Legislature(2007 - 2008)HOUSE FINANCE 519
04/27/2007 01:30 PM House FINANCE
| Audio | Topic |
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| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 177 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 27, 2007
1:44 P.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 1:44:35 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Les Gara
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas Jr.
MEMBERS ABSENT
Representative Richard Foster
ALSO PRESENT
Representative Anna Fairclough; Representative Mark Neuman;
Representative Woodie Salmon; Tom Irwin, Commissioner,
Department of Natural Resources; Pat Galvin, Commissioner,
Department of Revenue; Kurtis Gibson, Acting Deputy
Director, Division of Oil and Gas, Department of Natural
Resources
SUMMARY
HB 177 An Act relating to the Alaska Gasline Inducement
Act; establishing the Alaska Gasline Inducement
Act matching contribution fund; providing for an
Alaska Gasline Inducement Act coordinator; making
conforming amendments; and providing for an
effective date.
HB 177 was HEARD and HELD in Committee for further
consideration.
HOUSE BILL NO. 177
An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming
amendments; and providing for an effective date.
1:46:55 PM
Co-Chair Meyer disclosed a potential conflict of interest
stating he works for Conoco-Philips during the legislative
interim; he asked to be excused from participating.
Representative Joule OBJECTED. Co-Chair Chenault commented
that Co-Chair Meyer would be required to participate in the
meetings.
TOM IRWIN, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
noted the Administration is diligently working on the Alaska
Gas Inducement Act (AGIA), to move Alaska to move forward.
He voiced full support, stating that the purpose of the plan
takes a business approach. The fair open process gears the
proposal request, trading Alaska's gas as a business to move
the gasoline forward.
Commissioner Irwin addressed gas volumes belonging to
Alaskans. There are significant volumes, over thirty-six
trillion cubic feet of gas, which has been identified when
looking for oil. Those are certifiable reserves that can be
recovered.
Commissioner Irwin directed his comments to the producer's
intent to take care of their business; of course, the
Administration's work is to protect the State's business.
The newest estimate of identified gas is 262 trillion cubic
feet, which is a significant quantity. Alaska is rich with
gas potential.
Commissioner Irwin mentioned gas hydrates, identified by the
U.S.G.S. as over 32,000 trillion cubic feet. At present
time, the recovery technology is not available & may never
happen; however, there is significant time to work on the
gas hydrates. The bottom line is that Alaska has a
significant future in gas reserves.
1:52:44 PM
Commissioner Irwin addressed previous negotiation language,
claiming that if the State only negotiates with the
producers, no one wins. The previous deal gave away all
judicial rights of the State. If that language passed,
during the next 45-years, our upcoming generation would have
no judicial right on the slope. The State entered into a
highly unbalanced arbitration process. The State, in front
of a single arbitrator, was responsible for showing non-
diligence, through surrendering judicial rights and
restricting the ability to sue. That bill would eliminate
the State's administrative rights to manage leases. It was
not acceptable that large quantities of money could be lost
through various definitions of the contract. AGIA was
created through determining how "business" is handled in the
world. Proposals are common. At this time, Alaska is not
trusted by any of the companies.
Commissioner Irwin recommended providing inducements to
certain areas and protecting the State's future gas
development. The Administration has defined "must have's",
including creating an incentive program, in the amount of
$500 million, not a gift. He noted the intent to make a
fair bidding process to help move the project forward. The
State defines the variables.
2:00:08 PM
Commissioner Irwin stated it is critical for Alaska to
maintain pipeline expansion and fair tariffs. If companies
do not have a certainty to be able to monetize their value,
they do not explore. He reiterated the need for fair
tariffs and an "expandable" gas line. If the line moves
through Canada, two-thirds of the rates could be "rolled-
in". The Administration maintains the fields so that they
are affordable and expandable. There are no other options.
He emphasized that there are no risks to the State through
the AGIA plan. There would be clear definition through a
fair and open process. When the plan is chosen, then the
Department will come back to the Legislature.
2:02:59 PM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, distributed
a handout: "The Palin-Parnell Administration presents AGIA
- the Alaska Gasline Inducement Act". (Copy on File).
Slide 2 highlights AGIA designed to be a commercial vehicle
to create a competitive playing field, providing a pipeline
on Alaska's terms through a transparent inducement process.
2:04:59 PM
Commissioner Galvin noted Slide 3:
· AGIA uses competitive bidding, not
negotiation;
· Successful bidding process requires AGIA's
inducement and without inducements, there
rd
would be no 3 party bidders. Without
bidders, the State has no ability to get a
pipeline on its own terms.
