Legislature(2003 - 2004)

03/31/2003 03:39 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
         HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS                                                                      
CHAIR OGAN asked Representative Fate to present the bill.                                                                       
REPRESENTATIVE  HUGH  FATE, prime  sponsor  of  HB 16,  gave  the                                                               
following explanation of the measure.                                                                                           
The Stranded  Gas Act was  enacted in 1997 but  its authorization                                                               
has terminated.  HB 16  reauthorizes the  Stranded Gas  Act until                                                               
March of  2005. The  original Act  was designed  to apply  to LNG                                                               
only. That language was removed from  HB 16 so that it allows for                                                               
any form of gas. It also  allows more businesses to qualify as it                                                               
reduces the  entry fee. In  the past, a corporation  was required                                                               
to have a  net worth of 33 percent of  the estimated construction                                                               
cost of a  project. That percentage was reduced to  10 percent in                                                               
HB  16. The  line  of credit  equal  to the  amount  that is  not                                                               
encumbered to the  project cost was also reduced  from 25 percent                                                               
to 15 percent. The word  "contractor" was made plural because the                                                               
state  often  needs  more  than  one  contractor  to  review  the                                                               
qualified work.  HB 16  also contains  intent language  that will                                                               
not  disturb  the  clause  that  allows  negotiations  between  a                                                               
qualified  sponsor and  the State  of Alaska.  Those negotiations                                                               
are the centerpiece of the legislation.                                                                                         
REPRESENTATIVE FATE  said he worked  with the  Administration and                                                               
industry personnel on HB 16 and  attempted to keep it as clean as                                                               
possible to  allow the negotiations  that take place  between the                                                               
State of Alaska and the  qualified sponsors to be as unencumbered                                                               
as possible. He believes HB  16 achieves that and embodies intent                                                               
language  as  a  reminder  that the  renegotiation  of  contracts                                                               
cannot be  forgotten. He noted  that Senator Ted  Stevens pointed                                                               
out the U.S. Senate may have  another hurdle to clear regarding a                                                               
gas  pipeline.   He  believes   this  legislation   is  extremely                                                               
important  to  show  that  the state  is  responsibly  trying  to                                                               
facilitate  the construction  of a  gas pipeline.  He offered  to                                                               
answer questions.                                                                                                               
CHAIR  OGAN  noted  the  original Stranded  Gas  Act  applied  to                                                               
projects  north of  latitude 64  degrees  and was  specific to  a                                                               
route  that parallels  the TransAlaska  pipeline  system and  the                                                               
Alaska  Highway. He  noted that  HB 16  is silent  on the  Alaska                                                               
Highway  route,  as  well  as  the latitude.  He  asked  why  the                                                               
pipeline route language  was dropped and why it would  be open to                                                               
any pipeline and any gas in the state.                                                                                          
REPRESENTATIVE  FATE  said  specific  legislation  regarding  the                                                               
route  has  already  been  enacted   [AS  38.35.017]  so  it  was                                                               
unnecessary  to duplicate  it.  The removal  of  the latitude  64                                                               
degrees provision  was done to  encourage others to get  into the                                                               
"play." At  the present  time, the  only stranded  gas is  on the                                                               
North Slope.                                                                                                                    
CHAIR OGAN said that  might be true but it sets  a new policy. He                                                               
asked if any other projects have been discussed.                                                                                
REPRESENTATIVE FATE said no other projects have been discussed.                                                                 
CHAIR OGAN asked where latitude 64 degrees cuts across Alaska.                                                                  
REPRESENTATIVE  FATE  said  it parallels  the  Brooks  Range  and                                                               
includes the  coal bed methane  at Red  Dog but nothing  south of                                                               
CHAIR  OGAN asked  if  this  Act could  include  any natural  gas                                                               
REPRESENTATIVE FATE replied that it could. He explained:                                                                        
     ...if  there  were  a  large  natural  gas  find  -  an                                                                    
     exploratory  - and  they delineated  a field  along the                                                                    
     route of  that pipeline, I'm  sure that they  would try                                                                    
     to incorporate that pipeline given  the capacity of the                                                                    
     pipeline. But any find, for  example in the Cook Inlet,                                                                    
     or somewhere that's not on  that route even though it's                                                                    
