Legislature(2003 - 2004)
03/31/2003 03:39 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 that. CHAIR OGAN asked if this Act could include any natural gas projects. 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 percent?" 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 issue. 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 coordinated. CHAIR OGAN asked who will be involved in the open season negotiations. 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 application. 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 stated: ...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 project. 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 reminder. 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 possibility. 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 testify. 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 pipeline. 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 happen. 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.