Legislature(2001 - 2002)
04/29/2002 01:56 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
April 29, 2002
1:56 P.M.
TAPE HFC 02 - 96, Side A
TAPE HFC 02 - 96, Side B
TAPE HFC 02 - 97, Side A
TAPE HFC 02 - 97, Side B
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 1:56 P.M.
MEMBERS PRESENT
Representative Bill Williams, Co-Chair
Representative Eldon Mulder, Co-Chair
Representative Con Bunde, Vice-Chair
Representative Eric Croft
Representative John Davies
Representative Richard Foster
Representative John Harris
Representative Bill Hudson
Representative Ken Lancaster
Representative Carl Moses
Representative Jim Whitaker
MEMBERS ABSENT
None
ALSO PRESENT
Representative Beth Kerttula; Representative Mark Chenault;
Representative Jeannette James; Representative Pete Kott;
Representative Beverly Masek; Representative Sharon Cissna;
Senator John Torgerson; Representative Brian Porter;
Representative Vic Kohring; Larry Persily, Deputy
Commissioner, Department of Revenue; Dr. Doug Reynolds,
Consultant for the Joint Oil and Gas Committee, Economist,
Legislative Contract; Patrick Kaufflan, Senate Resources
Committee, Senator John Torgerson.
PRESENT VIA TELECONFERENCE
Randy Hoffbeck, Tax Division, Department of Revenue,
Anchorage; Joe Marushack, Phillips Oil Alaska, Anchorage;
Rob Shilab, Exxon Mobil, Anchorage; Ken Conrad, British
Petroleum (BP), Anchorage; Bob Lohr, Division of Insurance,
Anchorage; Robin Procter, Emergency Medical Technician,
Anchor Port Fire Department, Homer; Ron Wilhoit, Anchor
Point Manager & Administrator, Homer; Steve Van Sant, State
Assessor, Department of Community & Economic Development,
Anchorage; David Tyler, Alaska State Fire Chiefs
Association, Fairbanks; Eric Mohrmann, Chena Goldstream
Volunteer Fire Department, Fairbanks.
SUMMARY
HB 6 An Act relating to optional exemptions from
municipal property taxes on residential property.
CS HB 6 (FIN) was reported out of Committee with a
"do pass" recommendation and with fiscal note #1
by the Department of Revenue.
HB 315 An Act requiring a single insurance provider for
all state employees and allowing small employers
to join as a group; and providing for an effective
date.
HB 15 was SCHEDULED but not HEARD.
HB 464 An Act relating to statewide school district
correspondence study programs.
HB 464 was SCHEDULED but not HEARD.
HB 489 An Act relating to cruelty to animals.
HB 489 was SCHEDULED but not HEARD.
HB 519 An Act authorizing priority treatment under the
Right-of-Way Leasing Act for an Alaska North Slope
natural gas project; expanding the scope for the
kinds of gas development projects that may become
qualified projects under the Alaska Stranded Gas
Development Act; extending the deadline for
submitting applications under the Alaska Stranded
Gas Development Act; exempting an Alaska North
Slope natural gas project from state property tax
and all municipal taxes during construction; and
providing for an effective date.
CS HB 19 (FIN) was reported out of Committee with
a "do pass" recommendation and with new fiscal
notes by the Department of Revenue and the
Department of Natural Resources.
#HB6
HOUSE BILL NO. 6
An Act relating to optional exemptions from municipal
property taxes on residential property.
REPRESENTATIVE JOHN DAVIES explained that HB 6 would allow a
municipality the option to increase the residential property
tax exemption from the current level of $10,000 to $40,000
dollars through voter approval. The exemption would apply
only to homes that are the primary residence.
He advised that Section 1 would raise the limit from $10,000
to $40,000 dollars. Section 2 would allow a municipality,
when approved by the voters, the ability to add an
additional $10,000 to the amount provided in Section 1 to
those residents donating time as a volunteer fire fighter or
emergency medical services.