     certainly  below  the  64th parallel,  it  wouldn't  be                                                                    
     included in that. It's not  stated in this Act but it's                                                                    
     just a matter of common  sense that you're not going to                                                                    
     run  a pipeline  up from  Cook Inlet  to where  the gas                                                                    
     pipeline comes down from Prudhoe Bay.                                                                                      
CHAIR  OGAN asked,  "Whose  got a  dog  in the  fight  on the  10                                                               
REPRESENTATIVE FATE  said no  one but he  has been  approached by                                                               
individuals   who  suggested   that  a   combination  of   Native                                                               
corporations could get "underneath that  wire." That gave him the                                                               
idea to change  the net worth provision to 33  percent instead of                                                               
placing strict  parameters around  the negotiations at  the back-                                                               
end.  Even  though  that  lowered   the  bar  substantially,  the                                                               
producers had no real objection.  However, there was objection to                                                               
placing language  in the bill  that would set the  parameters for                                                               
the negotiations.   He noted the first figure he  had in the bill                                                               
was 20  percent, which he  changed to  10 percent in  a committee                                                               
substitute to encourage more exploration and to share the risk.                                                                 
SENATOR WAGONER asked Representative Fate  to repeat what he said                                                               
about Cook Inlet.                                                                                                               
REPRESENTATIVE  FATE said  in response  to Chair  Ogan's question                                                               
about  the 64th  latitude,  he  was suggesting  that  if a  large                                                               
enough gas field was found  along the pipeline, the company would                                                               
want to  tap into  the pipeline  if it had  the capacity.  If the                                                               
find is in Cook  Inlet, it would be impractical to  run a line up                                                               
to the other because of the distance.                                                                                           
CHAIR OGAN  noted that the  Joint Natural Gas  Pipeline Committee                                                               
had many  discussions about  open season and  how to  ensure that                                                               
others can  access the gas  line but the  bill is silent  on that                                                               
REPRESENTATIVE  FATE  said  the  bill is  silent  on  that  issue                                                               
because  that  will have  to  be  negotiated  and because  it  is                                                               
unclear whether the regulatory authorities  will weigh in on that                                                               
issue. He said he hopes  the Federal Energy Regulatory Commission                                                               
(FERC)  will issue  an opinion  about which  authorities will  be                                                               
involved,  how  they   conflict  and  how  their   roles  can  be                                                               
CHAIR  OGAN  asked  who  will  be involved  in  the  open  season                                                               
REPRESENTATIVE  FATE  answered  the   State  of  Alaska  and  the                                                               
qualified sponsors.                                                                                                             
CHAIR OGAN  expressed surprise  and said he  thought that  was an                                                               
internal matter.                                                                                                                
REPRESENTATIVE  FATE said  his understanding  is that  it can  be                                                               
negotiated and that FERC will not determine the open season.                                                                    
SENATOR ELTON  referred to Section  5 on page  3 and called  it a                                                               
"double barreled  edition." He said  the applicant  can reimburse                                                               
the state for  reasonable expenses according to  language on line                                                               
24, but  those expenses  are capped at  $1.5 million.  He pointed                                                               
out that both of those  provisions are additions to existing law.                                                               
He asked  if anyone  has determined that  any expenses  over $1.5                                                               
million would be unreasonable.                                                                                                  
REPRESENTATIVE FATE said the House  labored with that section and                                                               
considered   the    words   "redundant,"    "non-redundant"   and                                                               
"reasonable." The amendment adopted  on the House floor contained                                                               
the  word "reasonable."  The House  does  not want  the state  or                                                               
contractor to duplicate bills and it  wants to make sure that any                                                               
overlap  of costs  is  reasonable, for  example,  in a  situation                                                               
where  one  expert might  be  used  to  corroborate the  work  of                                                               
another one.                                                                                                                    
SENATOR  ELTON  again  asked if  anyone  made  the  determination                                                               
during  those  discussions that  any  expense  over $1.5  million                                                               
would be unreasonable.                                                                                                          
