Legislature(2003 - 2004)

04/02/2003 03:35 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 informed members that  a proposed committee substitute                                                               
had been  prepared. He  noted a  new Sec.  43.82.100(1)(A), which                                                               
reads: "the transportation of North  Slope natural gas by natural                                                               
gas  pipeline  to   one  or  more  markets,   together  with  any                                                               
associated processor treatment;" on page 2.                                                                                     
                                                                                                                                
He  told members  that  he and  the bill  sponsor  had a  lengthy                                                               
discussion  about  paragraph  (C),  which relates  to  any  other                                                               
technology.  The issue  is the  commercialization of  North Slope                                                               
gas  through  a  transmission  line  down  to  the  Lower  48  or                                                               
tidewater, which this  bill allows. The concern  was that playing                                                               
with that language could compromise  the possibility of using LNG                                                               
for the petrochemical  industry in the state. He  and the sponsor                                                               
agreed to  [the new] language  because if this [act]  is expanded                                                               
to other projects, the legislature will be in the loop.                                                                         
                                                                                                                                
REPRESENTATIVE FATE  acknowledged that  he and Chair  Ogan worked                                                               
on the change in the committee  substitute and the only change is                                                               
the addition  of the  North Slope. That  addition should  not, in                                                               
the opinion  of legal counsel  Jack Chenoweth, prevent  other gas                                                               
from  flowing through  the pipe  if that  gas were  available. He                                                               
said this  is the same  bill that  he presented to  the committee                                                               
before, with that  one exception. He believes this  bill is still                                                               
a "clean" bill. He urged the committee to support the measure.                                                                  
                                                                                                                                
CHAIR OGAN announced the committee would take public testimony                                                                  
and that Senator Lincoln was present.                                                                                           
                                                                                                                                
MR. DAVE MCDOWELL, Director of External Affairs for BP's Alaska                                                                 
Gas Business, gave the following testimony.                                                                                     
                                                                                                                                
     As you know, significant time  and effort and money has                                                                    
     been  dedicated  to  develop   a  viable  gas  pipeline                                                                    
     project  and  to  commercialize Alaska's  enormous  gas                                                                    
     resource.  Through 2002  and  continuing  on into  this                                                                    
     year, BP  has undertaken further technology  and design                                                                    
     optimization work  in an effort  to reduce the  cost of                                                                    
     this  $20  billion  project.  However,  technical  work                                                                    
     alone  won't  be  sufficient  to  make  an  Alaska  gas                                                                    
     pipeline a reality.                                                                                                        
                                                                                                                                
     Before  a project  can proceed  to  the next  expensive                                                                    
     stage,  three  key  government actions  are  needed:  a                                                                    
     clear  and  predictable  regulatory  process  with  the                                                                    
     Canadian  government and  First  Nations;  a clear  and                                                                    
     predictable state  fiscal framework for gas  in Alaska;                                                                    
     and  third,  the  passage  of  important  U.S.  federal                                                                    
     legislation.  While  success  is needed  on  all  three                                                                    
     fronts, the one  thing Alaska itself can  do to advance                                                                    
     an  Alaska gas  pipeline is  to work  with industry  to                                                                    
     develop  a fiscal  framework  that provides  confidence                                                                    
     that  the rules  of  the game  are  clear and  certain.                                                                    
     Achieving a mutually agreed framework  will also send a                                                                    
     powerful  signal to  Washington,  D.C.  that Alaska  is                                                                    
     ready to see a project advance.                                                                                            
                                                                                                                                
     That's why  we believe  reauthorizing the  stranded gas                                                                    
     act  by HB  16 is  a  good idea.  HB 16  can provide  a                                                                    
     framework that supports negotiation  toward a clear and                                                                    
     predictable fiscal  regime in the State  of Alaska and,                                                                    
     as such,  it will help  to support forward  progress on                                                                    
     North  Slope  gas  commercialization. And,  of  course,                                                                    
     under  any  circumstance,  agreements worked  with  the                                                                    
     state require legislative review and approval.                                                                             
                                                                                                                                
