Thus decisions by the
legislature aren't the final determination of whether the
project will go forward.
He recalled that Congress, in October 2004, set out a timeline
under which the State of Alaska or any sponsor had 18 months to
submit an application to FERC; it expired April 10, 2006.
Senator Ben Stevens said FERC and Congress also recognized that
any prospective sponsor of a project needed to be in agreement
with the state for the rights to the gas and the upstream field
contracts. He indicated this project is behind schedule from
the congressional Act in terms of submitting an application.
He said Congress has timelines under which FERC, the
environmental conservation agency, the U.S. Department of the
Interior and the Bureau of Land Management all must "do
diligence" and have their determination within 48 months after
submission of an application. Senator Ben Stevens also recalled
a vote by this committee in the prior special session on an
amendment crafted by members that said if there isn't a
pipeline, none of the provisions on fiscal certainty in the
contract will be in place. However, the legislature is now back
to ground zero, trying to explain to the public about a 35-year
and 45-year time period.
He fully agreed with a prediction by his father, U.S. Senator
Ted Stevens: If there is failure to act this year, legislators
will be at this table in June 2008 hashing over the same issues.
As for the costs of delay, Senator Ben Stevens noted the House
analyzed what tax rate must be imposed for each year that there
isn't a project in order to get the same net-present-value
return; he said Representative Samuels had shown that to him,
and it is about a 1 percent a year increase. Thus the
consequences of failure to act are enormous, not only affecting
benefits to the state, but also affecting the people in terms of
jobs, opportunities for education and so forth.
12:08:25 PM
CHAIR SEEKINS interpreted the concerns of Senators Wilken, Dyson
and Ben Stevens, as well as some constituents, to be this: If
the contract is signed, what is being agreed to? He told
Mr. Clark that many people don't understand that this is a
fiscal-terms contract, not a construction contract or gas
pipeline contract. People also don't want to be flimflammed.
He emphasized the desire to build the pipeline, and highlighted
the search for another remedy beyond cancellation if there is
lack of diligence. Chair Seekins also noted that people aren't
familiar with the burden of proof, clear and convincing, and
only understand it isn't the highest burden of proof and thus
may see it as the lowest; however, it's a middle level. He
emphasized the need for a prod to ensure that the companies are
moving forward with due diligence; he noted some people think
that can be accomplished through a reserves tax as a threat,
since the only other remedy appears to be termination of the
contract, which nobody wants.
He thanked Mr. Loeffler for his explanation of the prudent
operator standard. Chair Seekins said he has run into the same
thing Senator Wilken has: people who say they understand
certainty if it's mutual. Chair Seekins agreed with Senator
Wilken that most people want a gas pipeline built, but not at
all costs; they want it to be fairly done and to represent,
under the Stranded Gas Act, the maximum interests of the people
of Alaska. Chair Seekins emphasized that this is a fiscal-terms
contract, even though everyone wishes it were a contract to
actually build a pipeline.
The committee took an at-ease from 12:13:55 PM to 1:51:39 PM.
MR. CLARK returned to Senator Wilken's question of what Alaska
gets in return, informing listeners that it had been discussed
over the noon hour, with Mr. Loeffler taking notes.
1:52:19 PM
MR. LOEFFLER alluded to previous negotiations for the proposed
contract, explaining that the state got the companies to consent
to an oil-tax increase that should produce about $1 billion a
year, as part of the package decided by the chief executive
officers (CEOs) and the governor. He acknowledged it is
controversial.
He noted the list on pages 112-113 of the contract talks about a
number of considerations for the deal, including the following:
the right to own 20 percent of the project; the work commitments
clause; clarity on the agreements on all the monetary payments
in lieu of taxes (PILTs), Articles 11-19 and 22, many of which
are adjusted for inflation under the individual terms of those
articles; the capacity management provisions in Article 10,
which are unprecedented and reduce the state's risk in getting
its gas to market; the right to have production taxes paid in
gas as opposed to cash, which increases the amount of gas Alaska
has for its use; and a number of individual items on in-state
needs, including timely studies of in-state needs, natural gas
liquids (NGL) processing in Alaska, clarity on in-state mileage-
sensitive service and a labor clause. Mr. Loeffler suggested
Dr. van Meurs or Mr. Clark might want to add to this list.
MR. CLARK added the agreement to move the project forward to the
sanctioning point, at the expenditure of (indisc.) dollars. He
also mentioned the $125 million in impact payments for
municipalities.
1:55:24 PM
SENATOR BUNDE suggested two of the aforementioned should be
taken off the list, since to his belief they are not state's
rights, but "gimmes" for the companies, insisted on for the deal
and not in the state's best interest. Those two are Alaska's
taking its gas in kind and investing in the pipeline.
CHAIR SEEKINS asked how those two benefit the state.
MR. CLARK answered that the federal Minerals Management Service
(MMS) had related its experience: making more money by taking
its gas in kind than in value, and lowering of the transaction
costs because there no longer were disputes about previous
valuations and look-backs on valuations - which Mr. Clark said
the state has had many times over the years. He reported that
both of those were seen as valuable to the State of Alaska.
DR. VAN MEURS added that in the economic valuation, the whole
deal was analyzed to protect state revenues. His field analysis
assumed the state's marketing costs could be as much as
5.5 cents per million Btu. Whereas he'd viewed that as a
negative, MMS is experiencing it as a positive. Thus he might
be underevaluating the benefits to the state, on a cumulative
basis, by as much as $1 billion. Dr. van Meurs said he didn't
have much experience in North American gas marketing, which some
DNR experts have; however, he has done a lot of this work
internationally. He related his experience that transaction
costs on very large blocks of gas are quite low.
1:58:29 PM
CHAIR SEEKINS requested details about supplies for in-state use.
DR. VAN MEURS pointed out that Mr. Loeffler is far more familiar
with the rates and decisions on that. He then explained that
the contract provides for four offtake points where another
party can tie in to the pipeline. These are predetermined in
consultation with the state, and there doesn't have to be major
reconstruction to add or tie in a line. This is important
because any third party with a commercial contract that wants to
get into the first open season has the ability to tie in.
He noted some people have asked why 1 Bcf of gas isn't shipped
to Valdez for export as LNG. Dr. van Meurs said if North
American gas prices continue to decline and Asian prices
strengthen, perhaps LNG to Asia will be a good idea two years or
four years from now. At that point, if a person has a
commercial contract to sell LNG to Asia at 1 Bcf a day, for
example, a spur line can be built to Valdez and the project can
be put in place. Nothing in this contract prevents it. Thus
the importance of these offtake points is an enormous option for
any entrepreneur in Alaska to secure gas resources in Alaska for
use in the state, for export or for any other use.
2:00:54 PM
CHAIR SEEKINS asked about the intention of the state to utilize
its gas to satisfy in-state demand, rather than ship it to the
Midwest market.
MR. CLARK reported that Governor Murkowski announced yesterday
another effort to look into that more closely. Mr. Clark said
the contract provides three things that matter: 1) taking gas
in kind, 2) the offtake points and 3) the mileage-sensitive
rates. Once the state has the gas, it is the state that decides
how to use it. One barrier identified by the Alaska Natural Gas
Development Authority (ANGDA) is that the first open season
would come within two years under the summary of the Qualified
Project Plan, as proposed now.
He explained that there is some concern that this is too soon.
For some potential players, particularly those that might be
distributors of gas in Anchorage, there is also concern about
gas availability too late on the Kenai Peninsula. "We're
worried about both," Mr. Clark told members, indicating the
administration will try to help prepare anyone who wants to bid
in the open season, and has committed to using state gas, once
it is obtained, to satisfy in-state needs.
He said an inventory would be done to find out how much is
needed, both in the Anchorage Bowl and on the Kenai Peninsula;
the governor, in his announcement, had mentioned seeing whether
there is some way to speed up getting gas to the latter in order
to keep the plants there going. Mr. Clark concluded by saying
several plans and ideas are afoot to ensure there is a good way
to use in-state gas. That will show up in the fiscal interest
finding, currently being put into final form.
2:03:10 PM
SENATOR WAGONER related his understanding that the current
leases on the North Slope require the producers - whoever has
the lease - to market the state's share of gas at no cost to the
state and at the "higher of" price; these leases will be rolled
in to the contract, and the current terms will be nullified,
since the lease terms will become the terms under the contract.
He asked: Was any concession given by the companies to make up
for what the state is losing in this manner?
MR. CLARK requested that Dr. van Meurs, Mr. Loeffler or Roger
Marks talk about the economics. He then offered his belief that
the state never received it for free. Rather, the question was
where the state paid. Because it was taken in value, Mr. Clark
said he believed it was paid on the back end, through the
tariffs.
DR. VAN MEURS agreed that under the current leases there is a
"higher of" option; companies market the gas for the state, and
the state has a benefit. He said that option was evaluated, and
a DNR study concluded it was worth about 2 percent of the value
of the gas. In his own economic analysis, therefore, with
respect to the status-quo option with which it was compared,
he'd added 2 percent to the status quo. Thus it was taken
completely into account in structuring the deal.
