Legislature(2013 - 2014)BUTROVICH 205
02/07/2014 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Sectional Analysis | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 138 | TELECONFERENCED | |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
3:31:17 PM
CHAIR GIESSEL announced SB 138 to be up for consideration and
that today they would get a sectional analysis of it.
3:31:40 PM
SENATOR FAIRCLOUGH moved to bring SB 138 forward. There were no
objections and it was so ordered.
3:32:50 PM
SENATOR DYSON joined the committee.
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
said he wanted to revisit a couple of high level concepts in the
HOA and the MOU to put the legislation into context.
3:33:17 PM
MIKE PAWLOWSKI, Deputy Commissioner, Department of Revenue
(DOR), said the HOA describes the roadmap to advance the project
through a phased process, each with stopping points for
evaluation and with room for legislative input, and then the
decision to move to the next stage.
The MOU describes the agreement to transition from the AGIA
license to a more traditional commercial relationship with
TransCanada and describes key commercial terms of that
relationship. Both documents inform SB 138, which asks for three
basic things:
-state participation in the AKLNG project
-that the state set the appropriate percentage through the gas
share for the state participation in the AKLNG project
-that the state initiate a process for the development of the
project-enabling contracts that will involve legislative
oversight and approval of those future contracts
3:35:47 PM
MR. PAWLOWSKI said that the coming together of the parties to
work together on an LNG project leverages all the work that has
happened in the past to date including:
-the settlement of Pt. Thomson
-the roughly $330 million for qualified expenditures under the
Alaska Gasline Inducement Act (AGIA)
-$130 million worth of data collection and work done by
TransCanada and ExxonMobil under the Alaska pipeline Project
(APP)
-$200 million worth of work performed by BP and ConocoPhillips
under the Denali Pipeline Project
SENATOR DYSON said it would be useful to know at some point
where the BP/ConocoPhillips and TransCanada/ExxonMobil efforts
overlapped.
MR. PAWLOWSKI said he would work with the partners on how they
view that work for him and also get a recent report on the AGIA
reimbursements that have a geographic breakdown of that
spending.
Following passage of SB 138, he continued that the project will
step into the pre-FEED (front end engineering and design) stage
which is the point at which all the AGIA and Denali work will be
contributed to AKLNG. The state and TransCanada will agree
mutually to abandon the AGIA license and that there will be no
more reimbursement.
3:38:44 PM
In lieu of taking that step and moving forward, under the AGIA
license the state has an option to buy that $130 million worth
of data. AGDC, at this stage, is also progressing towards their
open season in 2015 sharing the work they are doing with AKLNG,
working together cooperatively as their statute says.
3:39:33 PM
The pre-FEED stage, expected to last a number of months, is
estimated to cost around $435 million, which does not include
any of the costs upstream in Prudhoe Bay or Pt. Thomson. He said
the HOA contemplates a range of 20-25 percent for the state's
share of the project; the producers' share of costs in the pre-
FEED stage would be roughly $348-$327 million. The state/AGDC
subsidiary share would be roughly $35-$43 million. This does not
include some of the agency costs to hire experts and to do a lot
of the work that a will come along with the development of the
contracts, nor some of the contingency for exercising the equity
option, or potential overruns at this stage of the project.
MR. PAWLOWSKI said part of what TransCanada brings to the table
is the commitment of their cash resources to move the project
forward, because in pre-FEED TransCanada is spending $53-67
million. After the pre-FEED period progresses there will be a
point in time where the contracts contemplated in the HOA and
enabled through SB 138 come back to the legislature for approval
and are put through the public and deliberative process. At that
point is another gate where everyone will decide if the project
is ready to move forward. In a go scenario, the state has an
opportunity, per the MOU, to step back in and take a share of
the equity that TransCanada is carrying on its behalf in pre-
FEED. Again, if the project decides to stop, there is an
opportunity to pay TransCanada development costs plus the 7.1
percent AFUDC (allowance for funds used during construction).
3:42:23 PM
SENATOR FRENCH asked what TransCanada is risking if the off ramp
is for the state to pay back all of its costs.
MR. BALASH answered that the nature of this relationship is
differentiated from the AGIA license in that it is much more
like a traditional transporter/shipper arrangement where the
pipeline company takes on certain development costs in order to
provide service to the shipper, in this case the state agencies.
If the agreement is terminated, we pay back their development
costs, and in this case the state receives all of the equity
rights associated with work that was done during the pre-FEED
phase.
He contrasted this with the AGIA process where for the last six
years the state has been reimbursing TransCanada at either 50 or
90 percent of their qualified expenditures and not gaining any
equity rights associated with what could be described as
ownership. The state now has a right to an option to exercise
for all of that information, a much more direct approach where
there is no question of who owns the data at the end of the day
if things don't go forward.
3:44:32 PM
SENATOR FRENCH asked what risk TransCanada bears.
MR. BALASH answered the use of their equity to pay pre-FEED and
FEED costs, which they are accustomed to earning a higher return
on, and the AFUDC at 7.1 percent reflects that debt to equity
capital. So, there is a certain opportunity cost associated with
their equity at this point, as well as the use of their
expertise.