Representative J. Davies recognized the burdens that are
placed on residential property owners, pointing that the
bill would grant greater relief from property tax. The bill
recognizes the commitment to the community by volunteer fire
fighters and those providing emergency medical services by
allowing municipalities the ability to increase their
property tax exemption another $10,000 dollars. The bill
would be entirely optional at the local level.
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
noted that the number indicated in the fiscal note was
correct. If every community took the full exemption allowed
under the statute and made up for that lost revenue by
raising the mill rate rather than cutting spending or
finding alternative revenue sources, could place a burden on
the oil and gas property owners. He requested that Mr.
Hoffbeck, the Department's Tax Division, testify regarding
specific questions. He added that the bill's passage could
amount to a $1.6 million dollar impact to the State.
RANDY HOFFBECK, (TESTIFIED VIA TELECONFERENCE), TAX
DIVISION, DEPARTMENT OF REVENUE, ANCHORAGE, commented that
Mr. Persily had adequately covered all information.
STEVE VAN SANT, (TESTIFIED VIA TELECONFERENCE), STATE
ASSESSOR, DEPARTMENT OF COMMUNITY & ECONOMIC DEVELOPMENT,
ANCHORAGE, offered to answer questions of the Committee.
DAVID TYLER, (TESTIFIED VIA TELECONFERENCE), ALASKA STATE
FIRE CHIEFS ASSOCIATION, FAIRBANKS, spoke in support of the
legislation. The legislation provides an opportunity for
the State to recognize the contributions of volunteers to
the community. He commented that there are two types of
volunteers in service, one being the young person who comes
to fire service as a career. The proposed incentive targets
those people, who are homeowners and who have families that
intend to stay in the community for many years. He
reiterated his support for the legislation.
ROBIN PROCTER, (TESTIFIED VIA TELECONFERENCE), EMERGENCY
MEDICAL TECHNICAN, ANCHOR PORT FIRE DEPARTMENT, HOMER, urged
support for HB 6. She claimed that the legislation would
help to address the retention of fire fighters. She stated
that it would provide a cost recovery recouping of
expenditures. The legislation would make it possible for
municipalities to provide a tax benefit for volunteers. In
a small way, that would assist them with the recovery of
some of the personal expenditures associated with their
effort. Volunteers not only respond to medical and fire
emergencies, but they must also attend a number of training
classes and continuing education to remain current on their
certification. Ms. Procter urged that Committee members
pass the bill. She commented that it would be a small
effort in showing appreciation and could be a significant
dividend in recruitment and retention issues.
RON WILHOIT, (TESTIFIED VIA TELECONFERENCE), ANCHOR POINT
MANAGER & ADMINISTRATOR, HOMER, explained that the fire
department was bound by federal mandates regarding the
number of minimum personnel on the operation of a fire site.
If there are not enough people, there are two choices,
attack the exterior or pursue operations and be out of
compliance. He noted that if he had more volunteers, he
could save more houses. Mr. Wilhoit added that anything
that could be done to help recruite and retain personnel
would help save lives and property.
ERIC MOHRMANN, (TESTIFIED VIA TELECONFERENCE), CHENA
GOLDSTREAM VOLUNTEER FIRE DEPARTMENT, FAIRBANKS, encouraged
members to support HB 6. He noted that volunteers
contribute approximately 23,000 hours of volunteer time in a
year. The bill recognizes the savings that volunteers
provide the State.
Vice-Chair Bunde asked about the Internal Revenue Service
(IRS) impact.
Representative Davies explained that it was not a repayment
for services but rather an appreciative recognition of
volunteer services. It would not be tied to a specific
number of hours. In the worse case scenario, the IRS could
tax the benefit.
Vice-Chair Bunde understood that in other cases of "in-kind"
services, those taxes had been taxed.
Representative Croft MOVED to ADOPT Amendment #1, #22-
LS0075\C.1, Cook, 4/17/02. He explained that the amendment
would address a potential ambiguity that came up in the last
Committee hearing. The amendment clarifies that only one
exemption could be used per household.