CHAIR  OGAN noted  that  the  maximum is  $1.5  million for  each                                                               
application. He asked if it could apply more than once.                                                                         
REPRESENTATIVE  FATE  responded  that  amount  applies  for  each                                                               
SENATOR ELTON  asked, "So  you could have  a series  of expenses,                                                               
each of which would be a separate application?"                                                                                 
REPRESENTATIVE FATE  replied, "Not  to exceed -  correct, through                                                               
the Chair, not to exceed $1.5 million for each application."                                                                    
SENATOR  LINCOLN referred  to Section  1  on page  1, the  intent                                                               
section, and asked  why it was included as  intent language since                                                               
no one can be held accountable to it.                                                                                           
REPRESENTATIVE FATE explained that if  it was included as part of                                                               
the bill and  was not intent language, it would  begin to set the                                                               
sideboards of the negotiations.  He explained the intent language                                                               
is basically  a reminder of something  that is usually done.   He                                                               
     ...To place  that and to  force any type  of sideboards                                                                    
     that  have to  be negotiated  was not  acceptable. Very                                                                    
     frankly,  it [began]  to muddy  the  water because  you                                                                    
     begin -  and this  is what  we're very  good at  in the                                                                    
     Legislature, is  trying to assert our  will into things                                                                    
     rather than  to let the negotiating  process take place                                                                    
     in good faith.                                                                                                             
SENATOR SEEKINS asked  what benefits would accrue  to a qualified                                                               
CHAIR OGAN explained that the  original legislation was passed to                                                               
enable the  state to  negotiate a  payment in  lieu of  taxes, an                                                               
approach  recommended  by  a  consultant   named  Van  Meers  who                                                               
cautioned the project  was front-end loaded with  too many taxes.                                                               
A  major  stumbling  block  to   making  a  project  economically                                                               
feasible  was the  requirement to  pay all  of the  upfront money                                                               
before the  project made a  nickel. The  idea was to  negotiate a                                                               
payment in lieu  of taxes to compensate  the communities directly                                                               
affected  by   the  impact  of   the  pipeline.   The  discussion                                                               
surrounding the original  legislation was to pick  up those costs                                                               
at the back-end when the project was amortized and making money.                                                                
SENATOR SEEKINS  said it is  important to reiterate  that because                                                               
many people  do not  understand the  concept. He  then questioned                                                               
the  phrase  in  the  intent section  that  says  "the  qualified                                                               
sponsor  group   may  develop  and   enter  into   project  labor                                                               
agreements     with     appropriate     collective     bargaining                                                               
organizations..." and noted that should be assumed.                                                                             
REPRESENTATIVE  FATE  repeated  the  intent language  is  just  a                                                               
SENATOR SEEKINS said he wanted  to distinguish that because he is                                                               
not aware  of any legislation  that forbids a sponsor  group from                                                               
entering into a project labor agreement.                                                                                        
SENATOR ELTON said  he is still concerned about  the $1.5 million                                                               
limit. He  pointed out  the Department  of Revenue's  fiscal note                                                               
leads him to believe that the  state agencies are not clear about                                                               
whether  the  limit  is  per   application.  He  asked  that  the                                                               
committee double-check with the Department of Revenue.                                                                          
CHAIR  OGAN  said  that  Department of  Revenue  staff  would  be                                                               
available to answer questions via teleconference.                                                                               
SENATOR  LINCOLN noted  a concern  was raised  on the  House side                                                               
that  this  bill  is  too  broad and  could  give  incentives  to                                                               
projects  that don't  need them,  for example  projects in  areas                                                               
where  the  gas  is  not  stranded.   She  asked  if  that  is  a                                                               
REPRESENTATIVE  FATE said  he  does not  believe  so because  the                                                               
project must be  qualified and the qualified sponsor  must have a                                                               
certain level  of capitalization.  In addition, the  project must                                                               
produce at least 500 BCF of  gas so it sets benchmarks to prevent                                                               
a "fly-by night" operator to get in on this type of activity.                                                                   