3:47:49 PM
SENATOR BISHOP asked if the equity is the documents, engineering
data, and everything that is tangible.
MR. BALASH answered yes.
SENATOR BISHOP asked if the state would have to pay $130 million
for that data if the project would be a no go.
MR. BALASH said that was correct, if we wanted to get that
information from them.
SENATOR BISHOP said that information could be plowed into AGDC
advancing to its 2015 open season.
MR. BALASH said that could be done, but they weren't
recommending it. However, they are recommending to take this
step forward with SB 138 and then would see that legacy
information contributed to the joint venture.
SENATOR MICCICHE remarked that besides risk equity opportunity,
TransCanada is also risking $63-77 million in development costs
that would not be reimbursed, and simply by executing this
contract, the state absorbs $130 million worth of previous work,
not mentioning the work done by the other companies. And the
state's cost at the first off ramp if we decide to back out is
only $53-67 million.
MR. PAWLOWSKI said that was correct. He said there are a lot of
quantifiable risks which the legislature's consultants would
review on Monday and just as TransCanada has an equity
opportunity cost, so does the State of Alaska (SOA). Money that
remains in our treasury and is invested through the
Constitutional Reserve Subaccount and other funds returns 6
percent to the state long term. So, the evaluation looks at the
spread between what the state is not spending in cash versus the
7.1 percent we would be repaying TransCanada in a development
cost situation outside of that $130 million for the expertise,
the data, and the momentum.
He said they would develop how that plays across time on Monday,
but today he wanted to bring it back to just the near term and
what is going on in the first two or three stages with off ramps
and legislative approval, so that when they get into the
contracts, members can orient the raw costs with the raw step.
3:49:58 PM
SENATOR FRENCH asked if he saw this potential repayment avenue
as having been capitalized on the front end or subject to
appropriation.
MR. BALASH replied there are a couple of ways to do that.
SENATOR FRENCH said that nothing in the fiscal note sets out
some set-aside for covering the cost of the off ramps.
MR. BALASH replied that what is reflected in the AGDC fiscal
note is a capitalization that would assume success in the pre-
FEED stage and cover the state share of costs for liquefaction
as well as the cost to exercise the option to acquire the 40
percent interest in the midstream - but nothing for the off
ramps.
3:52:07 PM
MR. PAWLOWSKI said slide 5 shows the FEED stage that comes after
pre-FEED and costs that were developed by the consultants. The
numbers are very rough estimates recognizing that FEED is
something where you get a better idea both as sponsors of the
project with the legislature of what the costs will be going
forward. Black & Veatch estimated 4 percent of the cost of the
project or roughly $1.8 billion would go into the FEED stage.
3:53:01 PM
Without exercising the equity option the state's share of the
FEED period would be $145-180 million; exercising the equity
option that would increase to $310-390 million, whereas
TransCanada carrying the interest alone would spend $215-270
million; but with the option $130-160 million. So, the state
realizes some significant synergies and benefits from the
partnership with TransCanada. And again, after the FEED is
another point where all of the parties involved will decide if
the project is ready for financing and advancing. That is the
final investment decision (FID).
MR. PAWLOWSKI said the core mission of AGDC, regardless of ASAP,
was thoughtfully described as getting gas to Alaskans and that
mission does not go away if the AKLNG project advances. A lot of
work will continue being needed, which is not captured in any of
the estimates.
3:54:31 PM
SENATOR MICCICHE asked if it was safe to say that prior to the
FID if the state would buy out TransCanada's interest at either
of those two gates [on slide 5] and the project were to go
forward anyway that none of the work including the AGIA-related
work would have gone to waste.
MR. PAWLOWSKI said he thought that argument could be made;
having that information keeps the project on track. The work
done north of Livengood up to Prudhoe Bay is valuable in any
instance. The big challenges from the state perspective really
start to grow in the FID stage with the cash commitments coupled
with financing. A lot needs to be understood that will become
much clearer during pre-FEED stage and that's where the
partnership will really pay dividends. He sees it using the past
to move forward as expeditiously and successfully as they can.
3:57:03 PM
At each stage in the project there are off ramps and decision
points for legislative and public review, he summarized, and the
state's commitments will be commensurate with the project's
progress.
^Sectional Analysis
Sectional Analysis of SB 138
3:58:13 PM
CHAIR GIESSEL announced taking up the sectional analysis of SB
138.
3:58:31 PM
MR. PAWLOWSKI started with a presentation prepared by the
Department of Law (DOL). Sections 1-9, on pages 2-10, deal with
expanding the general purposes of the AGDC to add a subsidiary
corporation of the state to pursue an equity option in the
midstream portion of a gas pipeline and in the associated
treatment and liquefaction.
Sections 10-22, on pages 11-18, amend Department of Natural
Resources (DNR statutes), empowering the commissioner to
negotiate the agreements both under confidentiality and with the
ability to work with legislative committees and legislators in
executive session relating to the authority of the commissioner
to work with lessees to amend certain oil and gas leases,
provide royalty in kind for the project, and to manage the tax
as gas (TAG). This is where the authority is found to develop
the project-enabling contracts that would be subject to
subsequent legislative oversight in certain circumstances; for
example, the firm transportation services agreement with
TransCanada, that final agreement to enter into the true
commercial partnership.