     We do believe  it's important that the  bill retain its                                                                    
     focus   and  simplicity   as  it   moves  through   the                                                                    
     legislative  process.  Otherwise  there's  a  potential                                                                    
     risk  that the  bill becomes  burdened with  extraneous                                                                    
     provisions.                                                                                                                
                                                                                                                                
     In closing,  I'd like  to say  we're encouraged  by the                                                                    
     priority and  attention this bill has  received so far.                                                                    
     We hope  that it continues  and we stand ready  to work                                                                    
     productively with the state toward  a clear and certain                                                                    
     fiscal  regime  that  will   support  North  Slope  gas                                                                    
     commercialization.  Thanks  for  the  opportunity,  Mr.                                                                    
     Chairman. We'd be happy to  take questions if there are                                                                    
     any.                                                                                                                       
                                                                                                                                
CHAIR OGAN  told Mr. McDowell that  this bill is a  high priority                                                               
and  is  being expedited  through  the  legislative process.  The                                                               
legislature has been  told that a negotiating team  will be ready                                                               
to  go at  an  early  date. The  bill  crosses  party lines.  The                                                               
legislature hopes  the producers negotiate  in good faith  and do                                                               
everything  possible to  get North  Slope gas  commercialized. He                                                               
thanked Mr. McDowell for his testimony.                                                                                         
                                                                                                                                
MR. MCDOWELL thanked  the Chair and committee  members for making                                                               
this legislation a priority.                                                                                                    
                                                                                                                                
SENATOR ELTON  moved to adopt  the proposed  committee substitute                                                               
(Version W) for HB 16(FIN) am.                                                                                                  
                                                                                                                                
There being  no objection,  CHAIR OGAN  announced that  Version W                                                               
was adopted.                                                                                                                    
                                                                                                                                
MR.  ROBBIE  SCHILHAB, the  Alaska  Gas  Development Manager  for                                                               
Exxon Mobil Production Company, told members:                                                                                   
                                                                                                                                
     Alaska North Slope gas is  an important asset for Exxon                                                                    
     Mobil with a gross known  resource of 35 trillion cubic                                                                    
     feet (TCF). Exxon Mobil owns  over one-third of the gas                                                                    
     and  is the  largest gas  interest owner  on the  North                                                                    
     Slope. We've been diligently working  for over 30 years                                                                    
     to  commercialize this  gas  since  discovery in  1968,                                                                    
     spending more than $150 million on this effort.                                                                            
                                                                                                                                
     Exxon  Mobil appreciates  the  interest  of the  Alaska                                                                    
     Legislature  in considering  legislation that  can help                                                                    
     progress  commercialization of  North Slope  gas. Exxon                                                                    
     Mobil  supports   legislation  that   reauthorizes  the                                                                    
     stranded gas act  with provisions to allow  its use for                                                                    
     all  potential  technologies.  The act  allows  project                                                                    
     sponsors in  the state to  establish a  fiscal contract                                                                    
     that defines how Alaska revenues  will be determined in                                                                    
     a  manner  that would  be  simple  to apply  and  would                                                                    
     minimize  the   possibility  of  costly   disputes  and                                                                    
     litigation.                                                                                                                
                                                                                                                                
     While a  pipeline project is the  most promising option                                                                    
     to date, it is not  currently commercially viable. Even                                                                    
     though  that  is  the  case today,  we  believe  it  is                                                                    
     important to put the framework in place now.                                                                               
                                                                                                                                
     Regardless   of  the   option  or   options  that   are                                                                    
     ultimately chosen  to commercialize the  gas, achieving                                                                    
     fiscal  certainty   will  be   an  important   step  in                                                                    
     progressing the project. The  risks resulting from such                                                                    
     a large  investment with a  long payout period  make it                                                                    
     imperative that  the sponsors  have the  opportunity to                                                                    
     work  with   the  state  to  establish   a  stable  and                                                                    
     appropriate fiscal system.  Exxon Mobil recommends that                                                                    
     the   legislature   avoid    placing   any   additional                                                                    
     requirements  or hurdles  in  this  legislation. As  we                                                                    
     said  earlier,  let's keep  it  clean.  Any project  to                                                                    
     commercialize  North  Slope  gas  will  be  a  marginal                                                                    
     project economically due to  the distance from markets.                                                                    
     Therefore,  any  mandates  or  additional  requirements                                                                    
     should  be avoided  as they  could  increase costs  and                                                                    
     hamper  or   delay  a  project   becoming  commercially                                                                    
     viable.                                                                                                                    
                                                                                                                                