He emphasized that an entirely new package is being put in place
of an older one, and he explained: "We are not trying to offset
every little thing with another thing; that's not how you
negotiate. You negotiate one package versus another package."
In comparing the packages, Dr. van Meurs said, the 2 percent
differential in value was taken into account in order to ensure
that, under the stranded gas contract that was negotiated, a
fair share of the revenues was received. However, it wasn't
offset by any specific issue, because that isn't practical.
2:06:14 PM
^Roger Marks, Economist, Department of Revenue
ROGER MARKS, Economist, Department of Revenue (DOR), clarified
that under the current system, there actually are upstream
deductions for royalties on Prudhoe Bay and for tax on all
fields. As Dr. van Meurs noted, however, the state incorporated
the additional marketing costs and "higher of" provisions.
Mr. Marks emphasized that the state came to the table wanting
more than the status quo, while the producers expected to pay
less. As it evolved, however, it settled on the status quo.
He suggested focusing on the total deal, not just items where
something was given up. For example, the 7.25 percent severance
tax is quite a bit higher than the status quo in terms of money.
Mr. Marks explained that for Prudhoe Bay, the average severance
tax over the next 35 years is about 5.9 percent, but 7.25
percent under the contract. All fields are put together, so the
average severance tax is about 0.4 percent higher than the
status quo. It is actually quite a bit of money: 0.4 percent
of 20 percent of 4.5 Bcf a day for 35 years. When it is put
together, Mr. Marks opined, it comes out fairly even at all
prices compared with the status quo.
2:08:38 PM
MR. LOEFFLER offered another point: Downstream marketing costs
under a netback system would be deducted and thus affect the
netback received by the state at the North Slope. Companies
marketing gas downstream would deduct all their legitimate costs
to produce that lower netback figure. Marketing costs
downstream are paid by the state under the current system.
2:09:12 PM
CHAIR SEEKINS asked Mr. Marks what the status quo is and how it
was arrived at.
MR. MARKS specified that the status-quo severance tax is a
10 percent nominal rate and an economic limit factor (ELF) quite
a bit different from the oil ELF. The gas ELF is simply 3,000
Mcf per well per day tax-free. The effective severance tax rate
varies on different fields. Over 35 years, the average rate is
about 6.8 or 6.9 percent, whereas the state would get 7.25
percent under the contract. As for other fiscal terms in the
contract compared with the status quo, royalties are pretty much
unchanged; corporate income tax is unchanged; and property tax
is changed quite a bit, from a tax based on value to one based
on throughput.
CHAIR SEEKINS summarized that the current severance tax on
natural gas is 10 percent, with an ELF that is really an in-
field allowance of 3,000 Mcf per well per day tax-free. He
suggested it is similar to a proposal for a field allowance
under the PPT bill.
MR. MARKS replied that it is similar to the current oil ELF
under which 300 barrels per well per day is tax-free, but there
is also a field-size element that affects it. For gas, there is
no field-size component. It is simply based on well
productivity.
2:11:40 PM
SENATOR BUNDE voiced appreciation for the list given earlier,
suggesting it would be wise to add, for consideration, what
Dr. van Meurs had said about other potential players in the
world. Senator Bunde opined that what the state gets out of the
deal is someone who will participate. He said the public should
be aware of all the potential "Prudhoe Bays" elsewhere in the
world and that Alaska isn't in the driver's seat when it comes
to negotiating for gas because of the supply and demand.
CHAIR SEEKINS pointed out that most legislators would see a tax
increase as a state prerogative, whereas here there is an
agreement by the CEOs for a tax increase.
2:13:27 PM
MR. LOEFFLER, in response to Senator Wagoner, explained that for
oil, for the most part, the state takes it in value, not in
kind. All costs between the point at which it is sold back to
the wellhead are deducted, including the TAPS tariff, tankers
and commissions on the sale of the oil wherever it is sold.
MR. CLARK highlighted the value of a seat at the table. He
recalled serious debate in the Egan administration on whether to
take an ownership interest in TAPS, which failed by two votes in
the Senate but passed the House. He surmised Alaska would have
profited by having a seat at the table then. "We will here," he
predicted, saying it relates back to the point about work
commitments, since the state will be a member of the ownership
group, the limited liability company (LLC) that will oversee
development of the project. It is another way to have far more
information about what is going on in terms of diligent
advancement of the project as is prudent under the
circumstances, for example.
2:15:54 PM
CHAIR SEEKINS indicated that a recent e-mail relayed a concern
that the permanent fund would be used to finance and build the
gas pipeline. Having previously been on the Board of Trustees
of the Alaska Permanent Fund Corporation (APFC), which has
returned about 8 percent over time, Chair Seekins said he looked
at ownership of the pipeline, with about a 14 percent guaranteed
return, as a fairly stable investment that perhaps should be
taken advantage of by APFC.
2:17:17 PM
^Bill Corbus, Commissioner, Department of Revenue
WILLIAM A. CORBUS, Commissioner, Department of Revenue, noted he
is a trustee for APFC. He suggested there are three ways for
the state to come up with its equity portion of the pipeline.
The first is through direct appropriations, for which the
legislature put aside $300 million last session; DOR recommends
that the remainder come from direct appropriations in the
future. Barring that, further options are to sell more
obligation revenue bonds or to ask APFC whether it is interested
in making an equity investment.
He informed the committee that the Board of Trustees has begun
an education process to get familiar with this complex subject.
Responding to concern that investing in the pipeline would
endanger the permanent fund, for example, Commissioner Corbus
gave assurance that if invited to invest in the gas pipeline,
APFC would scrutinize it the same as all investments.
He opined that the 14 percent rate of return on equity,
apparently the going rate for FERC, is an attractive return, one
APFC would consider if it came to that. In response to Chair
Seekins, Commissioner Corbus said two or three years ago APFC
embarked on private-equity investments. Some have a rate of
return of that order, but certainly it's at the higher end of
returns for the corporation as an asset class. Private equity,
in his assessment, is considered more risky than the pipeline.
SENATOR STEDMAN pointed out that an 80 percent government
guarantee doesn't exist in private-equity markets. It is a
handsome benefit if it can be secured.
CHAIR SEEKINS agreed, saying he'd like to own the whole thing if
he had the money.
2:22:29 PM
MR. LOEFFLER urged care, however, because those who want a lower
tariff will argue that the presence of the federal guarantee
reduces the risk of the project and thus the rate of return on
equity should be lower than normal.
COMMISSIONER CORBUS reminded members that the federal loan
guarantee just provides assurance to the people who lend the
money that they will be repaid. The state, along with the
producers, would be borrowing the money, and would still be on
the hook in the event of a default.
SENATOR BEN STEVENS remarked that the challenge to get the
project built isn't the financing package, but getting financial
commitments to ship the gas. He referred to Senator Wagoner's
comments and said the policy call is whether to take the royalty
gas and tax gas in kind, and whether to make the commitment to
ship that gas in the capacity. He suggested going through this
element by element: the upstream, the gas treatment plant
(GTP), and the midstream. He said most important to the state
is the upstream, and the policy call proposed in the agreement
is this: whether taking the gas in kind is the proper thing to
do and will result in a deal and a good return for the state,
compared with the alternative.
2:25:35 PM
CHAIR SEEKINS inquired about the qualification process in order
to get the loan guarantee.
COMMISSIONER CORBUS explained that the U.S. Department of Energy
(DOE), which is responsible for this process, hasn't issued
regulations or provided much information on the exact process.
He pointed out that the project must be built beforehand, so
there is an issue of interim financing. That is where the
completion-risk issue comes in.
CHAIR SEEKINS surmised the loan guarantees are for long-term
financing of the pipeline, not for construction or interim
financing.
COMMISSIONER CORBUS affirmed that and deferred to Mr. Loeffler.
MR. LOEFFLER agreed there is little guidance on what DOE will
want for the loan guarantees. He noted his law firm represents
a number of federal agencies in loans for overseas energy
projects and thus has some experience. He said they'll want to
be satisfied on their own, like a bank, that it is a viable
project. Thus it wouldn't surprise him if they hired their own
investment bankers, financial consultants and construction
engineers to look at making a creditworthy loan. He pointed out
that a big question is whether they'll want their own fee on top
of the terms of the loan.
2:28:58 PM
MR. CLARK emphasized the critical nature of the completion
guarantee, touched on by Commissioner Corbus. Mr. Clark said it
is probably the single most important piece. For construction
financing, this guarantee is given on the strength of one's
balance sheet. Once there is construction and first gas,
revenue will flow to pay going forward. The risk lies between
sanction and first gas, during construction. The completion
guarantee is probably the biggest risk for someone in order to
reach the $18 billion.
He noted this issue has come up with the Alaska Gasline Port
Authority ("Port Authority") project, for example, where they
say they'll build it on the basis of the federal loan
guarantees. Mr. Clark said that cannot be reached unless
something is constructed, but construction cannot be completed
without the completion guarantees. He deferred to Mr. Loeffler
and Commissioner Corbus, saying this is highly important to
understand with respect to the financing.