Sections 23-27, amend tax statutes and related authorities of
the commissioner of DOR allowing him to participate with the
DNR; it affects confidentiality for the commissioner and makes
adjustments to the corporate income tax and the oil and gas
production tax, which are the most significant changes in the
tax sections. The current production tax is amended to a gross
tax levied on gas after 2022 and allows for certain leases to
pay that production tax in kind, which is one of the key
sections in the project enabling concepts in the HOA. Those are
the broad three section of the legislation as they related to
the 3-Ps.
4:03:05 PM
Key terms in the legislation:
-definition of a "large diameter natural gas pipeline project"
inserted to provide a distinction versus the Alaska Stand Alone
Pipeline Project (ASAP) that AGDC is currently pursuing
-"statutory subsidiary," in section 7, calls out the bright
distinction the draft contemplates for that AGDC subsidiary
which would be participating in the AKLNG project
-"tax as gas" (TAG), in section 29, is a term not actually used
in the bill, but refers to the concept of production tax being
paid for in gas rather than in payments under taxes to the DOR.
4:04:14 PM
SENATOR DYSON asked if paying tax with gas is common in the
industry.
MR. PAWLOWSKI answered not to his knowledge on this continent.
4:05:01 PM
SENATOR FAIRCLOUGH asked if there were any federal tax
consequences to the state for taking gas in kind versus dollars.
MR. PAWLOWSKI replied none that he was aware of. He added that
issues were raised surrounding infrastructure rather than the
actual receipt of revenue through the tax.
SENATOR FAIRCLOUGH asked if the state taking gas in kind would
provide an advantage to the state's other partners.
MR. PAWLOWSKI responded that the advantage to the other partners
is really in the economics of the project and the alignment of
interests in the project. As they get into the specific sections
related to state corporate income tax and the tax as gas
sections there are some important points they would want to be
conscious of in the legislative process about how that gas gets
claimed for the purposes of the state's corporate income tax,
and yet doesn't inadvertently impact the producers on their
claims at the federal level, because their payments to the state
for production tax are deductible against federal income tax. It
is a key point and the valuation needs to be transparent in
order for them to make that claim. That's why they should be
cautious with the language here.
4:07:22 PM
-"modifications of leases," which is not used in the
legislation, but actually refers to sections 13-14 and the power
of the DNR commissioner to adjust the lease terms
-"North Slope natural gas project," which is in section 19 and
covers a generic trigger that is a gate for qualification for
entering into these processes with the DNR and ultimately the
DOR
4:08:12 PM
Section 1 on page 3, lines 20-27, amends AS 31.25.005 and is
intended to clarify and expand the authority of AGDC to advance
a large diameter natural gas pipeline project other than the
instate pipeline project described in one other section and
provides that important parallel path for the state. The
addition on lines 24-27 is the power for liquefaction and
treatment in connection with that large diameter natural gas
pipeline project; it's a separate authority but connected to
advancement of the large scale project as drafted. Section 2 is
largely conforming.
4:09:36 PM
SENATOR BISHOP asked him to explain section 3 that removes the
description of a large diameter natural gas pipeline and asked
if that is taking the large diameter pipeline out of HB 4.
MR. BALASH answered that this section, in particular,
distinguishes between the two projects that AGDC will now have
an interest in in going forward In an effort to make that clear,
the specific language referring to the two projects and the use
of funds for the projects is changed - in part to conform with
the establishment of a separate fund to capitalize the expenses
associated with AKLNG. Previously, HB 4 was talking about
cooperating with some other project that it didn't have anything
to do with, and in this case, they will basically have a foot in
each camp.
SENATOR FRENCH said they just created AGDC last year and gave
them the function of building a small pipe and told them not to
even compete with the other pipeline, and now they are sort of
shoehorning this much bigger project into the same corporation.
MR. PAWLOWSKI responded that is an extremely important part of
the discussion around SB 138. The A version is drafted with very
bright lines between the AGDC subsidiary participating in the
AKLNG project and AGDC participating in the ASAP project. The
idea is to start from a very bright line and leave open to the
legislative process some discussion about how to wrestle how the
state's participates in terms of that corporation.
SENATOR FRENCH said he agreed with that but was struck that
money to the large diameter pipeline subsidiary can never be
used in advancing the ASAP line (page 4, lines 20-24), which
seems to be almost the exact opposite of efficiency.
4:14:50 PM
MR. PAWLOWSKI said he could see how it would appear that way,
but the intent of the administration in developing this version
was to provide the protection and support for that distinct
vision.
As deputy commissioner of DOR, Mr. Pawlowski said, he serves on
the Alaska Industrial Development and Export Authority (AIDEA)
Board and he thinks about it potentially in this way: AIDEA and
the Alaska Energy Authority (AEA) are separate corporations with
separate budgets and separate missions that co-locate and share
resources. So, there are examples, in state, where those
concerns for inefficiency are dealt with, even when there are
separate budgets and distinct protections.