There being NO OBJECTION, Amendment #1 was adopted.
Representative Foster MOVED to report CSHB 6 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CS HB 6 (FIN) was reported out of Committee with a "do pass"
recommendation and with fiscal note #1 by the Department of
Revenue.
HOUSE BILL NO. 519
An Act authorizing priority treatment under the Right-
of-Way Leasing Act for an Alaska North Slope natural
gas project; expanding the scope for the kinds of gas
development projects that may become qualified projects
under the Alaska Stranded Gas Development Act;
extending the deadline for submitting applications
under the Alaska Stranded Gas Development Act;
exempting an Alaska North Slope natural gas project
from state property tax and all municipal taxes during
construction; and providing for an effective date.
Co-Chair Mulder advised that he had invited industry members
to provide Committee members a presentation on the gas
project study.
JOE MARUSHACK, (TESTIFIED VIA TELECONFERENCE), PHILLIPS OIL,
ANCHORAGE, introduced the "Alaska Producer Pipeline Update"
handout. (Copy on File). He referenced Page 4, Project
Overview from the handout, which:
· Developed feasibility cost estimates for a world-
class pipeline project, Gas Treatment Plant, and a
Natural Gas Line (NGL) facilities. The cost
estimates accounted for:
· $125 million spent for that phase of the project;
· 110 owner company representatives and over 1
million staff-hours (including contractors) with
about 20% in the field;
· Performed multiple environmental field studies
along 5,400 miles of right-of-way.
ROBBIE SHILAB, (TESTIFIED VIA TELECONFERENCE), EXXON ALASKA,
ANCHORAGE, referenced Page 5, the Conclusions:
· Project currently not commercially viable as the
risks outweigh the rewards. There is substantial
additional engineering work not justified at the
present time and the future activity must match
progress with governments and commercial
viability.
· Governments will play a key role in reducing
project costs and schedule risks. He noted the
U.S. Federal regulatory enabling legislation, the
NEW/First Nations regulatory process clarity and
the Alaska fiscal certainty.
KEN CONRAD, (TESTIFIED VIA TELECONFERENCE), BRITISH
PETROLEUM (BP), ANCHORAGE, referenced Page 7, the
Statistical Summary (Alaska to L-48). The project would
begin with a gas treatment plant moving the supply from
Alaska into an Alberta pipeline, moving into a NGL plant
along the way and then into Alberta to a L-48 pipeline.
· 4.5 (bcfd) pipeline design rate
· 5.6 (bcfd) expansion potential
· 24-28 compressor stations
· 1.2 - 1.4 million total pipeline horsepower
· 1,800 - 2,100 miles Alaska to Alberta
· 1,500 miles - Alberta to market
· 52 inches pipe diameter
· 2,000 - 2,500 (psi) operating pressure
· 5 - 6 million tons of steel
· 50 million + construction staff-hours
Mr. Conrad pointed out that Page 8 indicates the gas
treatment plant (GTP), located on the North Slope. The
picture indicates the central compression plant and the
central gas facility. The primary purpose of the plant
would be to remove carbon dioxide from the gas stream. The
facility would use as an amine system to remove the acid
gas, and then dehydration using glycol. The total cost
would be approximately $2.6 billion dollars. The average
fuel consumption would be over 150 million cubic feet a day.
Mr. Conrad commented that Page 9 shows the Alaska to Alberta
technical challenges. Those common challenges are:
· Permafrost
· River Crossings
· Skilled Labor
· Pipe availability
· Logistics
He continued, Page 10 indicates the elevation profile and
the route profiles for both the northern and southern
routes. The northern route takes a more gradual incline.
Mr. Conrad continued, Page 11 demonstrates the Alberta to
market route. He pointed out that it would run 1,469 miles
from Ft. Saskatchewan area to Chicago.