     Exxon  Mobil  supports  the  passage  of  HB  16  as  a                                                                    
     positive step  in the commercialization of  North Slope                                                                    
     gas. We're also simultaneously  pursuing the passage of                                                                    
     U.S.  federal enabling  legislation  that will  provide                                                                    
     the  regulatory framework  for  securing the  necessary                                                                    
     federal  permits. Again,  thank  you  Mr. Chairman  for                                                                    
     allowing  me to  comment  on this  bill  today. I'd  be                                                                    
     happy to answer any questions you might have.                                                                              
                                                                                                                                
SENATOR SEEKINS noted that Mr.  Schilhab said the North Slope gas                                                               
delivery system  is not  economically viable  now and  asked what                                                               
will make a project commercially viable.                                                                                        
                                                                                                                                
MR.  SCHILHAB   said  several  factors   could  make   a  project                                                               
economically viable. The sponsors and  owners of the gas continue                                                               
to  work toward  those ends,  primarily in  the area  of reducing                                                               
capital costs.  They are looking  at construction  techniques and                                                               
new  materials  to  find  breakthroughs  to  reduce  the  overall                                                               
capital costs. He  said they have also talked  about reducing the                                                               
rent, which comes  in many forms. That could be  done in the area                                                               
of the government framework: getting  the permit process in place                                                               
and  getting certainty  in the  fiscal terms  they would  operate                                                               
under to help reduce the risk.                                                                                                  
                                                                                                                                
SENATOR SEEKINS asked what the risk factor is.                                                                                  
                                                                                                                                
MR. SCHILHAB  said there are  numerous risks, both  political and                                                               
fiscal, to  this project  as it  is a  large undertaking.  If the                                                               
project  is built  based on  the royalty  and taxation  scheme in                                                               
place today,  any changes down the  road would create a  big risk                                                               
because the  investor will  not know  what the  cash flow  or tax                                                               
bill will  be. In addition to  the fiscal risk, building  a high-                                                               
pressure pipeline  over the required  distance brings  risks that                                                               
involve construction techniques and materials.                                                                                  
                                                                                                                                
SENATOR SEEKINS  said he  has not  been able to  get a  handle on                                                               
what   challenges  must   be  overcome   to  make   this  project                                                               
commercially viable  and is  been unable  to make  an independent                                                               
evaluation without knowing the risks.                                                                                           
                                                                                                                                
CHAIR  OGAN told  members that  last year  the Joint  Natural Gas                                                               
Pipeline Committee  spent about $500,000 on  consultants and held                                                               
hours  and hours  of hearings  on this  issue but  that committee                                                               
never produced a final work  product. The committee never got any                                                               
definitive numbers  from the  producers because  that information                                                               
was proprietary.  He said he  has no  doubt, from looking  at the                                                               
bigger picture  of the price of  gas and expense of  the project,                                                               
that the legislature  has to be mindful that  some incentives are                                                               
necessary  from the  federal government  in the  form of  a floor                                                               
price, otherwise the  well head value could be  negative. He then                                                               
commented that  one of  the state's concerns  is access  by other                                                               
producers who might  not be primary owners of  this pipeline. The                                                               
state has issued leases on the  North Slope for the first time to                                                               
develop gas.  The producers have  invested a  considerable amount                                                               
of money and they are not  entirely certain they will have access                                                               
to the pipeline to sell that gas.                                                                                               
                                                                                                                                