The statutory subsidiary developed in this language is slightly
different in that in AIDEA he wears the same board hat whether
he is on the AIDEA Board or the AEA Board. The legislature can
then clearly follow what money is devoted to what project.
SENATOR FRENCH asked if he foresaw any possibility that one
state bureaucrat would be forbidden from seeing what another
state bureaucrat was working on in these two subsidiaries or
should they be able to share information freely.
MR. BALASH answered there may be certain circumstances where
employees of the subsidiary and employees of the ASAP effort
don't see information or share information, particularly in the
context of marketing.
4:18:15 PM
SENATOR FAIRCLOUGH asked what a large diameter pipe size is
exactly.
COMMISSIONER BALASH answered that the current plan and
configuration for the ASAP project is a 36-inch low pressure
pipeline; the AKLNG project currently being evaluating is 42-48
inches operating at the significantly higher pressure of 2200
psi.
SENATOR FAIRCLOUGH said the tariff for the larger diameter pipe
in theory should be lower and she thought that was why they were
going after a larger project.
COMMISSIONER BALASH said that was correct initially. The more
efficient the pipeline, the lower the cost will be to recover
the cost of constructing it. So, as an initial matter, the ASAP
project may experience a higher tariff, but over time, that
would change.
4:21:31 PM
SENATOR FAIRCLOUGH asked if one could report fixed fees to
establish those tariffs or could different costs be blended
across boundaries in a subaccount (referencing Senator French's
comment about efficiencies to be had by merging money together).
COMMISSIONER BALASH said she was really "striking at" the
tension between efficiency and transparency and that they were
erring on the side of transparency.
4:22:14 PM
SENATOR DYSON mused that he was a late and reluctant supporter
of the ASAP, because he couldn't see how it could deliver energy
anywhere in Alaska at an attractive price, but then realized for
lots of places, a price north of $15/mcf would still be quite
attractive and that with all the uncertainties - geopolitical
stuff and world gas supplies - and significant pushback on lots
of unconventional gas development plus extraordinary decline
rates in those fields, plus reservoir dynamics, and the fact
that this project is out at least 10 years, and his sense was
that this governor has known that there will never be two
pipelines built. But with the ASAP line going forward if
everything else went in the ditch, Alaskans would be working
forward to a project that could supply gas for Alaskans,
although expensive. It also provides a bargaining point for the
state in talking to the producers. He was also a believer that
the rocks were there in the reservoir in Cook Inlet and two or
three years ago that was very much in question.
MR. PAWLOWSKI said he thought that line of reasoning was sound
and encouraged all Alaskans to be very cautious about assuming
something is expensive or not, and the AGDC should be commended
on all the work it had done to drive those costs down.
4:27:16 PM
SENATOR FRENCH said they were careful last year not to make the
small diameter a competing project of the big diameter pipe and
asked if that restriction is gone now. Can they actually set
them up as real alternatives?
4:27:57 PM
MR. PAWLOWSKI went to page 4, section 3, and said the references
have changed and now includes a "cooperation standard." The
concept of competition really is rooted in an AGIA concept and
with the cessation of AGIA that concept of competition doesn't
have the same issue related to it. However, the question of the
level of competition going forward that anyone would want to see
is a fair point that needs to have some discussion, but the
intent for cooperation - not competition - is retained in the
language.
SENATOR FRENCH said it's still not clear whether the state is in
AGIA or not.
COMMISSIONER BALASH said the question around competing projects
are rooted in the commitment in the MOU to the state's licensee
to not otherwise compete with them by providing inducements -
cash or fiscal terms. In the MOU the state pre-agreed with
TransCanada to abandon that license and move forward. He
explained that this particular clause about ensuring that the
AGDC project does not become a competing project had put some
handcuffs on AGDC in their approach to things, and when AGDC
holds its open season in early 2015, they might have already
gotten to a point where they know AKLNG is not moving forward
for one reason or another: the market or some fatal flaw
affected cost estimates or design.
If, however, AGDC's open season meets with success and they have
bids in excess of 500/mmcf/day, by having the license behind
them, AGDC will be able to respond to those bidders and
hopefully develop firm transportation arrangements with them.
4:32:11 PM
MR. PAWLOWSKI went to section 7, on page 6, line 17, that
establishes a statutorily-created subsidiary as an
instrumentality of the state to hold the state's equity interest
in the large diameter LNG pipeline and associated facilities.
The subsidiary would also act as an investment entity during the
LNG project and return revenues to the state. The subsidiary is
in the AGDC chapter for administrative purposes, but has a
separate legal existence (the bright line).
Some advantages to the statutory subsidiary are that the powers
flow directly from the legislature over which the state
maintains control, including state revenues. They believe in
maintaining state revenues' exemption from federal income taxes
related to gas and the infrastructure, itself. Taking a step
away from traditional instate gas pipelines to a liquefaction
facility requires a higher level of diligence.