Mr. Conrad pointed out that Page 12 indicates Environmental
Field Studies:
· Vegetation & soil surveys;
· Wildlife, including threatened and endangered
species;
· Wetlands, fisheries, hydrology & water quality;
· Cultural & archaeology resources;
· Marine mammal studies, and
· Traditional knowledge consultation.
Mr. Marushack overviewed the project feasibility study
outlined on Page 14.
· Joint project feasibility work results in
significantly improved project definition and a
better understanding of the risks and
opportunities.
· Updated study results indicate higher capital
costs, increased volumes delivered, lower
operating costs, reduced fuel consumption, current
capital cost estimates have accuracy to
approximately +/-20%, and achieving lower costs
and less cost uncertainty would require
substantial future investment.
· The project continues to have significant risks
such as regulatory, political, and fiscal costs,
long-term prices and market volatility.
Vice-Chair Bunde understood that the producers would prefer
the northern route, as it would be shorter and less
challenging. He asked if incentives would continue to be
made available if the northern route was chosen.
Mr. Conrad emphasized that it was not the intention to move
forward with a project unless both governments supported it.
Routing concerns would be a decision made by the
governments. To make a project happen of this magnitude
requires the support of all governments.
Mr. Marushack added that Phillips would be "happy" to focus
on the southern route. He referenced Page 15, a Summary of
the Capital Costs and Tolls, comparing the southern and
northern routes. Alaska's project share for the southern
route would be $19.4 million dollars and for the northern
route, $18.6 million dollars. The uncertainty of each
project creates a +/- 20%.
Representative Croft understood that under federal
legislation, guaranteed $3.25/bbl price in Alberta or a
$3.75/bbl price within the U.S. market. At that range,
there would be a tariff even at the 20% number and that
would provide less than one dollar of minimum guaranteed
wellhead price.
Mr. Marushack explained that with the $3.25 price and given
the $1 dollar wellhead cost, the operating costs would still
have to pay the royalty and severance costs. That mechanism
currently covers only the market risks. The mechanism
referenced by Representative Croft would not cover capital
risks. The project is not design engineering and those
costs amount to hundreds of dollars. Any overrun in the
project would be directly reflected in higher tariffs.
There is no cost containment in the number. He emphasized
that the project has an extreme amount of risk and that
there is a lot of caution around the project.
Mr. Conrad added that to make the project successful, the
industry is attempting to reduce costs and other risks. The
project will require substantial future investment. There
is a history in Alaska of lawsuits resulting from regulatory
over-runs. He indicated that a +/- 20% had been the number
provided.
Representative Whitaker asked if the wellhead, less the
operating costs, would result in the pipeline or field
operational costs.
Mr. Marushack replied that it would result in costs for the
field operations.
Representative Whitaker remarked that the pipeline
operational costs would be included in tariff fees.
Mr. Marushack responded that would be the cost of the
pipeline operation plus the profit on that plus depreciation
and taxes.
Representative Whitaker asked if the operation would be
separate from the operation on the pipeline and if it would
include the return on the investment.
Mr. Marushack stated that what had been included was all the
operational costs of the pipeline and the gas treatment
plant and would include the servicing costs for those new
buildings. That price has nothing to do with what it will
take to get the gas to the treatment facility.
Mr. Conrad added that it would not address costs associated
with royalty taxes or the oil losses.
Representative Whitaker asked if there would be a return on
the investment over and above the wellhead cost.
Mr. Marushack remarked that was correct and that it would
amount to an assumed percentage of 70/3%, projecting a
minimum of a 12% rate of return.
Mr. Shilab interjected that the 12% would be used for the
pipeline portion.
Mr. Marushack referenced Page 16, the Estimated Government
Take. He advised that the revenues would be roughly
equivalent for both the northern and southern routes. The
increased government take was based on a higher system
throughout, the longer project life and the 51 TCF Alaska
gas reserves produced including 16 TCF yet-to-be-discovered
gases. He suggested that the State of Alaska could
anticipate $50 billion dollars in revenue.
Co-Chair Mulder asked about the $28 and $50 billion dollar
discrepancy in the numbers as provided by the Department of
Revenue. He asked if that was the known reserves and the
estimated reserves.