Representative Joule mentioned the competitive process,
recalling that TransCanada had submitted an application but
since has backed away. He asked which companies remain in
the bid process. Commissioner Galvin explained that the
bill attempts to strike a necessary balance to provide the
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State with a credible opportunity for the 3 parties
entering the process. The identified parties within that
group are:
1. Ambridge
2. TransCanada
3. Mid American
Commission Galvin pointed out that the message from
TransCanada has been "warm" and have concerns with the
portion of AGIA that requires the State to mandate the
applicant to commit to obtain a Federal Energy Regulatory
Commission (FERC) certificate even if the season is not
successful. Mid American has indicated they are comfortable
with the current bill. AGIA will only succeed through
maintaining competition.
Commissioner Irwin interjected that no producer had
specifically indicated they would not participate.
TransCanada has already invested $200 million dollars in the
process. All the companies are interested in the reserves,
but want to make sure it is a fair process. There are many
other companies closely watching what Alaska is doing. He
reiterated the value of a fair process.
Representative Gara asked about other all-Alaskan lines.
Commissioner Galvin recognizes that the Port Authority
presents a unique case and do have a viable project, which
could come forward as a proposal. Criteria and evaluation
of all projects will compare them.
2:15:10 PM
Representative Joule noted his concern about which options
were best for Alaska. He asked if a single application
would be fair. Commissioner Galvin replied the State does
not know; it should be determined through an evaluation of
each proposal. If an application meets all the criteria,
the bill proposes the commissioners make that determination.
Any proposal is based on expectation. Commissioner Irwin
added that to date, there have been two confirmations made.
Once a competitive process is started, he anticipated other
producers coming on line.
2:18:42 PM
Commissioner Galvin pointed out the inducements indicated on
Slide 4:
· Midstream inducement of $500 million dollars,
reducing the licensee's project development
risks, especially the independent pipeline
licensee; and
· Upstream tax and royalty inducements coupled
with the licensed midstream project to make
the license more valuable, encouraging open
season participation. It ensures that the
State would stick with its licensed partner.
· The requirement to obtain a pipeline
certificate reduces the overall project risks
& improves the State's strategic position.
2:27:30 PM
Commissioner Galvin said Slide 5 shows a proposed Project on
State terms:
· By creating a more competitive playing field,
the State can specify some "must haves".
· Such factors focus on the State's future such
as creating a pipeline quickly, competitive
and vibrant oil and gas industry, jobs and
careers not only from the pipeline, but also
from a competitive oil patch, bringing gas to
Alaskans.
Representative Thomas inquired about the job portion of the
negotiated project labor negotiation. Commissioner Galvin
explained that it is the intent of the Administration to
provide only a "broad" overview at this meeting. At the
meeting scheduled for 4/28/07, the Department will provide
an analysis of each section, reiterating the intent for
Alaskan hire.
2:30:11 PM
Commissioner Galvin noted Slide 6 indicates the State's
"must haves" obtained through the pipeline tariff and access
terms that ensure a competitive oil and gas industry:
· Competitive oil and gas industry flowers if
pipeline ownership provides no upstream
competitive advantage;
· Jobs and careers for Alaskans would be
maximized by ensuring a competitive upstream
industry; and
· Cheap gas for Alaskans will be enjoyed if the
pipeline expands regularly.
2:30:58 PM
Commissioner Galvin explained that Slide 7 illustrates a
State of Alaska terms project.
· A pipeline more quickly
· The required minimum of 70/30 debt/equity
ratio, ensuring reasonable base tariffs
· Expansion requirements ensuring the gas found
by any party could access the pipeline
· Rolled-in rate requirements guaranteeing that
all parties have the economic incentive to
explore for the gas. The competition for oil
and gas and all of Alaska's gas could move
into that pipeline.
2:35:46 PM
KURTIS GIBSON, ACTING DEPUTY DIRECTOR, DIVISION OF OIL AND
GAS, DEPARTMENT OF NATURAL RESOURCES, explained that Slide 8
represents the costs of delays on the project and/or the
benefit resulting from the acceleration of getting under
way. With prices at the $7 dollar range, the project
acceleration represents nearly five times what the State's
capital contribution is. Delays are costly. The AGIA
process establishes a competitive process for developing a
framework for the State. The slide indicates a $500 million
dollar capital contribution value.