4:33:55 PM
The subsidiary is created as an instrumentality as an integral
part of the state and the state has the authority to terminate
it. Some key attributes are:
-the state directs its revenues
-its employees are state employees
-the state retains control over its operation
-it's subject to general laws that apply to other governmental
entities
-the governor retains board members' appointment and termination
powers
MR. PAWLOWSKI went back to section 4, because having created
that statutory subsidiary he wanted to focus on separation of
the money between the two projects. As Senator Bishop pointed
out, Section 3 creates clarity around the instate fund that was
established last year and amends it to be clear that it cannot
"cross purpose" with the fund created for the new statutory
subsidiary in section 5, on page 5, lines 11-25.
4:35:38 PM
SENATOR FRENCH said language through the top of page 10 goes to
great lengths to keep the different lines distinct, but then it
says "instate natural gas pipeline shall refer to a large
diameter natural gas pipeline project described upstream." That
caused him to scratch his head and ask why they are suddenly
conflating the two. They are bootstrapping the instate natural
gas pipeline and the large diameter gas pipeline into a bunch of
provisions in HB 4 from last year. Is the large diameter
pipeline exempt from procurement, confidentiality and so forth?
4:38:29 PM
MARY GRAMLING, Assistant Attorney General, Department of Law
(DOL), said Senator French was correct in his interpretation:
where the AGDC corporation provisions say "instate" those powers
need to apply also to the large diameter natural gas pipeline
project that would be transferred over to the subsidiary.
SENATOR FRENCH asked if all the provisions, like the instate
natural gas pipeline exemption from the Procurement Code, apply
to both the large diameter pipeline as well or just the large
diameter one, since it seems like one definition was substituted
for another.
MS. GRAMLING replied that the intent in the current version is
that the ASAP powers stay the same and the subsidiary would have
all the powers that it needs that are currently in "Sec 4
31.25.080."
SENATOR FRENCH said that section seems confusing.
MS. GRAMLING said the intent was to do minimal edits to the ASAP
line since they are so close to going to an open season.
4:40:42 PM
MR. PAWLOWSKI said Sections 10-11, starting on page 10, line 24,
amend the powers of the commissioner of Department of Natural
Resources (DNR) to enter into short term commercial agreements
for project services, the precedent agreement (PA) in the MOU
prior to the firm transportation services agreement, to
negotiate terms for inclusion in proposed contracts related the
North Slope natural gas pipeline, to enter into confidentiality
agreements related to the negotiations and contracts -
recognizing that a proposed contract subsequently presented to
the legislature for purposes of obtaining authorization is not
confidential, the development of the contract is, but the return
to the legislature is not. The changes are on page 11, lines 27-
31, to page 12, line 14.
4:41:54 PM
SENATOR DYSON asked him to explain why at several points
confidentiality is necessary in building these relationships.
People want to know why everything can't be in the open.
MR. PAWLOWSKI responded that the DOR thinks, for one, that under
the construct, the DNR would be managing the taxed gas on behalf
of the DOR; they would be consulting and following along because
of their fiduciary duty to that tax revenue to return to the
general fund. He envisioned, for instance, that the DNR through
the HOA is entering into one of those individual negotiations
with one of the producers for disposition or sale of a share of
the LNG - ExxonMobil, for instance - so the state is benefiting
from their expertise (their global supply chain). The ability at
the same time of another party - say ConocoPhillips - who is
also negotiating with the state in that marketing arrangement,
to file a freedom of information act and get the terms of the
negotiations with DNR would inhibit DNR's ability to get the
best deal for the state of Alaska. There is constantly a tension
in all of these discussions between the need for transparency
and protecting a very real business interest.
SENATOR DYSON added that these individual companies certainly
don't want any of their partner/competitors to know much about
their financial situation.
MR. PAWLOWSKI said that was a good point and that Section 10 has
that balance and confidentiality that is critical in moving a
project forward in a way that protects the project from
competitors and protects the state interest within that project.
Language on page 12, lines 11-13, provides the ability for the
legislature (as the state's board of directors) to get a window
into these discussions by extending confidential information
into executive sessions. The next step will demand a different
level of engagement between the administration and the
legislature that they were looking forward to having.
4:46:16 PM
SENATOR FRENCH said three sections - section 10, subsection 13
on page 12, line 14, and section 11 that modifies subsection 13
and adds a 14 - seem to modify the same existing law and asked
why that was done.
MS. GRAMLING explained that when sections appear to repeat each
other it's often because they have different effective dates.
Section 10 would be effective immediately; section 11 would be
effective January 1, 2015. In this bill the reason for the
occasional delay in the effective dates is that the tax
provisions would take effect January 1, 2015. So, any section of
the bill that refers to the tax provisions has the similar
delayed effective date.
4:47:43 PM
SENATOR FRENCH said page 12, lines 3-13, talk about the
legislature authorizing the contracts and there is no procedure
set out for how that happens: how much time they might have for
what sort vote or whether or not the contracts are negotiable at
that point, and asked what the minimum time would be for the
legislature to consider this proposal.