MR. SCHILHAB  said the  committee should  feel some  comfort from                                                               
the  fact that  the pipeline  would be  regulated by  the Federal                                                               
Energy Regulatory  Commission (FERC). Once this  pipeline project                                                               
goes forward, the owners of  the pipeline would file applications                                                               
with  FERC and  go through  the open  season process.  During the                                                               
open season  period, any company that  wants to ship gas  on that                                                               
pipeline  can nominate  its gas.  That procedure  is overseen  by                                                               
FERC and is non-discriminatory.  Those companies would enter into                                                               
contracts with the pipeline owner.                                                                                              
                                                                                                                                
CHAIR  OGAN  questioned  whether  FERC  directly  regulates  open                                                               
seasons or  whether open  seasons are  based on  an understanding                                                               
and agreement between the producers and the people who have gas.                                                                
                                                                                                                                
MR. SCHILHAB  said in the  normal run  of things, FERC  would not                                                               
regulate the open season. However,  the enabling legislation that                                                               
is part  of the federal  energy bill contains a  provision saying                                                               
that  FERC would  script the  way the  open season  process would                                                               
work for this particular project.                                                                                               
                                                                                                                                
CHAIR OGAN said  that is assuming the  federal legislation passes                                                               
and the provision remains in the bill.                                                                                          
                                                                                                                                
MR. SCHILHAB  agreed but said  if that provision does  not remain                                                               
in the  bill, FERC  will still  have oversight  in that  it would                                                               
have to issue the permit  of necessity and public convenience. If                                                               
FERC felt discrimination  was involved during an  open season, it                                                               
could step forward and use its power over issuing permits.                                                                      
                                                                                                                                
CHAIR OGAN said  that is not the impression he  got from the FERC                                                               
Chairman  who  he  met  with  last   week.  He  said  it  is  his                                                               
understanding  that is  a  contractual  relationship between  the                                                               
owners of the  pipeline and the producers. He said  it's an issue                                                               
the  legislature will  continue  to monitor.  The legislature  is                                                               
interested  in encouraging  gas  development  as something  other                                                               
than a byproduct of oil exploration.                                                                                            
                                                                                                                                
SENATOR ELTON clarified that he  meant to say CSHB 16(RES) rather                                                               
than CSHB 16(FIN)am  in his earlier motion to  adopt the proposed                                                               
committee  substitute.   He  noted  that  Chair   Ogan  correctly                                                               
identified CSHB 16(RES) as Version W.                                                                                           
                                                                                                                                
CHAIR OGAN said  with no objection, the correction  was noted. He                                                               
then  said he  wanted  to  establish, for  the  record, that  the                                                               
committee  has  received a  legal  opinion  from Jack  Chenoweth,                                                               
legal counsel, who stated:                                                                                                      
                                                                                                                                
     In  my judgment,  as long  as  the project  principally                                                                    
     involves  movement of  the North  Slope natural  gas to                                                                    
     market, the  pipeline contemplated  could be  used also                                                                    
     to transport gas from other sources.                                                                                       
                                                                                                                                
He asked Mr. Banks if he concurs with the opinion.                                                                              
                                                                                                                                
MR. KEVIN BANKS,  Division of Oil and Gas,  Department of Natural                                                               
Resources (DNR),  said the division's  principal concern  is that                                                               
North Slope  gas certainly  would include  gas produced  from the                                                               
foothills. He stated:                                                                                                           
                                                                                                                                
     I think your  concurrence with that opinion  - it seems                                                                    
     to me that if most of  the gas flowing in this pipeline                                                                    
     is coming  from the  North Slope, that  production from                                                                    
     other sources  along the route  could be  also included                                                                    
     and that HB 16 would  allow us to negotiate those kinds                                                                    
     of terms if need be.                                                                                                       
                                                                                                                                
CHAIR  OGAN indicated  that  he  and the  bill  sponsor hope  the                                                               
language that allows other gas to  be put into the pipeline might                                                               
spur interest  in gas  development along  the pipeline  route, or                                                               
from  the Cook  Inlet  area if  there  was a  big  find there  or                                                               
anywhere else. He asked Mr. Banks if he concurs.                                                                                
                                                                                                                                