Mr. Marushack responded that he did not know how the State
achieved their numbers. He added that if the pipeline were
built, people would discover gas.
Representative Whitaker asked about the distribution of the
income number and the amount that the industry would receive
on that amount.
Mr. Shilab understood that the industry would receive about
40% of the government amount, making nearly a 60%-40% split.
Representative Whitaker inquired what 40% would be the
amount of.
Mr. Shilab responded that it would be 40% of the government
take.
Representative Whitaker asked if that amount would be net
dollars.
Mr. Shilab thought that they would be net dollars. He
explained that the $120 billion dollars would be "net" to
the government and the $40 billion would go to the
producers.
Mr. Marushack interjected that the industry was using the
Environmental Impact Assessment (EIA) forecast.
Representative Croft noted that if the government takes 60%
and the producers take 40%, the producers would be making
$80 billion dollars.
Mr. Conrad suggested that they get back to the Committee
with the correct numbers.
TAPE HFC 02 - 96, Side B
Mr. Conrad indicated that the industry is attempting to make
the risks balance with the rewards. Substantial revenues
are anticipated. He added there will be substantial costs.
Mr. Marushack referenced Page 17, the expansion, and major
expansion with new discoveries.
· Expandability built into the system design;
· System de-bottle-necking likely to yield small
volume improvements;
· Approximately 1 bcfd expansion with intermediate
compression;
· Cost effective expansion facilitated by large
diameter pipe; and
· Expansion will provide access to new gas
discoveries.
Representative Whitaker understood that there would be no
expansion until there is an additional bcfd added per day
for efficiency.
Mr. Conrad advised that an expansion of such magnitude would
be a function of how much horsepower the State wants to add.
It would depend on what the customers want and/or need at
that time. He added that lower volume expansion could be
done but might be less efficient if there is a continuum of
opportunity depending on the needs of the market.
Mr. Shilab referenced Pages 18, 19, & 20, the Three-legged
Stool for Government Framework:
· Viable Government Framework is Essential;
· U.S. Enabling Regulatory Legislation; and
· Alaska Fiscal Certainty.
If all the stakeholders do not support the project, the
st
investors, the government, the 1 Nations and Native
communities and the consumers will determine the success of
the pipeline. Predictable expenditures require having a
framework in place. Hopefully, once the framework is
established, a viable pipeline project will be found.
Mr. Shilab pointed out that the U.S. regulatory process
follows the Senate Energy bill and creates a market-driven
process for any viable project. That office will create an
office in the executive branch to coordinate all related
federal agency activity.
Mr. Shilab discussed Page 20, The Alaska Fiscal Certainty.
That aspect will provide certainty in the State government
take for predictable disposition of State royalty gas,
consistent with:
· Firm transportation commitments;
· Clear, simple predictable gas valuation for
royalty and severance tax payments;
· Severance tax rates and the economic limit factor
(ELF);
· Ad valorem tax rates and valuation methodology;
· Corporate income taxes; and
· Stable fiscal terms over the life of the pipeline
project.
Co-Chair Mulder inquired about the federal ceiling and the
floor agreements.
Mr. Conrad stated that the process was moving forward.
Mr. Marushack pointed out that the bill had made it through
the Senate and through the Conference Committee. The bill
needs to be thoroughly debated. The State of Alaska must
help move the bill, adding that this is not a "done deal".
Co-Chair Mulder asked if the project be a "non starter"
without the federal provisions.
Mr. Marushack explained that the bill is extremely
important. There must be federal enabling legislation, a
federal tax incentive, and State fiscal certainty in order
for the producers to move forward.
Mr. Marushack acknowledged that the federal side would help
the downside risks, however, that does not address
economics. It is important that Alaska demonstrate that
they want this project to happen.
Mr. Shilab mentioned that Exxon Mobil would not seek or
support government subsidy on the project. He commented
that the project would need to "stand on its' own feet" in
order to move forward.