2:30:31 PM
MR. LOEFFLER suggested perhaps the companies also could speak to
this. Equating interim financing to construction financing, he
explained that it is secured by demonstrating the following:
that there are customers, which means having shipping
commitments, although those are conditional; that there is a
viable project, with enough reserves behind the project; that
there is a realistic construction plan and cost estimate; that
all necessary permits have been secured; and that the project
will be built on a particular schedule.
He said to get that construction financing, one needs the basic
permits in hand: for the Alaska portion, a certificate of
public convenience and necessity in order to understand the
terms attached to it and the costs; the right-of-way leases,
along with their terms and conditions; perhaps clean-air
permits; and numerous others. Mr. Loeffler added that lenders
will look at the cost of complying with those permits and
whether they are feasible or realistic.
He reported that companies typically have their own construction
people. If there will be outside financing for the construction
loan, however, the outside financing people hire their own
experienced construction supervisors to ensure it is a realistic
plan and can be built within the timetable and conditions.
Mr. Loeffler also reported they'll hire their own reserve
engineers to double-check the reserves behind the project.
He gave his understanding that once the certificate of public
convenience comes from FERC - assuming the conditions are
acceptable and don't have to be clarified or changed - there
will be a rush period of six months or a year during which the
sponsors of the project, if borrowing outside money, work with
the banks. There will be a financing plan, Mr. Loeffler noted,
but the deal cannot be closed until the certificate is obtained
and people are satisfied that there is a viable project, under
viable regulatory permits.
2:33:32 PM
COMMISSIONER CORBUS highlighted a virtue of the state's future
partners on this project: their strong balance sheets. In
response to Chair Seekins, he explained that interim financing
will be based on the strength of the project. As backup,
however, it doesn't hurt to have three of the world's great
corporations involved, which the banks are certainly aware of.
SENATOR DYSON raised a concern that the state will likely deal
with subsidiaries of major companies, and the parent companies
won't be on the hook for the obligations.
COMMISSIONER CORBUS responded that if he were a banker lending
money, he'd point out to the borrowers that they need to get
repaid if something goes wrong. He said there is a difference
between a "parent guarantee" for purposes of this contract and
the purposes of a construction loan.
SENATOR DYSON asked: Has the state done as good a job as the
banks with regard to looking after its own interests?
MR. LOEFFLER said he believed the answer was yes. Recalling
discussion before the committee about the need for a
coordinating agreement to pull all the pieces together, and
discussion of ensuring there is a party of ample economic
strength backing up the obligations, Mr. Loeffler said the
subsidiaries of the company signing the contract, as it stands
today, have huge assets. The real test is whether the assets
are good enough to back up the obligation; this is what the
banks will ask too. He suggested asking the companies, but
offered his understanding that in many of their huge financings,
an intermediate-layer subsidiary provides the guarantee, instead
of the parent company.
2:38:05 PM
COMMISSIONER CORBUS brought up the question of how deep the
state's pockets are in the event of a cost overrun. He told
members, "We have wrestled with that, and want to be sure that
we do not adversely impact the state's general credit rating to
carry on our normal functions while the pipeline is being
constructed." Thus Commissioner Corbus said the following is
envisioned: For interim financing commitments, there must be a
standby line of credit or some other instrument to protect the
state against a cost overrun; that would be done before the
project starts, rather than when the money is needed.
2:39:22 PM
CHAIR SEEKINS mentioned a recent letter to the governor from
TransCanada. He asked whether TransCanada has the balance sheet
necessary to get financing for a project like this.
MR. CLARK recalled, from the last letter, that TransCanada
believed it necessary to have the Alaska North Slope (ANS)
producers to proceed. Mr. Clark said it is partly because of
the need to underpin this with the FT commitments that will lead
to the financing of this agreement, a position taken in
conversations with them. TransCanada is a very good $7 billion
company that could perhaps play an important role. However, in
terms of financially underpinning the project - for example,
getting the completion guarantees necessary to build the line -
Mr. Clark opined it would take more than that. Furthermore, the
assessment was that it would have taken more for the state if
TransCanada had been involved instead of the producers.
He made a final point: Because of the cost of using those
federal loan guarantees, it isn't a foregone conclusion that the
state will use them to support long-term financing. Mr. Clark
acknowledged there might be other ways that will cost the
project less, reducing the tariff and thereby increasing the
value of the state's gas.
2:41:44 PM
SENATOR DYSON asked: Will the federal loan guarantees after
completion of the project apply to cost overruns and other
obligations?
MR. LOEFFLER related his expectation that if they are used for
permanent financing, that would cover the cost of the pipeline
as built, which means including cost overruns.
SENATOR DYSON asked: Would it be an incentive to the companies
to contain cost overruns if the federal loan guarantees didn't
apply? He highlighted concern about project "creep" and higher
tariffs as a result of a significantly larger construction bill.
MR. LOEFFLER said he needed to think it through, but pointed out
that if the federal loan guarantee money is the cheaper money
and only covers part of the project cost, the part not covered
would be higher-cost debt. The higher overall cost of capital
would increase the tariff. Thus it might not work out right.
Mr. Loeffler again said he needed to think about it further.
COMMISSIONER CORBUS reiterated that DOE hasn't articulated its
policy on the federal loan guarantees. He relayed one concept
considered by the state: Finance the debt portion without the
loan guarantees, but keep a portion of the unused federal loan
guarantee in reserve in case of cost overruns.
SENATOR BEN STEVENS recalled from previous presentations that
the $18 billion resulted from an 80 percent loan-back guarantee
of what was then termed a $22.5 billion project, halfway between
$20 billion and $25 billion. He also recalled talk that,
depending on the outlook, Congress may consider increasing this
number as a result of the costs of steel and labor, as well as a
prolonged delay affecting construction costs.
2:45:52 PM
SENATOR WAGONER asked when the new study by Lukens Energy Group
would be available.
COMMISSIONER CORBUS gave his understanding that it would be
within a week or so, from discussions with Ken Griffin of DNR.
MR. CLARK indicated it would be provided to the committee.
2:46:27 PM
CHAIR SEEKINS reminded members of Senator Wilken's chart on the
timeframe, labeled "Oil Tax Certainty, Amendment 4, SB 2004,"
dated 6/4/06, as well as the amendment adopted to SB 2004 that
came from Senator Ben Stevens. Chair Seekins asked whether the
testifiers had had a chance to look at those.
MR. CLARK recalled that amendment had passed the Senate as well.
CHAIR SEEKINS concurred.
CHAIR SEEKINS reminded listeners that the concept was having no
certainty on the oil tax until the point of project sanction; a
period of 5 years, plus or minus, to procure and build; a period
of 9 years for capital cost recovery; and then some remaining
time at the end of that, if capital cost recovery hadn't been
reached, during which if the legislature raised the taxes, the
commissioner would be authorized to enter into a balancing
agreement for the remainder of time necessary to do that. He
requested comment from Mr. Clark and Dr. van Meurs.
2:48:29 PM
MR. CLARK affirmed it had been looked at, with the producers as
well. He recognized the point made by the public and
legislators, driven home by what passed the Senate: Something
must be done differently with respect to fiscal certainty on
oil. Mr. Clark indicated the administration is looking to see
whether this is the best way to get at the issue Dr. van Meurs
discussed, that the risk of something going wrong with high
costs/low prices is a bigger risk to the companies and the state
than the upside potential.
He recalled Dr. van Meurs' discussion of the need to maintain
the opportunity not only to recover costs, but also to gain the
upside as a justification for taking on that asymmetrical risk.
Mr. Clark deferred to Dr. van Meurs, suggesting the desire is to
see whether there is something the administration can bring to
the committee and to Alaskans to fine-tune this and provide the
necessary risk coverage to maintain the existing agreement.
2:50:27 PM
DR. VAN MEURS noted he wasn't involved in preparing the
aforementioned amendment, but had participated in some
preliminary discussions. He said countries satisfy fiscal
stability and fiscal certainty objectives in different ways.
During feedback, public hearings and previous discussions with
the legislature about introducing a completely new PPT, concern
was expressed that there should be an experimentation period,
with changes in regulations, auditing procedures or other areas
before the PPT can be stabilized. Saying it's a reasonable
concern, Dr. van Meurs advised members that a period of
tinkering is typical when a whole new system is introduced. He
suggested it might be beneficial here.
He highlighted the concept, at the end of the period proposed
here, of a fiscal stabilization clause. Dr. van Meurs explained
that some governments consider the "pay on behalf" and "fiscal
exemption" systems, in the contract now, a little inflexible.
Their agreements have a simple stabilization clause that says if
there is any material change in fiscal terms, they'll
renegotiate the contract to establish the fiscal balance; this
in turn is subject to arbitration. This approach allows
modifying the tax without destroying the core objective:
guaranteeing that companies can count on extra profits to offset
possible losses. Common internationally, these clauses are
accepted by oil companies around the world, Dr. van Meurs said.
He observed there are some problems with every way of dealing
with fiscal certainty. For the fiscal-stabilization clause, the
most important problem is defining a material change; this
requires either relying on arbitration procedures or putting
criteria in. Dr. van Meurs noted another possible problem:
Substantial changes for oil might result in a commitment to
negotiate a substantial change to the gas contract, with
possible undesirable side effects.
