Legislature(2013 - 2014)BUTROVICH 205

02/07/2014 03:30 PM RESOURCES


Download Mp3. <- Right click and save file as

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

Document Name Date/Time Subjects
SB 138 vs A.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SB 138 Introduction.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SB 138 Sectional Analysis.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SB 138 Fiscal Note DCCED.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SB 138 Fiscal Note DNR.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SB 138 Fiscal Note DOR.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SB 138 Fiscal Note Fund Cap.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SRES SB 138 Sectional Analysis Presentation.pdf SRES 2/7/2014 3:30:00 PM
SB 138
SRES SB 138 Putting hte HOA and MOU in Context 20140207.pdf SRES 2/7/2014 3:30:00 PM
SB 138