Representative Harris pointed out that in regard to Alaska
fiscal certainty, no tax holiday had been indicated. He
asked if during construction, a tax holiday could determine
the project's feasibility.
Mr. Conrad replied that there is no "one point" which makes
or breaks the project. There needs to be clarity and
predictability on the regulatory and fiscal portion. He
outlined the key points. Costs will need to be reduced and
that a property tax holiday would be a way to help reduce
costs.
Representative Harris questioned previous statements made by
Mr. Shilab regarding the economics of the project and how it
must "stand on its' own merits".
Mr. Shilab stated that was correct. He noted that Exxon
does not seek or support incentives or subsidies. A project
of this size must be able to stand alone on its' merit.
Co-Chair Mulder asked if Exxon believed that the project was
economically viable.
Mr. Shilab replied they did.
Representative Hudson referenced comments made regarding
Alaska's fiscal certainty and asked if that was a concern.
Mr. Conrad agreed that it was. He noted that Alaska does
have a history of disputes and changes in settlements. The
project cannot economically tolerate such scenarios. He
pointed out that the "overall" fiscal picture in Alaska is
"wobbly", thus there needs to be a high degree of
confidence. Whatever "rule" is decided, it cannot change.
He noted that the producers were supportive of reenacting
the old Stranded Gas Act.
Representative Croft commented that a tax holiday was a
subsidy.
Mr. Marushack pointed out that there was a philosophical
difference between the companies presenting at the meeting.
Phillips position is that the project is one of several
building blocks which will help make the project viable. He
added that the legislation would send the right message to
move the project along.
Mr. Conrad interjected that BP should evaluate the project
with the rule in place. Fiscal predictability is very
important and taxes by far would be the biggest cost of the
project. He added that property taxes are a decision made
by the government, and then the industry can evaluate the
project against that information.
Representative Croft noted Page 15, the southern route. He
noted that it would cost $1.77 to get the gas to Alberta,
creating a $3.25 minimum price. He pointed out that number
would be 50% off, not 20%, which would yield a tariff to
Alberta of $2.66 leaving a $.60 wellhead value for the gas.
Mr. Marushack advised that the $1.36 would get the gas to
Gordondale. He stressed that the project is very risky and
the industry is concerned about moving forward and finding
that it is over the 20% mark. The industry does not agree
that price could likely make the project happen.
Mr. Conrad interjected that the operating costs had not been
shown and those costs would mitigate the oil losses.
Representative Croft questioned if the producers had been
involved in drafting the U.S. Energy authorization.
Mr. Conrad replied that they had and that was legislation,
which the industry proposed in order to regulate the risks.
He noted that the industry worked closely to create an
appropriate form.
Representative Whitaker referenced Page 20, and asked if the
statement "predictable disposition of State royalty gas,
consistent with firm transportation commitments" was
sufficient for the industry.
Mr. Conrad explained that the producers were supportive of
the State taking the gas in-kind and thought that could be a
form of fiscal stability.
Representative Whitaker questioned the "clarity" of the
existing regime.
Mr. Conrad replied that it is important that the
interpretation is clear. Problems need to be addressed
before they occur.
Representative Whitaker inquired if there were impediments
within the existing project because of the uncertainty.
Mr. Conrad responded that it could be determined by bringing
simplicity and clarity to the scheme.
Representative Whitaker asked if reducing the rate had been
included.
Mr. Conrad stated that what was being discussed was "simple
and predictable".
Representative Whitaker asked about severance.
Mr. Conrad reiterated that "simple, clear and predictable"
are the answer to all the elements; otherwise it would be
impossible to evaluate the project.
Representative Whitaker thought that there was a "mechanism"
inherent to the proposed legislation. He pointed out that
the Stranded Gas Act would provide the necessary clarity.
Mr. Conrad advised that it would not solve the problems, but
would rather establish a process to address it.
Vice-Chair Bunde asked if Mr. Shilab had participated in
crafting the federal legislation.