He suggested there are ways to make fiscal certainty more
flexible - as he understands this proposal is - as long as the
state sticks with the basic concept: the central need for
investors to have certainty that if there is a really good
upside, taken into account when they made the analysis, it will
balance against the downside, and that the companies want to
count on fiscal stability for oil. Dr. van Meurs said the
procedures in the contract are widely used internationally and
have certain advantages; for instance, the exemption system is
easy to handle and administer, and is less disputable.
He opined that an initial period of "no stability" could be a
very good idea as well. Dr. van Meurs noted it would allow the
state to make some improvements to the PPT law if administrative
details weren't working, thus perhaps addressing Alaskans'
concerns. He concluded by lauding the Senate for coming up with
ideas that are creative but still very much in line with
international practices.
2:59:30 PM
CHAIR SEEKINS mentioned concern about the length of time for
freezing a tax rate, as well as whether the legislature has that
ability constitutionally. He noted that Senator French had
provided a white paper on this.
He highlighted features of Senator Ben Stevens' proposal: In
that 4-year period, the question is answered, likely through the
courts; there is an opportunity for the legislature to adjust
the tax scheme; and at that point there is some incentive to get
to project sanction, because the tax rate can be changed if that
point isn't reached within a reasonable time or if there isn't
some diligence in proceeding. Saying this was presented to help
solve some of legislators' concerns, Chair Seekins asked whether
the AG would be available to give his opinion on this subject.
MR. CLARK affirmed that.
CHAIR SEEKINS asked: If the contract is passed as is, but the
supreme court says no, is everyone willing to take that risk
with that unanswered question in negotiating the contract?
3:03:30 PM
MR. CLARK suggested two issues are involved, discussed this
morning: Under Article IX, Section 4, of the constitution, is
there power to contract away the taxation powers of the state
for any period of time? If so, is 30 years for oil and 45 years
for gas too much? Mr. Clark opined that the supreme court would
uphold it.
He discussed the expected timeline. Mr. Clark explained that
within 60 days of ratification by the legislature, the governor
would sign the agreement, assuming it was the contract already
worked out. The planning process would start 90 days later.
Around that time, 120 days after signing of the contract, anyone
with a constitutional complaint must file it.
He said the administration hopes to persuade the legislature to
have such a case go directly to the supreme court; now it must
go through the normal process. Mr. Clark noted that under the
contract, planning would go forward for 15 months, contemplated
in the Gantt chart discussed earlier, up to an expenditure of
$120 million; at that point, if there were no decision from the
supreme court, it would stop unless the state wanted to put in
money to keep the process going.
He added that what is contemplated is getting the process moving
and then having the supreme court decide within that time period
whether this is constitutional or not. If the latter, the court
would explain why not. Mr. Clark pointed out that the state and
the producers would figure out what needs to be changed to win
the next round, and whether they are willing to do so. If so,
another contract would come back to the legislature. If not,
something else must be done.
3:07:18 PM
SENATOR BUNDE reported that an ExxonMobil representative
recently told him any PPT beyond the "20/20" - 20 percent tax
and 20 percent credit - would kill the deal. Senator Bunde
asked whether the administration is ready to address that
eventuality.
MR. CLARK affirmed that. He noted over the last year many
things were laid on the table as immovable, which is why
completing the contract took until May 10. Calling the deal
remarkable for all the obstacles overcome to get to an
agreement, Mr. Clark said he would view the issue raised by
Senator Bunde as another obstacle to overcome. The focus of
this administration and its gas team has been to get a gas line
because of its overwhelming importance to the state, and to
negotiate towards that position in a way that the legislature
hopefully can support after necessary changes are made.
3:09:28 PM
SENATOR ELTON surmised it is out of the question to have a
severability clause in the contract dependent on whether the
supreme court decides it is unconstitutional to provide the
fiscal certainty sought by the producers. He opined that the
legislature hasn't been rapacious over the last 30 or 35 years
when it comes to taxing natural resources.
MR. CLARK suggested looking at TAPS-related history, when a
number of changes in tax law were made.
SENATOR ELTON recalled a separate-accounting tax system, backed
off during that time, which the supreme court later found
acceptable. He said the tax system which was moved to didn't
bring in the revenues that separate accounting would have "if we
had stuck to our guns."
MR. CLARK observed that the PPT would return to separate
accounting, in a way, which is one advantage. He indicated that
from 1967 through construction of TAPS, seven or eight changes
were made to the tax laws, all increases. Offering to provide
specific information, Mr. Clark reported that a point cited
during negotiations was the number of times the State of Alaska
changed the tax laws during TAPS construction; the concern was
inability to accomplish the goal of the fiscal contract:
pinning down this project's economics.
He agreed, if the supreme court determines either the fiscal
certainty or anything else isn't constitutional, there would be
no contract because there is no severability clause. If that
happens, Mr. Clark indicated, the administration's current plan
is to sit down with the producers and go through the court's
rationale, to try to negotiate around it and get to a contract.
CHAIR SEEKINS asked whether the aforementioned position was
taken uniformly by the major producers.
MR. CLARK answered that some were more adamant about fiscal
certainty, while others were more concerned about issues such as
capacity or expansion. For the most part, there were nuances
among the parties, an additional challenge in negotiating.
3:14:21 PM
DR. VAN MEURS pointed out that there is an important tradeoff in
investors' minds between fiscal stability and government take.
He said the fiscal stability in Alaska's contract is why it was
possible to get significant revenues equal to the status quo.
This is in contrast to Canada, with its far higher government
take under lower prices; he gave details about the Mackenzie
Valley project.
He emphasized that if the supreme court orders renegotiation of
the contract, it will be important to explain the following to
the court: The more fiscal stability is reduced, the more
government take is reduced in order to create the same
risk/reward balance for investors. Dr. van Meurs cited
Australia as an OECD country that has large LNG projects without
fiscal stability; under low gas prices, there is no royalty,
severance tax or production tax - just corporate income tax. He
asked whether Alaska would be willing to live with that.
MR. CLARK added his belief that the risk from an adverse supreme
court decision is this: Time isn't on Alaska's side in terms of
waiting and renegotiating and doing it later. Suggesting
Mr. Marks speak to this, since he'd done the modeling, Mr. Clark
explained that the administration had looked at the current TAPS
system without a gas pipeline, and had deemed TAPS would stop by
about 2030. With 10 years' lead-time to get a gas line in
place, that allows only 10 years of wiggle room. The state will
have a far less favorable negotiating position.
3:21:54 PM
DR. VAN MEURS, in response to Senator Dyson, explained that it
isn't unusual around the world that if a government negotiates a
contract with a petroleum company, parliament approves it or it
goes back to the bargaining table; he cited examples including
Egypt and Kuwait. Agreeing with Mr. Clark that time isn't on
Alaska's side, and expressing deep concern, Dr. van Meurs
cautioned that if this contract is delayed and it is reported
internationally, companies eager to market gas to the U.S. will
see a new opportunity and capitalize on it. It will become
difficult to get into that market slot again; gas prices and
technology, especially LNG transportation technology, might go
against it. This contract could fade away as easily as the gas
contract in the 1970s. Acknowledging it is unfortunate that
time is so short, Dr. van Meurs suggested making the best of it.
MR. CLARK concurred with Senator Ben Stevens' assessment that if
it isn't done soon, there will be a two-year delay. Regardless,
there will be the supreme court issue.
The committee took an at-ease from 3:26:23 PM to 3:45:08 PM.
CHAIR SEEKINS invited representatives from BP, ConocoPhillips
and ExxonMobil to testify on fiscal certainty.
3:45:49 PM
^David Van Tuyl, BP
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP,
informed members that topics discussed this morning also arose
during negotiations and were worked through with the
administration. He assured the committee that others have had
sleepless nights wondering whether the deal struck is
suboptimal, but from a company perspective. He recalled hearing
questions from BP's internal groups similar to those heard
today. During the hard negotiations, many contract provisions
were resolved in a way BP didn't necessarily prefer. As a
whole, however, BP believes the contract is fair and provides
the fiscal stability necessary to attract the massive investment
required to allow the project to advance.
He noted the essence of the Strand Gas Act is to allow a
contract to be developed to provide the fiscal stability
necessary to enable a gas pipeline. For this project, really a
series of mega-projects, Mr. Van Tuyl said the biggest cost to
investors isn't the capital cost, but is the government take.
This risk can be mitigated through a contract. Simply,
investors want to know the rules so the necessary investments
can be made. One reason for fiscal certainty is linked to the
size of the investment and associated risk. That is why BP
requires fiscal certainty in this project.
He emphasized that including both oil and gas is critically
important to BP; as Dr. van Meurs had discussed, this is the
international norm for attracting investment for major projects,
since oil and gas are inextricably linked, physically and
commercially. Mr. Van Tuyl explained that to underpin the
project, the shippers - the producers - will commit to long-term
FT agreements. Thus they will commit to maintaining those same
oil and gas facilities for the term of the FT agreements and
decades longer, which is a significant challenge and undertaking
and is an implied work commitment for oil.