4:48:27 PM
COMMISSIONER BALASH answered that the administration envisioned
leveraging the state's royalty disposition process that they
rely on for purposes of selling royalty oil to Tesoro, for
instance. In those cases they provide a public notice -
opportunity for comment and review by the public - and
subsequent review by the Royalty Advisory Board, and then that
process finally culminates in the introduction of legislation
approving said contract. In this case the public notice
opportunity is a minimum of 30 days, the notice and meeting
schedule for the Royalty Board is also required to be publicized
on line and in numerous publications; the opportunity then for
the legislature is a function of the legislative process and how
long it will take to do the work.
SENATOR FRENCH asked if he would object to them making some of
those provisions explicit to this decision.
COMMISSIONER BALASH answered that they would be open to consider
those things, but they don't want to set out conflicting
processes.
4:50:55 PM
MR. PAWLOWSKI said the addition in section 11 is where in
consultation with the commissioner of DOR, the commissioner of
DNR takes possession of that tax as gas, works it through the
same process that the DNR and policies use for disposal of the
tax as gas with the royalty gas. Here they are leveraging DNR's
expertise, and the reason for the repeat of the section is the
effective date of that tax provision is January 1, 2015,
happening after the powers granted to DNR are effective in the
legislation with that immediate effective date.
4:51:51 PM
MR. PAWLOWSKI went to Section 23, on page 20, lines 23, to page
21, line 30, where the commissioner of DOR's directions and
powers reside. He explained in the previous sections the
legislation amends the powers of the commissioner of DNR and
some key elements need to be expanded in the powers of the
commissioner of DOR. The authorization for the commissioner of
DOR to consult with the commissioner of DNR on the development
of those contracts is on page 21, lines 28-30. A similar
situation exists in section 24 on page 21, line 31, to page 23,
line 11, where DOR needs the ability to work with DNR
immediately on the beginning of the development of contracts,
recognizing that the tax provisions don't come into effect until
January 1, 2015. So, then the powers to direct the disposition
of revenues received from that tax as gas need to be authorized.
4:53:51 PM
The purpose of sections 10 & 11 and 23 & 24 are really to
describe the relationship between DNR and DOR. He said the DNR
today has people who work through the contracts and manage the
resources and the DOR does not do that; it has auditors,
accountants, and economists. So, they are leveraging DNR's
expertise in managing the resource by creating these sections
where they cooperate together.
Sections 13-14 that begin on page 14, line 26, give additional
powers to the commissioner's powers to make modifications to
leases. There are specific instances in the HOA where the
particular impacts to things like switching between in value and
in kind where the department needs to really have upgraded
powers to deal with gas. He asked Commissioner Balash to
describe the real impacts of this section.
4:55:26 PM
COMMISSIONER BALASH said over time considering the impacts of
certain lease terms on the operation, commercial and otherwise,
of large diameter natural gas pipelines they have seen a need to
make changes driven by the contractual needs of the players in
the project. When they considered an overland project to North
America, the ability of the state to switch from in value to in
kind on relatively short notice could create a real challenge in
managing capacity on the pipeline. So, the solution in that
particular instance was to seek from the Federal Energy
Regulatory Commission (RCA) a limited waiver of the rules on
capacity or lease, so that in effect, capacity for royalty could
move from the shipper to the state.
4:56:58 PM
In an LNG context, Commissioner Balash said they have a
different challenge stemming from the nature of the sales and
purchase agreements that the gas holder is likely to enter into
with LNG buyers and how much of their reserves are being
committed in the sales contract. Prudhoe Bay, as an example, has
24 tcf of proven resource that will hopefully be sold under long
term contracts to buyers in the Pacific Rim. If all, 24 tcf of
that gas is sold under SPAs and the state is taking in value,
that is fine; but if in some other year the state suddenly
decides to switch and take our gas in kind, the producer will be
short of proven gas resource. That means a couple of things: the
seller of the gas and potentially the buyer may take that right
to switch into account by striking a lower price for the gas.
That is not necessarily in our interest and would put the state
in the position of having to accept the terms of that SPA in
order to facilitate the switch. So, then what's the point of
switching back and forth from in value to in kind?
Realistically, there may need to be some limitation on the
state's right to switch, and in certain cases it may be an
elimination of that right, but only if talking about the
commitment of all of the reserves.
He contrasted that with a different sales scenario and using the
same 24 tcf/gas. If only half of it is committed to SPAs, then
the state switching from in value to in kind won't necessarily
create the same challenge in terms of total reserves available.
There will be an impact on production and how quickly the field
could potentially ramp up production and produce one-eighth more
on a daily basis for the state's taking, but in that particular
circumstance there might need to be some reasonable limitation
on the duration of the notice the state must provide before
switching, but not necessarily an elimination of that right to
switch. So, here they ask for some flexibility in how those
prerogatives the state currently has under the lease might be
limited to fit the commercial needs of the circumstance in
question and the volumes under consideration.
5:00:25 PM
SENATOR MICCICHE said he wanted to know what the calculation in
number 3 providing revenue to the Permanent Fund is.
5:01:18 PM
COMMISSIONER BALASH responded that all of the leases provide
revenue (25 percent of the leases) to the Permanent Fund.