CHAIR OGAN said he shares  Senator Lincoln's concerns because the                                                               
requirement to  produce 500  BCF in  20 years is  so low  that it                                                               
could  provide a  two-year window  for a  project that  might not                                                               
even be  related to  North Slope  gas to  negotiate a  payment in                                                               
lieu of taxes.  He questioned whether the bill may  have a lot of                                                               
unintended consequences.                                                                                                        
REPRESENTATIVE FATE said the  producers have already acknowledged                                                               
that negotiations will have to take  place but at such a level of                                                               
capitalization  that  even  with  the bar  lowered  to  encourage                                                               
others to get  in, very few Alaska companies could  meet it, even                                                               
with this piece of legislation.                                                                                                 
CHAIR OGAN said Representative Fate  is missing the point because                                                               
this legislation is  not specific to the North  Slope anymore. He                                                               
suggested inserting  language on  page 2, line  15 to  read, "the                                                               
transportation of  North Slope natural  gas by a." He  noted that                                                               
would mean  the project has  to be principally,  not exclusively,                                                               
involved in North Slope natural gas.                                                                                            
REPRESENTATIVE FATE said  he would not object to  that change. He                                                               
said HB  16 was his  attempt to clean  up the language  and allow                                                               
and encourage exploration of other hydrocarbon prospects.                                                                       
CHAIR OGAN  said his intent  is to prevent creative  lawyers from                                                               
applying the incentives to projects they were not intended for.                                                                 
SENATOR  ELTON said  nothing in  the  bill compels  the state  to                                                               
enter into a  contract so, if the state  enters into negotiations                                                               
for a  questionable project, the  terms of the contract  would be                                                               
fundamentally different than  they would be with  a major company                                                               
from the  North Slope. Furthermore,  the fact that  the contracts                                                               
will  be  given  to  the legislature  for  confirmation  provides                                                               
additional protection. He asked if his understanding is correct.                                                                
CHAIR OGAN  said he is  correct in  that any contract  would come                                                               
before the legislature for approval.                                                                                            
SENATOR  ELTON  said he  believes  the  legislature needs  to  be                                                               
cautious about opening the door too  wide but, to some extent, it                                                               
has  to rely  on the  good faith  of the  administration that  is                                                               
negotiating the contracts.                                                                                                      
CHAIR  OGAN  pointed out  that  Senator  Elton has  defended  the                                                               
Governor twice today.                                                                                                           
REPRESENTATIVE  FATE noted  the  deadline  for applications  will                                                               
limit the  number of applicants.  That deadline was  extended one                                                               
year from  the original date  to allow other  Alaska corporations                                                               
that could meet the bar to do so.                                                                                               
CHAIR OGAN  said although that is  true, once a precedent  is set                                                               
in legislation, an applicant with  a catch-all project would only                                                               
have to  extend the  date. There being  no further  questions, he                                                               
informed  members  that  he would  hold  this  legislation  until                                                               
Wednesday to give  members time to think  about possible changes.                                                               
He then told members he was  recently in Washington, D.C. and met                                                               
with Senator Murkowski's  chief of staff who has  been asked what                                                               
Alaska is  doing to help  commercialize natural gas.  The staffer                                                               
was not  aware the Legislature  was working on  this legislation.                                                               
He then took public testimony.                                                                                                  
MS. WENDY KING, representing  Conoco-Phillips, stated support for                                                               
HB 16. Conoco-Phillips believes  a three-pronged strategy to make                                                               
a   gas  pipeline   a  reality   is  necessary.   First,  federal                                                               
legislation  should streamline  the  permitting process.  Second,                                                               
federal fiscal  legislation should provide insurance  against the                                                               
risk  of  extreme  price  volatility.  Third,  state  legislation                                                               
should reauthorize  the Stranded  Gas Act. As  currently written,                                                               
the Stranded Gas Act only applies to  an LNG project and not to a                                                               
gas  pipeline. It  also had  a  date of  June 30,  2001 by  which                                                               