He reported that at BP they talk about the 50-year future
underpinned by this gas pipeline. Mr. Van Tuyl explained that
because of upfront commitments, BP believes it is essential to
protect investors from after-the-fact tax increases, which have
happened in Alaska during the last 30 years.
3:51:47 PM
MR. VAN TUYL recalled a series of reports generated by the
Anchorage Chamber of Commerce this year that highlight the
importance of fiscal stability. He read the following excerpt:
As to why the State should even consider entering into
tax contracts under the Stranded Gas Act, the reason
is to substantially reduce or eliminate one of the
major risks that would-be investors perceive in going
forward with a Gas Pipeline.
And what, exactly, is this risk that would be reduced
or eliminated? The risk is that once the investors
have irrevocably committed to build a Gas Pipeline,
and especially once it is built the State would
"change the rules" by raising its taxes on the
Pipeline and materially lowering the financial
performance of the investment below the investors'
expectations for it. By then, of course, it would be
too late for the investors to change their mind.
How important do potential investors see this risk to
be? It's very important, at least for some parties.
Once built, a project that costs as much as
$20 billion or more becomes far more tempting to tax
than, say, enacting a state sales tax or personal
income tax or using any portion of the earnings of the
Permanent Fund to pay for the costs of state
government.
If investors don't have assurance that taxes on them
and their project won't be raised once the Gas
Pipeline is underway, they will make some assumption
about the likelihood that this would happen, and they
will factor that assumption into their economic
calculations about whether to invest in the Gas
Pipeline or not.
Of all the things that are in the State's power to
change or influence, the elimination both of the
actual taxation risk and of investors' perception that
this risk exists is among the most powerful things the
State can do to help move the construction of the Gas
Pipeline forward.
The taxation risk appears particularly great in light
of Alaska's own historical track record with the $8+
billion trans-Alaska oil pipeline and the development
of the Prudhoe Bay field on the North Slope. After
the pipe for TAPS had been ordered and started
arriving in Alaska, the State changed the tax laws
applicable to Prudhoe Bay and TAPS 14 times in the
next decade, and the great majority of those changes
were tax increases for Prudhoe Bay or TAPS, or both.
3:54:08 PM
MR. VAN TUYL listed taxation legislation enacted in Alaska,
reminding members that the Prudhoe Bay discovery occurred in
late 1967: In April 1968, the oil production tax was tripled.
Two years later, the gas production tax was raised from
1 percent to 4 percent, with a stair-step system for rates on
oil related to the production rate. Two years after that, the
stair-step rate was changed and a credit against the cents-per-
barrel rate was applied against royalty. A year later, in 1973,
after the pipe had arrived in Alaska, that credit was repealed
and the stair-step rates were increased; the 20-mill ad valorem
severance tax now in place was enacted; and a conservation tax
was enacted.
He continued, noting in 1975 a temporary new two-year ad valorem
tax was enacted. In 1976, the limit on a municipality's ad
valorem tax (AVT) was raised from $1,000 per capita to $1,500
per capita, and the concept of prevailing value was instituted.
In May 1977, still before first oil from Prudhoe Bay, the ELF
factor for production taxes was passed. After first oil, in
July 1978, the separate-accounting income tax, referenced by
Senator Elton at this meeting, was originally passed. In 1980,
the personal income tax was repealed. In 1987, separate
accounting was repealed and replaced with a modified
apportionment system, and an ELF "rounding rule" effectively
increased the ELF rate. Perhaps a month later, legislation
raised the oil conservation tax and imposed a gas conservation
tax. In 1989, legislation amended the ELF formula, and other
legislation created the 5-cents-a-barrel tax surcharge on oil.
3:57:17 PM
MR. VAN TUYL concluded the taxation history, noting 1994
legislation increased the amount of the spill-response fund to
greater than $50 million, and legislation last year again
modified the production tax system, with ELF aggregation. Of
the aforementioned changes, particularly important were the ones
near the time of the investments associated with TAPS and
Prudhoe Bay. That is why BP seeks fiscal stability to underpin
the investment of this project.
He explained that the fiscal-stability model is used
internationally, as mentioned by Dr. van Meurs, to enable
projects that investors otherwise wouldn't find sufficiently
attractive. Mr. Van Tuyl reported that a prime example for BP
is the recently completed Baku-Tbilisi-Ceyhan (BTC) mega-
project, which many predicted wouldn't happen because of
complexities and yet was made possible by a fiscal-terms
contract similar to what is discussed here; it has a term of 40
years from first oil, with two optional 10-year extensions, and
thus in effect is up to a 66-year term, since it was entered
into 6 years before first oil.
3:59:41 PM
MR. VAN TUYL highlighted Dr. van Meurs' testimony today on a
typical work commitment in a production-sharing contract (PSC),
where there might be specific wells drilled by a certain date
and so forth, versus a midstream mega-project, which typically
doesn't have a work commitment. Noting the BTC fiscal agreement
is publicly available on the Internet, which is a bit unusual,
Mr. Van Tuyl read an excerpt, which specifies that no
participant is in any manner obligated to any of the state
authorities to undertake any project activities; to carry out
the project; or to continue any project activities that may have
begun in reliance on that or any other project agreement, or
otherwise.
He pointed out that the language is almost the opposite of a
work commitment. Mr. Van Tuyl said it clarifies that what the
contract provides for is long-term fiscal stability, relying on
that stability to attract the investment - not compelling the
investment with a specific work commitment. He emphasized the
end result: The BTC project was built and is now shipping oil.
He recalled recent meetings on the North Slope at which the
current contract and project were discussed with employees. Two
people from Baku attended who'd worked on that project, and were
intrigued with the similar Alaska project. Mr. Van Tuyl
reported they'd talked about jobs and new opportunities created
in Baku. A South Caucasus pipeline in the same area has been
built under a similar fiscal-terms contract, with a 60-year term
instead of a 40-year term with two extensions.
He closed by saying BP wants the same result for the Alaska
project. The company develops projects around the world,
entering into agreements that enable those projects to be
developed. Mr. Van Tuyl emphasized BP's view: The fiscal
stability provided in the contract is essential to allowing the
project to go ahead.
4:02:58 PM
SENATOR ELTON referred to Mr. Van Tuyl's testimony with respect
to taxes and asked: Given BP's history with the state, has it
been mutually beneficial?
MR. VAN TUYL offered his belief that it has been mutually
beneficial. He reiterated earlier points, including BP's 50-
year future in Alaska; that the key is the gas pipeline project;
that what enables the project is this fiscal contract, which
provides fiscal stability; and that anywhere in the world there
is investment of this kind, there is a need to manage risks
where possible, including fiscal risks, which can be managed
through a contract.
4:05:31 PM
^Wendy King, ConocoPhillips
WENDY KING, Director of External Strategies, ANS Gas Development
Team, ConocoPhillips Alaska, Inc., characterized fiscal
stability as a core pillar to the contract. She explained that
in 2001-2002, when the three companies looked at updating the
engineering and costs, trying to assess risk versus rewards,
they concluded more work was needed to try to mitigate risks.
Some of this happened through so-called government frameworks:
the federal Alaska Natural Gas Pipeline Act (ANGPA), supported
by all three companies, and reauthorization of the Stranded Gas
Act, also in 2003, which ConocoPhillips supported as a tool to
allow developing government frameworks needed to go forward with
this project with the state.
She said a key purpose of the Stranded Gas Act was to allow the
fiscal terms, applicable to a qualified sponsor or members of a
sponsor group, to be tailored to the particular economic
conditions, and to establish those fiscal terms in advance, with
as much certainty as the state constitution allows. Ms. King
informed members that ConocoPhillips therefore envisioned all
along that there'd be a question of constitutionality.
She recalled discussion in 2003, and specifically when
negotiating Article 27 of the contract. Ms. King explained that
this critical article addresses judicial challenge; it says the
project sponsors should continue diligent advancement through
either completion of project planning, 15 months, or, to her
belief, $120 million, even though the constitutional question
won't have been addressed yet. Ms. King said there is a
recognition that the final answer will need to come with the
constitutional test.
She referred to Mr. Van Tuyl's testimony. Ms. King specified
what is sought with respect to fiscal stability: removing the
risks associated with changes to Alaska Statute, regulations and
interpretations as the project is being moved forward. She
pointed out that although this removes one risk - fiscal risk
with the State of Alaska - it doesn't remove others such as
permitting or construction delays, labor shortages, procurement
challenges, cost overruns and market-price volatility.
4:09:13 PM
MS. KING observed that a number of provisions out there help
achieve fiscal stability. For example, there is a fiscal-
stability term right now with the State of Alaska with respect
to leases signed for Prudhoe Bay; that contract has existed
since the 1960s. She related personal experience, including
involvement with life-of-project contracts that give stability
with respect to the contract as long as a project is producing,
as well as involvement with the exploration-production PSCs
discussed by Dr. van Meurs. Most of those are confidential,
Ms. King pointed out, although Dr. van Meurs had distributed
publicly available model contracts and Mr. Van Tuyl had
mentioned one contract in the public arena.
She turned to issues raised by Senators Dyson and Wilken.