5:01:26 PM
SENATOR MICCICHE said section 13 (page 14) starts by saying the
commissioner may propose modifications to existing leases that
relate to: (3) establishing fixed royalty rates and modifying
net profit shares under leases subject to this subsection (page
15, lines 12&13) and it seems to him that it should also state
"not to go below 12.5 percent royalty rate."
COMMISSIONER BALASH said he understood what he was asking, but
in this item they have a desire to seek a fixed number in
instances where the state has leases that pay a net profit share
or that has a sliding scale royalty. As they talk about
establishing a fixed position equity-wise in the project, if the
state winds up in a situation where our royalty payment of gas
is going up or down, that is something that is going to affect
the producer as well as the state. So, they want to establish a
fixed number somewhere between the base royalty rate and
whatever the high end is. The counterparty would want the
minimum and the state would want the maximum, so they would find
something reasonable in the middle. He would entertain language
that provides more comfort.
SENATOR MICCICHE asked if he would feel comfortable at least
matching this code to the base royalty, so that people realize
the Permanent Fund is protected.
COMMISSIONER BALASH replied he would be happy to provide waders
in addition to the belt and suspenders.
SENATOR FAIRCLOUGH said she thought that was a good idea and
likened it to a floor for the boots to walk on.
5:04:16 PM
MR. PAWLOWSKI said preserving the state's royalty share is very
important and this is an appropriate place to put a floor for
the boots to walk on. He said tax provisions come in on January
1, 2015, and a conforming amendment (to the commissioner's
authority) was made in AS 43.55.014(b), which is the "taxed as
gas" where the department gets a share of the molecules instead
of a tax payment.
5:05:17 PM
SENATOR DYSON said he was worried about the scenario where the
capacity of the pipe is not fully committed and the state is
receiving both royalty and tax in molecules and it has elected
to get its gas in value, so our gas is being marketed for us,
but there is more supply than we have long term contracts for.
So, then there is the opportunity for gas to be sold on the spot
market. If our gas is being marketed in long term contracts, he
was worried about losing the opportunity to sell it in the spot
market at two or three times the fixed price, because of
choosing to sell our gas in value.
MR. PAWLOWSKI said that was a good question that is solved in
the contracts related to the LNG sales themselves. The state
could decide to subscribe only 90 or 95 percent of its gas in a
long term fixed contract and keep some for the spot market. DNR
might be a little more comfortable with that concept today and
DOR would be a little cautious - part of the tension that will
continue. That issue will be developed in the pre-FEED stage
with more expert advice and work with people on the appropriate
level of what the spot market in LNG might evolve to.
SENATOR DYSON asked if it was possible for the state to say
we'll take ours in value and we want you to market ours just the
way you do.
COMMISSIONER BALASH said that was something he would expect to
achieve in an arrangement with any one or all three of the
producers for marketing purposes. Ultimately, the state will
want to get to a place where it has a portfolio of contracts;
then the question will be how many of them will similar and
which ones will differ and why. The issue is if the state will
be putting all of its eggs in one marketing basket and taking
our tax as gas puts a lot of it there. The state hopes to
continue receiving corporate income tax payments and property
tax payments in cash and those are not insubstantial revenue
streams.
5:10:14 PM
SENATOR FAIRCLOUGH said Asian markets do not have spot pricing
and Alaska has not been a partner before. So, they must proceed
very cautiously in marketing on behalf of Alaskans so that they
can provide sustainable energy across the state. There are both
risks and rewards.
MR. PAWLOWSKI agreed that this is a major step for the state;
with it comes risks and the opportunity for more substantial
revenues than we would see in playing it safe and trying to make
a project competitive. That is why they envision a very phased
approach where these issues continue to be worked with the
legislature and come back to it for approval; the state's
commitment grows as its understanding grows, but it's not a
decision to unilaterally take today. That is why there are
requests in the fiscal notes for additional experts and very
good staff to work on these things. The opportunities are
substantial, but they are not something that should be entered
into lightly.
5:12:49 PM
MR. PAWLOWSKI said a key point in the modification slide [12] is
the step that needs to be taken before the processes are
initiated: the commissioner of DOR needs to make a written
determination that the North Slope natural gas project really
has sufficient financial commitment for a work plan, sufficient
commitment of gas by lessees, and the concurrence of lessees to
the proposed modifications. It's a trigger to start a process so
that not just any idea draws staff time and resources. The
royalty study the DNR did this summer cost several hundred
thousand dollars' worth of detail work plus staff time.
5:15:02 PM
MR. PAWLOWSKI said the heart of the tax section is in section 29
on page 26, line 17, to page 27, line 13, and the opportunity
for a producer to elect to pay production tax with molecules.
So, the state gets a larger share of the gas than the regular
tax payments. The trigger is on page 26, lines 18-20. The oil
and gas that is eligible to be paid in molecules comes from a
lease that has been modified by the commissioner of DNR, to
recognize that these are production tax payments.