Mr. Shilab responded that Exxon Mobil had participated in
crafting the base language for the enabling legislation.
Vice-Chair Bunde inquired if they were supportive of the
results.
Mr. Shilab responded that Exxon Mobil was supportive of the
July 2001 legislation, however, that they did not support
some of provisions regarding access, expansion, and royalty
in-kind.
Vice-Chair Bunde inquired if Exxon Mobil had been supportive
of the subsidy and/or financial aspects.
Mr. Shilab stated that they do not support the financial
subsidy.
Mr. Shilab outlined Page 21 - Predictable New/First Nations
Regulatory Process. He outlined it:
· Establishes clear regulatory processes between New
and First Nations;
· Details plans for cooperation among Canadian
Federal, Provincial, Territorial and First Nations
regulatory authorities; and
· Predicts expedited process that fully complies
with all environmental and regulatory laws.
He continued illustrating why it was essential:
· Ensures timely completion or regulatory and
environmental assessment process;
· Lacks clear New/First Nations permitting process
increases project risk; and
· Avoids duplication of environmental assessments
and conflict among Canadian governmental agencies
and First Nations.
Mr. Shilab reviewed Page 23, Wrap-up. He stated that the
intent was:
· Project is currently not commercially viable.
· A viable government framework is essential.
· Joint team resources have been redeployed.
· Companies will collaborate as appropriate on
future work.
Representative Harris asked if there had been any on going
talks with the Canadian government regarding incentives or
tax holidays.
Mr. Marushack replied that there have not been any at this
time. The industry has focused only on the federal
guidelines. The benefits to the Canadians, especially on
the southern route, are significantly less than they are to
Alaska and the federal government. Canadians see the
project as an opportunity for jobs.
Mr. Conrad interjected that there has been some discussion
initiated by the Canadian government regarding accelerated
depreciation. In terms of property tax, most of the
jurisdictions in Canada already have a system that is less
burdensome than it is in Alaska.
Representative Davies questioned why the southern route
would be less valuable to the Canadians.
Mr. Marushack explained that scenario assumed that the
MacKenzie Valley was developed. Part of the $29 billion
revenue dollars is associated with separate MacKenzie lines.
Representative Davies asked if the Mackenzie River portion
was built, would a tax holiday play a role.
Mr. Shilab advised that if the southern pipeline were built,
there would then be no association with the MacKenzie
project.
Co-Chair Mulder pointed out that "tax holidays" are not new
concepts, however, relatively new to Alaska. He inquired
how often the tax holiday was used around the world.
Mr. Marushack advised that on several large projects
throughout the states, municipalities do compete for the
projects by offering the tax holiday. That is a common
practice. On the world scale, opportunities are negotiated
on a different base. He noted that the legislation does not
allow the industry to compete against other municipalities.
He indicated that the proposed project is world scale and
has enormous risks involved.
Co-Chair Mulder asked if Exxon Mobil had used the tax
holiday anywhere else in the world.
Mr. Shilab was not aware of that.
SENATOR JOHN TORGERSON introduced Dr. Doug Reynolds, Oil and
Gas Economist, Legislative Contract, and Mr. Patrick
Kaufflan, Senate Resource Staff.
Senator Torgerson outlined items that he felt were missing
from the proposed report. He indicated he was disappointed
with the report. The financial summary consists of eight
numbers, three subtotals, and one tariff range. He was
outraged that the State was expected to respond to only
eight numbers being provided, given the size of the project.
Senator Torgerson listed missing items from the report:
· Does not show the liquid price
· Evaluation criteria
· Rate of return
· Pipeline tariff model
· Benefit for the federal price
· Federal loan guarantee
· State tax exemption
· State property tax exemption
· Other fiscal changes that could affect the
economics of the projects
· Expect jurisdictions to reduce their take
· Information on when the pipeline would be expanded
· Cost benefit of any expansion
· Oil loss models
Senator Torgerson claimed that the $50 billion dollar figure
was a new number with no appropriate indication of how it
was determined. He noted that using the producer's numbers
would provide them a much higher value than 15%. Senator
Torgerson noted that the preliminary analysis indicates that
the property tax exemption during the four-year construction
period would provide a greater return.