MR. BANKS  said he  believes that would  be the  best alternative                                                               
for the state and agrees that  is the way to treat the expression                                                               
"principally involved."                                                                                                         
                                                                                                                                
CHAIR OGAN thanked  Mr. Banks. He then asked who  would be on the                                                               
negotiating team.                                                                                                               
                                                                                                                                
MR. MARK  MYERS, Director of  the Division  of Oil and  Gas, DNR,                                                               
said  he  shares  the  committee's curiosity.  He  then  said  he                                                               
concurs with  the comments made  earlier. He believes  adding the                                                               
North Slope  phrase is fine and  believes HB 16 is  still a great                                                               
bill.                                                                                                                           
                                                                                                                                
SENATOR  SEEKINS said  one of  his  campaign promises  was to  do                                                               
whatever  he could  to  get the  God-given  natural resources  in                                                               
Alaska to market  to put new money into the  economy, and he does                                                               
not care where  the resources come from. He said  if a project in                                                               
Ketchikan qualified,  he would want  to provide  these incentives                                                               
to get those resources to  market as soon as possible. Therefore,                                                               
while he does not object to the  bill, he does not care what area                                                               
of the  state the natural gas  comes from. He believes  this kind                                                               
of an incentive should be applied  across the entire state to get                                                               
any project going.                                                                                                              
                                                                                                                                
CHAIR OGAN said he believes  it is important that the legislative                                                               
branch  retain  its  policy-making authority  on  a  case-by-case                                                               
basis because this bill has  far reaching implications. It allows                                                               
the commissioner  of the Department  of Revenue to  preempt local                                                               
law and  local taxation.  The municipalities  have signed  off on                                                               
this  particular  issue  for  this   project.  He  fears  if  the                                                               
legislation  is  too  broad,  the  commissioner  will  have  that                                                               
authority for  any project anywhere. He  believes the legislature                                                               
should make  sure the affected  communities have  the opportunity                                                               
to publicly  weigh in and  that the  legislature needs to  make a                                                               
conscious  decision to  delegate the  authority to  the executive                                                               
branch.                                                                                                                         
                                                                                                                                
SENATOR SEEKINS said  he understands that and would  plan to make                                                               
a conscious  effort to take a  look at any project  that surfaces                                                               
between now  and the sunset  date [2005]. He believes  in opening                                                               
the door to consideration of projects anywhere in the state.                                                                    
                                                                                                                                
CHAIR  OGAN  said the  door  could  be  easily opened  by  simply                                                               
extending  the  sunset date  but  he  wants  to make  sure  these                                                               
projects are done with the local governments' concurrence.                                                                      
                                                                                                                                
SENATOR LINCOLN said  she reads the legislation to  open the door                                                               
wide. She  cited Mr. Chenoweth's  memo, which reads,  "A proposed                                                               
project  is not  expected to  serve exclusively  as the  means to                                                               
move North  Slope stranded gas  and should have some  latitude so                                                               
as  to  the sources  of  natural  gases  that may  eventually  be                                                               
transported." She said it opens it  up beyond the North Slope but                                                               
identifies the North Slope as the primary area.                                                                                 
                                                                                                                                
SENATOR SEEKINS replied,  "If the door's open, call  it open." He                                                               
repeated  he  is not  criticizing  the  legislation, he  is  just                                                               
clarifying his philosophy.                                                                                                      
                                                                                                                                
CHAIR OGAN thought  it was fair to say that  a company that found                                                               
gas in the  Mat-Su or Kenai would  not be able to  connect to the                                                               
gas line under this bill. That  is a separate issue that he would                                                               
be  happy  to  consider  with the  concurrence  of  the  affected                                                               
communities because it affects their taxing powers.                                                                             
                                                                                                                                
SENATOR  WAGONER  moved  SCS   CSHB16(RES)  from  committee  with                                                               
individual recommendations and its attached fiscal notes.                                                                       
                                                                                                                                
CHAIR OGAN announced that with  no objection, the motion carried.                                                               
He then announced a five minute at-ease.                                                                                        

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