Ms. King surmised, because of confidential negotiations, that it
is hard for the public to understand that the companies have
been diligently advancing the project. She predicted diligent
advancement will be easy to determine, however, since the
project is so big. The companies will be spending millions,
soon to be hundreds of millions, advancing it. Drawing
attention to the project summary - a separate document on the
website that clearly describes what the schedule is believed to
be right now - Ms. King said it will need to change, but is
publicly available and will be updated annually so people can
see whether the project is advancing diligently.
She told members that there are real penalties - primarily
termination of the contract and thus fiscal stability - if the
state doesn't believe the project is being advanced diligently.
Ms. King emphasized there also may be opportunities to cure.
Addressing motivation to keep costs, she called this a key
driver in alignment among the parties, since the majority of
value in the project comes from delivering gas at the lowest
cost possible.
4:13:24 PM
SENATOR ELTON clarified that penalties are incurred if an
arbitrator - not the state - decides a company isn't acting
diligently. Furthermore, an arbitrator cannot find in favor of
the state if the company makes a compelling argument that there
was an error in judgment.
MS. KING, in response to Chair Seekins as well, specified that
it will be a tribunal with three members and that technically
Senator Elton is correct: the state would file a notice of
dispute to begin the termination process, and it would go to a
tribunal as outlined in Article 5, work commitments. With
respect to dispute resolution, she recalled that Article 5 was
important to the state because of wanting a rapid decision on
contract termination. Thus the informal dispute-resolution
process had been waived. With respect to the opportunity to
cure within the contract, she noted this is at the time of
filing a notice of dispute, but also exists if the tribunal
rules that there hasn't been diligent advancement.
4:15:13 PM
^Bill McMahon, ExxonMobil
S.A. (BILL) McMAHON JR., Commercial Manager, Alaska Gas
Development, ExxonMobil Production Company, began by saying he
would echo comments by the administration as well as Mr. Van
Tuyl and Ms. King about fiscal stability. As for leaving the
PPT open before sanction so it could change, Mr. McMahon
highlighted that it would expose the producers to significant
risk, since close to $1 billion will be spent to get to project
sanction. For example, the legislature could increase taxes to
pressure the companies to hurry the project. He referred to
previous testimony about increased risk of failure for projects
that become schedule-driven, especially mega-projects, if there
is pressure to go faster than prudent.
He estimated that an increase in PPT taxes by 50 percent in the
last two years before sanction would increase the producers' tax
burden such that a $20 billion project would become a
$23 billion project. Looking at it another way, Mr. McMahon
said it would consume half of the first year of production from
the project. Leaving that open increases risk for the project.
He recalled that in discussing the PPT with the administration,
the sponsor group sought a 12.5 percent tax rate, but agreed to
20 percent - doubling production taxes at today's prices - in
return for stability with respect to oil, because that is how
important the stability is. Mr. McMahon noted if the project is
to the point of sanctioning but something has gone wrong and the
economics aren't right, the production taxes will have been
doubled but there still won't be a pipeline. Thus uncertainty
about building the pipeline hits both sides.
He emphasized that fiscal stability is critical to ensure
commercial viability for this project. Mr. McMahon reported
that during contract negotiations it was agreed from the onset
that significant steps needed to be taken to mitigate risk and
improve commercial viability. On May 24, 2006, a final
agreement was reached that he opined meets the state's needs and
provides fiscal stability for the producers. Adverse changes to
taxes on oil and gas, including a reserves tax, would clearly
undermine the fiscal stability necessary to advance the project,
Mr. McMahon warned. He closed by saying the three producers are
prepared to sign this fiscal contract and progress the project
when it is approved by the legislature and signed by the
governor.
4:19:52 PM
MR. McMAHON, in response to Senator Wilken, said the LLCs are
being discussed between the sponsor group and the
administration, and are being advanced at this point. He added
that those agreements are highly important for the full
understanding of this contract, and he wouldn't expect the
fiscal contract to be signed without being able to see them.
SENATOR BEN STEVENS highlighted the number of decisions to be
made. While the producers say they're ready to execute the
contract, the legislature is still at the point of approving
changes to the Stranded Gas Act. He said the public comment
period closed two days ago on the contract, for example, but
under statute the legislature cannot address that until the
fiscal interest finding is presented by the commissioner of
revenue. Suggesting the need for clarity on how to proceed, and
indicating the contract probably won't be executed until a
template is seen for the LLC or pipeline corporation, he pointed
out that the contract cannot be fulfilled without such an entity
in place.
CHAIR SEEKINS noted today's discussion relates to amendments to
the Stranded Gas Act when talking about as much fiscal certainty
as the state constitution allows, but some ancillary issues are
inextricably linked. With respect to the calendar, he agreed
with Senator Ben Stevens, saying he wasn't sure what was
happening in response to the public comment period that closed
on the 24th regarding any potential modifications to the
contract that will be proposed to the legislature under the
Stranded Gas Act. He suggested perhaps this wasn't as far along
as everyone hoped.
SENATOR BUNDE said he also feels the pressure of time and
frustration of spinning of wheels. Alluding to SB 3002 and
SB 3001, he expressed hope that the chairman would focus the
committee more tightly on amendments to the Stranded Gas Act and
the other first step, the PPT.
CHAIR SEEKINS suggested the need to hear about related issues,
however. For example, tomorrow the committee would hear from
Anadarko with respect to the draft contract. Then the committee
would address proposed amendments to the Stranded Gas Act. He
indicated he would ask Attorney General Mrquez to testify about
the language "with as much certainty as the Constitution of the
State of Alaska allows" in SB 3002.
4:28:08 PM
SENATOR WILKEN asked what happens in the following scenario
under the fiscal contract: As the project-sanction point
approaches, one producer decides this doesn't meet the hurdle
rate, for example, and thus that company doesn't want to proceed
for legitimate business reasons.
4:29:42 PM
^Patrick Coughlin, Senior Counsel, BP
PATRICK COUGHLIN, Senior Counsel, BP, replied that the fiscal
contract addresses that possibility. If one of the group
doesn't wish to go forward, it can terminate, with consequences.
The others can continue by picking up the obligations of that
entity. The consequences to the withdrawing company depend upon
timing. After the state has made a FT commitment in an open
season, a producer cannot withdraw without severe consequences:
relinquishing interests in all of Alaska. That producer would
be forced to either sell, in a distress sale, or give everything
up to the State of Alaska. All investment would be lost and
would become the property of the state.
He noted if that happens, options allow the project to continue.
If the other sponsors elect not to go forward, Mr. Coughlin
explained, the sanctions again depend upon timing. After an
open season in which the state has taken FT commitments, the
consequences will be severe. Once the state has made those
types of commitments, it would be putting itself at risk; thus
the state negotiated this to ensure adequate protection.
SENATOR WILKEN recalled discussion of that at Centennial Hall.
He asked which article in the contract addresses those options.
AN UNIDENTIFIED SPEAKER offered his recollection that it is
Article 31, paragraph (5).
MR. COUGHLIN, in response to Senator Wilken, reported that one
provision relating to judicial challenge provides that if any
portion of the contract is declared unconstitutional, a
participant may elect to terminate; it is a participant-by-
participant decision. It is possible the supreme court will
declare something unconstitutional that might not be so bad and
the parties might decide to go forward anyway. So that option
exists. If a party elects to withdraw at that point, however,
the party faces the consequences of losing the investment and
also losing fiscal stability and becoming subject to whatever
tax the state chooses to impose.
He explained that the other producers still would have the
option of picking up the obligations and continuing with the
project, or else finding someone else to substitute in.
Mr. Coughlin noted if someone is substituted in, there are
protections for the state. It couldn't be just any mom-and-pop
organization and would have to be approved by the state. So the
state would have comfort that the new entity would fulfill the
obligations agreed to by the withdrawing company.
4:35:07 PM
^David W. Mrquez, Attorney General
DAVID W. MRQUEZ, Attorney General, Department of Law (DOL),
provided a handout labeled "Excerpts of Attorney General's
Presentation to the Legislature at Centennial Hall Regarding the
May 10, 2006 Attorney General's Opinion on the Authority to
Provide Fiscal Certainty Under Article IX, Sections 1 and 4 of
the Alaska Constitution." Noting this would be the basis of
today's slide presentation, he referred interested persons to
DOL's website for the full presentation; the May 10 opinion;
and opinions from legislative counsel and others, as well as
DOL's responses.
He explained that many aspects of this contract will present
unique issues to the Alaska Supreme Court. Pointing out that he
couldn't predict how the court would address fiscal certainty or
any other issue that might be raised, Attorney General Mrquez
offered his belief that the May 10 opinion thoroughly examined
the issue. It was conducted over a couple of years, starting
before he became AG. Prior to devoting resources to developing
a contract, the administration had wanted some assurance on
whether it was worth the time and effort.
He noted that, through the Stranded Gas Act, the legislature had
directed the administration to develop a contract, recognizing a
possible constitutional issue with respect to fiscal certainty
and allowing people to bring suit in an expedited manner.
Giving further history, Attorney General Mrquez said a good
case was made as to why the supreme court likely would find the
fiscal contract constitutional; thus DOL felt confident enough
to devote thousands of staff hours and, with the legislature's
appropriations, millions of dollars, to develop it. Similarly,
he surmised the producers spent much time and money with the
expectation that the supreme court, more likely than not, would
find it constitutional. Thus it was thoroughly researched.