2:37:45 PM
Mr. Gibson continued, Slide 9 represents the tariff & State
revenue effects of a debt-equity structure, referenced in
the FERC rate-making. The slide does not indicate anything
related to the capital structure of the project nor does
the bill. It would protect the State's low tariff interests
ensuring that no less than a 70/30 split would be used
instead of the mentioned split of 50/50, including the
associated tariff benefit of 41 cents. The State revenue
benefits would total approximately $2.5 billion dollars.
2:39:32 PM
Mr. Gibson addressed the expansion provisions indicated on
Slide 10. He pointed out the difference between the
likelihood and interest of expanding a pipeline, hinging on
whether the owner is an integrated energy company or
independent pipeline company. Integrated energy companies
will not commit capital to a project with roughly a 14%
projected rate of return. An independent pipeline company
is interested in projects with regulated and low-risk and
low-rates of return in the neighborhood of 12%-14%. In the
event that an explorer wanted to get the gas to the
pipeline, the expansion provisions not included and delays
could result, ultimately becoming a strong deterrent.
Mr. Gibson highlighted Slide 11, illustrating the expansion
provisions addressing the cost of delays to the explorer,
outlining net present value (NPV). He acknowledged that
expansion provisions exist and that a non-independent
pipeline company could act as the pipeline operator, which
could result in significant delays to the explorers.
2:42:18 PM
Representative Gara asked for more information on the net
present value (NPV) in relationship to time/valued money,
questioning if it were the same for the State as it would be
for a private investor. Mr. Gibson advised that the
discount rates apply to private enterprise as opposed to
those used by the government. The figures used indicate a
5% State discount rate in terms of delayed project costs.
Representative Gara questioned what had been factored into
the State's rate of return. Commissioner Galvin responded
that the nature of the question is determined by when it is
spent. He suggested that a 5% rate or discount return
factor is an appropriate cost approximation for opportunity
lost. The State recognizes different opportunities when
creating projected revenue streams. He maintained that the
State is better off having access to the money now for
investment purposes. He acknowledged that 5% is a lower
rate than most businesses want to assume. Mr. Gibson added
that there is a portion of the royalty revenue collected and
placed into the Permanent Fund Division included in the
General Fund.
2:46:43 PM
Representative Kelly observed the value of a present cost
calculation, pointing out the volatility of the oil industry
and the explosive price fluctuations. Mr. Gibson agreed
that price could be one of the most volatile factors.
Mr. Gibson spoke to Slide 14, the rolled in expansion
provision options. He mentioned that the cost-of-delays,
pointing out that all shipper prices could come down under
the FERC expansion. The transportation rate would be driven
up due to increases in fuel rates. There would be an
incrementally calculated transportation rate. Under the
lower 48 FERC regulations, there is a looping expansion,
which could drive the price up.
2:50:54 PM
Mr. Gibson reviewed Slide 12, which compares the AGIA
expansion rate policy to the normal lower 48 FERC policy.
He thought the AGIA mechanism would look different for
explorers under that, rolling in all the expansion costs up
to 115% of the shipper's tariff rate. The difference could
be a 15% up-lift of the original transportation costs.
2:52:57 PM
Mr. Gibson continued, Slide 13 indicates scenarios on how an
explorer should view the program depending if the expansion
rate treatment was rolled-in or incremental. Rolled-in
rates would be spread evenly to all shippers and within the
incremental, all the costs of the expansion, and fall upon
the expansion shipper.
2:55:14 PM
Commissioner Galvin pointed out that Slide 14 indicates the
transparency issues of the public making decision process.
The process will be competitive, not negotiated; bids will
be submitted, commented upon and then evaluated. A "winner"
should be chosen by the commissioners; their decision would
be reviewed by the Legislature.
Commissioner Galvin hoped the risks and inducements would
also be transparent, providing contrast to the previously
proposed contract. There would be a cap on the contribution
with a clearly defined role for the State.
Commissioner Galvin summarized that the State needs
competition to encourage participants to reach for the best
and most competitive proposal. Without competition, the
State is placed into a leveraged position of waiting for
producers to move the project ahead. AGIA creates a
competitive arena while establishing commercial incentives
for all interested parties.
2:59:29 PM
Representative Hawker requested further information
regarding the $10 million dollars of the previous
Administration. Commissioner Galvin agreed.
3:00:17 PM
In response to a question by Representative Gara,
Commissioner Galvin revisited Slide 13, explaining how
rolled-in rates encourage exploration. He reiterated that
the Administration is "excited" by the proposed AGIA plan; a
sectional analysis will be presented at the next scheduled
hearing on the bill.
3:01:45 PM
Representative Kelly requested information regarding how the
Administration intends to execute the plan. Commissioner
Galvin agreed to provide that data.
HB 177 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 3:02 P.M.
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