But the DOR doesn't have the same interaction in the civil
arrangement with the lessees. The in kind sections of the HOA
recognize there are still a few major issues that need to be
worked out: marketing (the downstream) and what happens to the
LNG sales, what happens on the upstream (around the off take and
balancing agreements) that provide the gas custody transfer from
the producer to the DNR. The option to pay tax as gas is limited
to production from those leases where the DNR has entered into a
modification agreement. The DOR saw that as a gate to limit the
scope of where this ability to elect by a producer to pay their
tax as gas provides some protection to the DOR.
5:17:27 PM
SENATOR FRENCH asked how many leases have the opportunity of
changing rates referred to in sections 13 & 14.
MR. PAWLOWSKI answered the ones they contemplate in looking at
this project have been Prudhoe Bay and Pt. Thomson, particularly
the Pt. Thomson leases, because that's the gas that is committed
to the AKLNG project.
COMMISSIONER BALASH agreed and added that this is a general law,
which may be useful again further down the line by other
companies or for other lessees at other fields. That is why they
tried to make it a fairly flexible tool to use depending upon
the circumstances that come through the door.
SENATOR FRENCH asked if there is any oil and gas lease on the
North Slope to which that could not be made to apply.
MR. PAWLOWSKI answered that the payment of tax as gas wouldn't
be possible on a federal lease, because the DNR doesn't have any
relationship to modify.
5:19:32 PM
SENATOR FRENCH said it could apply to any lease where the state
is the primary land owner. Mr. Pawlowski nodded yes.
MR. PAWLOWSKI said the first instance of a gross tax rate of
10.5 percent (not the variable net tax rate) was on page 26,
lines 24-27. The HOA envisioned a tax rate somewhere between 7
and 13 percent and on Monday he would discuss why the
administration introduced the legislation at 10.5 percent.
Language on page 27, lines 2-7 (slide 16) says if there is
somehow a tax deficiency related to the TAG that the tax
including interest and penalties would be paid in value.
Also, he said it's important to know that TAG will be reported
in annual filings where the producer will be required to note
the gross amount of gas produced from each lease or property
subject to the election of payment (in section 37). He mentioned
it now because members and the DOR hadn't worked with this
concept before. While DNR is fairly used to accounting for
barrels in kind, the DOR has to adjust its system to account for
how much gas was produced that was taken in kind because a
producer might actually have another lease where they are not
producing production tax as gas. That is why their fiscal note
has an addition of money to reprogram the tax revenue management
system. The bill has some conforming section to detail how that
will be reported.
Often members are concerned about Section 25 (page 23, lines 12-
16) that states the amount of gas produced from each lease, and
the name of the person - in tax law a producer is a person -
will be public information. This is important for the Revenue
Sources Book.
5:23:16 PM
MR. PAWLOWSKI said Sections 27-47 are about the implementation
of this tax for North Slope gas. He explained that two taxes
are happening: one is the ability for tax as gas and the other
is setting a basic fixed tax of 10.5 percent on gas recognizing
that there may be opportunities for in value production to be
contributed. It does not amend the 35 percent production tax
value on oil but rather separates out the tax on gas throughout
the sections of the bill.
The additional conforming amendments are in places where, for
example, in the minimum tax section it makes no sense to have a
minimum tax of 4 percent on the gross when the tax is 10.5
percent on the gross. So, a conforming amend is in the minimum
tax sections. Also, recognizing that the Middle Earth oil and
gas production may be subject to the tax ceiling and credits,
there is conforming language to adjust to what really is a
simple settling of the gross tax rate for the production tax.
5:24:50 PM
When they get into the modeling next week, Mr. Pawlowski said,
he would talk about the impact of some of the sections - section
43 (AS 43.55.165(e) - on page 44, line 21, which discusses how
the calculation of lease expenditures is done and the fact that
the production tax as gas is not included in as a deductible
lease expenditure. Mr. Pawlowski said the dilemma for the
department and the policy call is that lease expenditures do not
apply in a gross world, but yet they are still lease
expenditures related to the production and development of gas.
So, they looked at the impacts of lease expenditures on the
overall production tax system and next week they would walk
through how that push and pull around lease expenditures affect
the gross tax rate on gas. He pointed out that this section
looks conforming but in economic terms it's actually not. It has
some substantial issues to understand from a tax perspective.
For instance, SB 138 does not change several pieces of statute
like the Alaska Gasline Development Corporation's (AGDC) core
mission, the property tax for oil and gas exploration production
pipelines, what happens with royalty for Permanent Fund (PF) or
tax revenues for general fund (GF), or some of the oil and gas
production tax limitations. There are sections that have an
important impact on revenues that they would also highlight for
the members.
CHAIR GIESSEL thanked the presenters and held SB 138 in
committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 138 vs A.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SB 138 Introduction.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SB 138 Sectional Analysis.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SB 138 Fiscal Note DCCED.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SB 138 Fiscal Note DNR.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SB 138 Fiscal Note DOR.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SB 138 Fiscal Note Fund Cap.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SRES SB 138 Sectional Analysis Presentation.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |
| SRES SB 138 Putting hte HOA and MOU in Context 20140207.pdf |
SRES 2/7/2014 3:30:00 PM |
SB 138 |