He told members the administration and legislature would be
shirking their duty if they didn't address the policy issues,
deciding whether to enter into this contract with the
expectation that DOL will do everything it can to defend its
constitutionality. Attorney General Mrquez said the
legislature often passes laws in spite of constitutional
concerns. He opined that the legislature has the right and the
obligation to go forward with legislation it deems in the
citizens' best interest. The Alaska Supreme Court will decide
when a case is brought before it.
He turned to the slides, duplicated in the handout. Attorney
General Mrquez said the question is whether Sections 1 and 4 of
Article IX of Alaska's constitution permit the state to enter
into a long-term fiscal contract under the Stranded Gas Act. He
noted that slide 3, with respect to whether states can enter
into binding fiscal contracts that cannot be modified by
subsequent legislative enactments, says the federal contract
clause provides that no state shall pass any law impairing the
obligation of contracts.
4:41:48 PM
ATTORNEY GENERAL MRQUEZ continued, reporting that in a series
of cases, starting in the 1800s, the U.S. Supreme Court held
that the contract clause applied to contracts in which state
legislatures agreed to specific tax obligations. He read from
slide 4, saying although the court found there are certain
inherent and essential elements of sovereignty - "reserved
powers" - that can never be contracted away, the court also held
that the taxation power isn't one. Rather, it is "alienable"
and can be bargained away for consideration because it is
incidental to the exercise of governmental functions and exists
to facilitate inherent and legitimate governmental functions.
He continued with slide 4, saying any such alienation must be
allowable under the state's constitution and must be expressed
in a clear and unequivocal manner; it must be unmistakable.
Attorney General Mrquez said passage of an Act authorizing the
governor to execute the contract on behalf of the state would be
such a clear and unequivocal expression of the alienation.
Furthermore, a state can be held to a contract despite
subsequent state legislation that alters the fiscal terms in a
manner that substantially impairs the contract and isn't
otherwise justified as reasonable and necessary to serve an
important public purpose.
He turned to slide 5, saying Sections 1 and 4 of Article IX,
read together, provide the authority to enter into a fiscal
contract that would be enforceable under the federal contract
clause. Noting Section 1 provides that the power of taxation
shall never be surrendered, Attorney General Mrquez opined that
many critics of the fiscal contract stop there; however, the
constitution goes on to say that this power shall not be
suspended or contracted away except as provided in this article.
Section 4 provides for specific exemptions from taxes, such as
for properties owned by state and local governments and
nonprofits, and also provides that other exemptions of like or
different kind may be granted by general law.
He said the history of Sections 1 and 4, depicted in slide 6,
shows that the Framers chose to give the legislature the
flexibility to provide for tax exemptions by general law to
develop industries in Alaska. They rejected stricter language,
endorsed economic development incentives and were familiar with
contemporaneous industrial incentive Acts. Turning to slide 7,
Attorney General Mrquez pointed out that the Framers
specifically considered and rejected a model provision put
forward by the National Municipal League that said the taxation
power shall never be surrendered, suspended or contracted away.
4:44:57 PM
ATTORNEY GENERAL MRQUEZ reported that the Framers instead
adopted Article IX, Section 1, which says the power of taxation
shall never be surrendered, and shall not be suspended or
contracted away except as provided in this article. They
rejected the stronger wording and adopted more flexible
language. He opined that the stricter wording arose from
concerns of some states that it restricted the power to tax
businesses through approval of long-term tax rates and corporate
charters which were later upheld by the U.S. Supreme Court under
the contracts clause in the cases he'd discussed in the opinion.
He continued with slide 7. Attorney General Mrquez said
consultants to the Framers noted that without the model
provision - the stricter wording - Alaska could be bound by the
types of fiscal contracts other states had authorized to be
bound by. Nonetheless, the Framers rejected this stricter
language in light of Alaska's unique circumstances as a
resource-rich but sparsely populated state without local capital
available to develop its resources.
He read from slide 8, posing the following question: What did
the Framers mean when they stated that the power of taxation
shall not be suspended or contracted away, except as provided in
this article? Attorney General Mrquez told members the
official commentary about Section 1 explained that the power to
tax is never to be surrendered, but under terms that may be
established by the legislature, it may be suspended or
temporarily contracted away. This could include industrial
incentives, for example.
He continued, noting the convention history demonstrates that
the Framers were referencing the tax-exemption power provided in
Section 4, which says other exemptions of like or different kind
may be granted by general law. Attorney General Mrquez went on
to say that the official commentary to Section 4 explained that
the legislature is authorized to make further tax exemptions to
encourage, among other purposes, new industry.
He related historical information from slides 9 and 10.
Attorney General Mrquez said Delegate White had indicated the
last paragraph of Section 4 provides that other exemptions may
be provided by general law, and that this would allow, among
other things, granting of tax incentives to new industries;
Delegate Nerland had said this is the provision that allows for
some exemption or inducement to industries or similar things;
Delegate Smith had asked whether that isn't, in effect, saying
exemptions of any kind may be granted; and Delegate Nerland had
responded to Delegate Smith, "Yes, that was the purpose of it."
He opined that such archival history demonstrates the following:
Although the prohibition against surrendering taxation power may
be absolute, the prohibition against suspending or contracting
away taxing power is not absolute, but is qualified by the
permissible-exemption provision in Section 4.
He turned to slides 11 and 12. Attorney General Mrquez said
that consistent with the Framers' intent, the Stranded Gas Act
provides fiscal certainty for the length of the project in order
to realize the state's long-term goal of an ANS gas line
necessary to monetize its vast gas resources. The Finance and
Taxation Committee of the Framers had expressly considered but
chose not to include any time limit on tax exemptions provided
for in Section 4.
He further opined that if tax liability could constitutionally
be entirely extinguished by granting an exemption for a
particular industry, it follows that tax liability could also
constitutionally be extinguished in favor of fixed payments in
lieu of those taxes for a set term. In short, Attorney General
Mrquez said, the proposed Stranded Gas Act contract is within
the parameters established by the Framers in Sections 1 and 4 of
Article IX to use the state's tax structure to encourage
development for the maximum benefit of the people.
He turned to slide 13. Attorney General Mrquez said that to
address the need for an economic base, Congress granted 103
million acres of federal land to Alaska - including land
containing the North Slope oil and gas fields - as an endowment
that would yield income to meet the costs associated with
becoming a state. He opined that the Framers recognized that
developing Alaska's resources according to the mandate of
Article VIII might require an innovate tax regime, as reflected
in their rejection of the highly restrictive model provision
wording in favor of Section 1 of Article IX and the adoption of
the "like or different" exemption language in Section 4 of
Article IX.
He turned to slides 14 and 15. Attorney General Mrquez said it
is significant that fiscal contracts have been employed in
Alaska to attract new industries since territorial days. In
1949, the territory authorized the tax commissioner to enter
into fiscal contracts for new industrial enterprises. In 1957,
after Alaska's constitution was ratified, the territory enacted
an industrial incentive Act to permit businesses to apply for
fiscal contracts to encourage new investments. In 1968, the
legislature enacted the Alaska Industrial Incentive Tax Credits
Act. And in 1971, the Alaska Supreme Court held that the grant
of tax relief provided for in the 1968 Act was in the broadest
possible form, and that the legislature intended that a credit
could be provided for almost any tax within the State of Alaska.
He opined that the proposed contract is more favorable to the
state than the tax exemptions previously required to attract
industry to Alaska. Attorney General Mrquez cited the
following reasons: It is not a complete exemption from taxes;
it requires continuous payments in lieu of taxes; and it will
provide a steady source of state revenue while providing an
incentive to the sponsor group to build a gas line in order to
develop Alaska's gas resources.
He relayed the conclusions on slide 16. Attorney General
Mrquez said there is always a degree of uncertainty in trying
to anticipate what action a future legislature might take and
how a court might rule on that action. He opined that the
proposed contract is within the parameters established by the
Framers in Sections 1 and 4 of Article IX to use the state's tax
structure to encourage development for the maximum benefit of
the people. Additionally, Article 11.1 of the proposed
contract, coupled with a legislative Act authorizing the
governor to sign the contract, will constitute a clear and
unequivocal statement of intent to alienate the power to change
taxes for the terms established in the contract; thus the
contract will be enforceable under the contracts clause.
4:52:01 PM
SENATOR HOLLIS FRENCH, Alaska State Legislature, expressed
concern that a wealth of legal opinion contradicts some of the
foregoing testimony. He recalled that Jack Coghill and Vic
Fischer, Founding Fathers from opposite ends of the political
spectrum, recently opined that this sort of long-term tax freeze
was never in their minds when drafting and voting on the
proposed state constitution. Senator Hollis reported hearing
from former attorneys general and assistant attorneys general
that a long-term tax freeze isn't constitutional, and hearing
something similar from Tamara Cook, head of Legislative Legal
and Research Services Division, and from legislative attorney
Don Bullock. Senator French explained that he'd been looking
for some authority outside DOL that took the view expressed by
Attorney General Mrquez, but couldn't find it.