companies had to file applications. If  it were not for those two                                                               
limitations, companies  that want to  build a gas  pipeline could                                                               
be negotiating with  the state today under the  Act, creating new                                                               
jobs. She repeated support for HB 16.                                                                                           
CHAIR OGAN  asked why  no one  from BP or  Exxon is  available to                                                               
MS. KING said she could not comment.                                                                                            
SENATOR ELTON  asked the representatives  from the  Department of                                                               
Revenue to  address his  concern about  whether the  $1.5 million                                                               
cap is per application.                                                                                                         
MR. DAN  DICKINSON, Director of  the Tax Division,  Department of                                                               
Revenue,  said  the  language  in  the  statute  is  the  correct                                                               
language. He  pointed out in  the fiscal note analysis  the words                                                               
"the   project  applicant(s)"   should  have   been  "a   project                                                               
applicant."  The  division  believes   there  will  be  only  one                                                               
application, but there could be more.                                                                                           
SENATOR  ELTON  said  his  concern   is  that  in  the  statutory                                                               
language, the companies are  called "applicants." Therefore, when                                                               
the word "application" is used, he  assumes it would be up to the                                                               
companies to  bundle if they wanted  to. In that case,  the state                                                               
could not be reimbursed for costs over $1.5 million.                                                                            
MR. DICKINSON said  he believes if multiple  companies qualify as                                                               
the  sponsor of  a single  project,  they would  submit a  single                                                               
application. He  noted that  AS 43.82.120  says that  a qualified                                                               
sponsor or qualified sponsor group may submit an application.                                                                   
TAPE 03-21, SIDE A                                                                                                            
SENATOR ELTON said  his concern is that two  thresholds are being                                                               
applied: one a  reasonable threshold; the other  is reasonable up                                                               
to $1.5 million. He  said it sounds as though that  may not be of                                                               
concern to others.                                                                                                              
CHAIR OGAN said  he believes the committee needs  to establish on                                                               
the   record  that   the  legislature's   intent  is   that  each                                                               
application cannot exceed  $1.5 million but it does  not limit it                                                               
to only one application. He stated,  "We may wish to put language                                                               
in there  that there  can be  more than  one application  just to                                                               
make it really clear so creative lawyers don't get creative."                                                                   
SENATOR ELTON suggested getting  that language from Mr. Dickinson                                                               
rather than himself.                                                                                                            
MR.  DICKINSON drew  members' attention  to  AS 43.82.160,  which                                                               
addresses   multiple  applications   for  similar   or  competing                                                               
qualified projects and said HB  16 says the limit per application                                                               
is $1.5 million.                                                                                                                
CHAIR OGAN felt that clarified the issue.                                                                                       
MR.  MARK  MYERS,  Director  of  the Division  of  Oil  and  Gas,                                                               
Department  of  Revenue,  stated  support  of  the  project.  The                                                               
division recognizes,  particularly with the North  Slope project,                                                               
with  over  35  TCF  approved  and over  100  TCF  of  additional                                                               
potential  gas,  the  gas pipeline  will  enable  development  of                                                               
Alaska's  incredible  gas resources  for  at  least the  next  50                                                               
years. He stated  HB 16 sets the stage  for broad-based technical                                                               
negotiations between project sponsors and the administration.                                                                   
CHAIR OGAN  said there is  a noticeable difference in  the number                                                               
of people testifying  today and the number that  testified at the                                                               
last Joint Natural  Gas Pipeline Committee hearing.  He asked Mr.                                                               
Myers his read on that change.                                                                                                  
MR. MYERS  said the state  is looking  at a good  opportunity for                                                               
development of  gas due to higher  gas prices. He noted  the last                                                               
year   has  illustrated   that   supply  in   North  America   is                                                               
problematic.  Overall, people  are  more optimistic  about a  gas                                                               
line, especially  with the war in  the Persian Gulf. He  said the                                                               