He asked whether Attorney General Mrquez was concerned about
that lack of legal authority in view of the supreme court's one
pronouncement on this topic - that the state couldn't and didn't
contract away its power to tax in a tax case involving ARCO, BP
and Exxon. Senator French also asked: What do you think about
this general law as being the parameters that the Founders put
on the authority to contract away the taxing authority?
4:54:01 PM
ATTORNEY GENERAL MRQUEZ referred Senator French to his reply to
Senator French's earlier letter for a definitive response to
that question and for a reference to the Atlantic Richfield
Company case. Expressing utmost respect for Jack Coghill and
Vic Fischer and their work as Framers, he nonetheless suggested
a couple of Alaska Supreme Court opinions would indicate their
present view of the constitutionality of the Stranded Gas Act or
a fiscal contract would not be considered by the court.
He added that in legal cases for which he could get the cites,
legislators had tried to testify about what they intended when
voting on legislation; the supreme court has rejected this type
of evidence as to whether it is controlling in deciding what a
statute means. Furthermore, in an early royalty-dispute
decision, then-Judge Carpeneti wouldn't allow a state expert to
testify on what he meant when writing the lease form, Attorney
General Mrquez reported.
He opined that the following were the reasons: 1) what people
say 50 years later might be different from what was in their
minds at the time; 2) if only a couple of Framers are heard
from, there won't be a full sampling of what everyone thought;
and 3) particularly with respect to Alaska's constitution,
explanatory documents were made available to the public at the
time, and thus what was in the people's minds at the time of
ratification is what's important. Attorney General Mrquez
emphasized his belief that the Alaska Supreme Court will take a
view of this that won't consider the opinions of 2 of the 55
Framers of the constitution.
4:57:25 PM
CHAIR SEEKINS asked whether Mr. Coghill or Mr. Fischer were
among those involved in the committee which drafted that
particular article.
SENATOR FRENCH replied that he didn't know. He said the AG had
made a perfect analysis, that it is difficult to look outside
the language of the constitution itself to try to get an answer.
He suggested, for the same reason, it undercuts much of the
discussion at the convention about what was happened to be
embodied in the document itself. Ultimately, they'll look not
at what someone said, but at what is written, which says
"general law." He opined that the Alaska Supreme Court has been
clear that what that means is statute, which the legislature can
change whenever it sits down.
He said he has yet to see anything that even begins to move him
away from that position. Senator French expressed appreciation
for Attorney General Mrquez's discussion, but offered his
belief that "general law" is not a complex term, and that the
supreme court has repeatedly set forth how it goes about
analyzing these cases - looking to the plain meaning of the
term, for instance.
He opined that the court will decide that the Framers put
constraints on the limits to give away the taxation authority;
it said to go ahead and give a property-tax exemption, for
example, but it can be taken away, and the same is true when
granting municipalities the authority to provide exemptions.
Senator French suggested it is all bound and constrained by the
term "general law."
4:59:05 PM
CHAIR SEEKINS acknowledged he isn't an attorney, as Attorney
General Mrquez and Senator French are, but said he has read a
lot of supreme court and superior court opinions having to do
with statutes passed while he has been in the legislature. In
every case, to his recollection, the courts referenced the
record in the committee having to do with the legislature's
intent as the process went forward; this is in contrast to what
is remembered afterwards. He asked whether the courts have ever
not considered the record of the committee process in reaching
these kinds of interpretations.
ATTORNEY GENERAL MRQUEZ affirmed that the courts consider
contemporaneous documents such as legislative history in
interpreting statutes when there is a dispute. The
contemporaneous evidence can be important to the supreme court.
As to whether it is always controlling, he said no. He added,
"I think the record that we've put forth in our opinion will be
considered by the Alaska Supreme Court, what people said at the
time, what these committee members said at the time."
5:00:54 PM
SENATOR FRENCH surmised Attorney General Mrquez would agree it
typically depends upon how difficult it is to understand what is
written in a statute or the constitution; if it is abstract and
not clear, then the history is looked at. Senator French opined
that the history here shows that what many delegates meant was
attracting new industry to Alaska, as mentioned in the document
provided by the AG and also in other parts of the minutes; it
was not about granting a tax exemption to an existing, robust
and healthy industry. To the extent the supreme court looks at
minutes of the constitutional convention, Senator French
suggested the justices might be of a divided mind about what the
delegates really meant.
ATTORNEY GENERAL MRQUEZ offered his belief that this is way too
a restrictive a reading of "new industry." Saying he knows of
no gas pipeline industry on the North Slope or through Alaska,
he suggested this will open a whole new basin of gas
exploration. As for general law, he said it isn't confusing: a
general law is one passed by the legislature that isn't special
legislation; for example, a case dealing with Northstar
legislation held it to be a general law, not a special one. He
said the Act approving the governor's signature on a Stranded
Gas Act contract will be a general law, as is the Act itself.
Both will provide a general law that the Alaska Supreme Court
will require as evidence of a clear and unequivocal alienation
of the taxing power in substituting it for these payments.
5:03:06 PM
CHAIR SEEKINS asked: If the proposed contract containing
fiscal-terms agreements or related items is approved and the
legislature then decides to increase the severance tax on oil,
would that increase apply to every other producer other than
those covered under this contract?
ATTORNEY GENERAL MRQUEZ answered that he believed so.
CHAIR SEEKINS surmised that the legislature wouldn't be
contracting away the general power to change oil taxes, then,
but would be doing it for this particular contract and project.
ATTORNEY GENERAL MRQUEZ noted if there were a huge oil
discovery in Bristol Bay, for example, the legislature could do
what it wanted with respect to taxes on that development. In
further response, he said the power would be contracted away to
help underpin this project.
5:04:43 PM
SENATOR ELTON related his belief that there is no discussion in
the commentaries or the constitution itself about how to define
a tax. He asked whether it could be defined as narrowly as
suspending a tax to a corporation, not just a general tax, and
whether it is correct that neither the commentaries nor the
constitution speak to one being okay, but not the other.
ATTORNEY GENERAL MRQUEZ acknowledged he didn't have that
thorough a knowledge of the commentaries, but said, "We
certainly haven't decided that." He added that a couple of
exemptions granted before and after ratification of the
constitution weren't just to provide for incentives, and were in
the minds of the drafters of the constitution.
SENATOR ELTON referred to slide 8, which quotes the official
commentary on Section 1 as saying, in part, "[t]he power to tax
is never to be surrendered, but under terms that may be
established by the legislature, it may be suspended or
temporarily contracted away." He asked whether there has been
any discussion at DOL of what "temporary" means. He said it
seems a multigenerational term of 30 or 40 years goes beyond
"temporary" as referenced in that commentary.
ATTORNEY GENERAL MRQUEZ referenced slide 11, which says the
Finance and Taxation Committee expressly considered but chose
not to include any time limit on tax exemptions provided for in
Section 4. He said this indicates they were leaving things
flexible for the legislature to determine what a good term is.
Indicating discussions at DOL were that "temporary" is the
opposite of "permanent" and so could be for any length of time,
he specified that is his own view.
SENATOR ELTON expressed concern that it is an expansive view.
5:07:41 PM
CHAIR SEEKINS suggested that the power in question relates to
the ability to bind future legislatures through a contract,
regardless of the length of time.
SENATOR HOLLIS highlighted the magnitude, noting it has to do
with binding the next legislature with respect to its power over
what constitutes 80-90 percent of the revenue that supports the
state. He voiced concern that it removes the ability to address
the fiscal health of the state.
5:09:16 PM
CHAIR SEEKINS announced that the committee would hear from
Anadarko and others tomorrow, and Dr. van Meurs would testify on
gross versus net tax systems. After that, amendments to the
Stranded Gas Act would be addressed.
SENATOR ELTON informed members that he wouldn't prepare any
amendments because he thought it premature to amend the Stranded
Gas Act until there was more information. He referenced
previous discussion about the LLC and the fact that the contract
hadn't been seen yet.
5:12:23 PM
^Patrick Coughlin, Senior Counsel, BP
MR. COUGHLIN referred to Senator French's question of whether
other attorneys support the AG's position that the effort here
is constitutional. Mr. Coughlin reported that BP has spent
millions of dollars in the last couple of years to try to bring
this contract to fruition in a manner that allows the project to
proceed. Before even beginning contract negotiations, BP did a
legal analysis of the constitutionality of such a clause; based
on that, the company went forward with negotiations.
Mr. Coughlin said he didn't intend to debate with Senator French
the merits of his memorandum, other than to state disagreement.
He opined that the negotiated position has a sound
constitutional basis, noting BP, along with the other companies,
has agreed to risk $120 million to find out the answer.
Mr. Coughlin emphasized the importance of an answer from the
supreme court in order to have a contract that is durable and
acceptable to the people of Alaska and all three branches of
government - executive, legislative and judicial. With respect
to whether it is constitutional, Mr. Coughlin concluded, "We
believe it is. We have received many legal opinions to that
effect. And that is the basis upon which we have gone forward
with this key provision in the contract."
CHAIR SEEKINS thanked participants and held SB 3001 and SB 3002
over.
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