three major producers  on the North Slope are  very interested in                                                               
the project,  as are individual  producers. He could  not explain                                                               
why they  were not at today's  meeting, but he believes  they are                                                               
more optimistic  about the project  now than they have  been over                                                               
the last few years.                                                                                                             
CHAIR OGAN pointed out that HB 16  is written so that it grants a                                                               
short-term window  of two years and  makes no mention of  a route                                                               
or the location of the gas. He  reads that to mean a company that                                                               
wants to  build a pipeline  over the  next two years  could apply                                                               
for the incentives  as long as the company could  produce 500 BCF                                                               
over the next 20 years. He asked Mr. Myers if he agrees.                                                                        
MR. MYERS said  he does agree. The standard is  broad; it applies                                                               
statewide and  includes GTL and  LNG projects. He said  he agrees                                                               
with  Representative Fate's  statement that  the state  could not                                                               
permit  an over-the-top  pipeline  under  AS 38.35.017(b),  which                                                               
does not  allow the commission  to issue  a lease for  a pipeline                                                               
across  state  land  in  or  adjacent to  the  Beaufort  Sea  for                                                               
pipeline  right-of-way  purposes  to  authorize  construction  or                                                               
operation of  a natural gas  pipeline.   However, that is  not to                                                               
say fiscal  terms on a pipeline  could not be negotiated  or that                                                               
one could never be permitted under current law.                                                                                 
CHAIR  OGAN  asked   if  that  would  not   prevent  the  federal                                                               
government from  doing it,  although it  can't traverse  ANWR and                                                               
would have to put  a pipeline three miles off of  the coast to be                                                               
in federal water.                                                                                                               
MR. MYERS said that is correct.  The pipeline would have to cross                                                               
state waters  at some  point and  get from  Prudhoe Bay  to Point                                                               
Thompson and over.                                                                                                              
CHAIR OGAN asked if GTLs  would be transported in the TransAlaska                                                               
MR. MYERS said under the definition  of the project, a GTL or LNG                                                               
project would qualify.  He referred to subsection (C)  on page 2,                                                               
line 19.                                                                                                                        
CHAIR OGAN asked if a  qualified group could negotiate tax breaks                                                               
on a GTL plant that might affect the North Slope Borough.                                                                       
MR. MYERS said that could be done.                                                                                              
CHAIR OGAN  said it  is his  opinion that  GTLs should  be talked                                                               
about in a  separate discussion. He referred to  language on page                                                               
3, lines 11 and 12, and asked who "has a dog in that fight?"                                                                    
MR.  MYERS said  he believes  Representative Fate  addressed that                                                               
question when  he said  the threshold is  high enough  to require                                                               
parties  to   be  very  serious   about  the  project   and  have                                                               
significant capitalization. He  said the intent was to  try to be                                                               
inclusive to capture more potential sponsors.                                                                                   
CHAIR OGAN asked if Anadarko would qualify.                                                                                     
MR. MYERS said  depending on the project, he  believes that could                                                               
CHAIR OGAN asked if the  North Slope Regional Corporation or Cook                                                               
Inlet Regional Corporation could qualify.                                                                                       
MR.  MYERS replied,  "Mr.  Chairman, I  believe  a consortium  of                                                               
Native  corporations  certainly  would  have  the  net  worth  on                                                               
several potential projects."                                                                                                    
CHAIR OGAN  asked if  Mr. Myers  could think  of anyone  else who                                                               
would qualify.                                                                                                                  
MR. MYERS said that some  of the major pipeline companies outside                                                               
of the state could.                                                                                                             
SENATOR ELTON  said he has  no problem  with the bill  as written                                                               
but the bill  cannot be heard in the Senate  Finance Committee on                                                               
Thursday unless it moves from committee today.                                                                                  
CHAIR OGAN said he would like to  work with the bill sponsor on a                                                               
few details so he will hold it in committee one more day.                                                                       

Document Name Date/Time Subjects