Representative Davies asked Senator Torgerson how long he
had been chair of the Joint Committee on Oil and Gas.
Senator Torgerson replied for one year.
Representative J. Davies asked during that time, how often
had the industry requested a tax holiday.
Senator Torgerson informed members that there had been many
requests. He noted that in March 2002, he requested that
the proposal be submitted in writing. Senator Torgerson
acknowledged that working with that group had been
frustrating. The industry continually has requested that
the State provide fiscal certainty.
Representative Croft requested that the industry to provide
feedback regarding the background of the project.
Mr. Conrad did not know what Senator Torgerson was
attempting to determine but offered to negotiate any used
assumption.
TAPE HFC 02 - 97, Side A
Mr. Conrad acknowledged that the State had used a different
number evaluation.
Representative Croft suggested that there should have been
substantial work done to determine the $2.39 tariff.
Mr. Konrad explained that there is "not a specific tariff
but rather a range". He noted that there is uncertainty
around that number.
Representative Croft requested to see reports on whatever
work had been done to date. He commented that for $100
million dollars, there should be more information than that
contained in the presentation.
Mr. Conrad replied that most of the money had been spent on
engineering and time in the field. He added that the
industry "would be happy to have any conversation with
Senator Torgerson".
Vice-Chair Bunde thought that it would be more in the State
of Alaska's interest to have a gas pipeline than it would be
in the producer's interest.
Senator Torgerson pointed out that the estimated rate of
return, including the floor, would be around 18.8% percent.
He emphasized that the industry does not need any incentive
with a predicted rate of return that high. He warned that
incentives should not be provided until they are needed.
Vice-Chair Bunde questioned why producers would not begin a
project if they were assured a 15%-18% percent profit.
Senator Torgerson commented that the producers need to get
federal legislation to pass before they began. He
reiterated that the industry only had eight numbers at this
time and asked how a decision this large could be made with
only eight numbers. He encouraged that the numbers "prove
out mathematically" when undertaking such a huge risk for
the State.
Co-Chair Mulder pointed out that Exxon had indicated that
the project "could be non-economic". He asked if Senator
Torgerson believed that the project was economic.
Senator Torgerson reiterated that at this time, the numbers
indicate that the project would produce over 15%. Each
company has their own internal hurdle rate. Exxon Mobil is
a large corporation and could have two or three projects
this size happening in any given year. Each company must
determine both their internal and external rates in order to
approach the hurdle.
Co-Chair Mulder noted that he was not willing to risk $22
billion dollars. He believed that the margin band was
narrow and that it would be unreasonable to have a
guaranteed good rate of return for such a risk.
Senator Torgerson reiterated that his concern was not the
rate of return but the fact that he does not have enough
numbers to make an informed decision.
Co-Chair Mulder stated that the actual dollar return would
lessen the cost of construction, would lower the tariff,
increase the wellhead price and at the same time, the
exemption would be marginal.
Senator Torgerson acknowledged that there was truth to that
assumption, however, needed further consideration and
numbers being provided.
Co-Chair Mulder understood that the State could recoup their
costs over time with the high wellhead price.
Senator Torgerson acknowledged that it was fair to presume
that the State would receive the return over a 50-year
period. He asked what the projected length was.
Co-Chair Mulder thought that now is the "window of
opportunity" for the project to enter the market.
Senator Torgerson pointed out that Cambridge had indicated
that there could be a new window of opportunity coming in
2015. He reiterated that there are many issues surrounding
the proposed project.
Co-Chair Mulder observed that there is more gas now in the
lower 48 than there was a couple years ago.
Senator Torgerson advised that usually there is a seven-year
supply ratio, which now has increased to eleven. He noted
the price of gas had increased, indicating that the amount
of product had declined.
Co-Chair Mulder stated that in order to get into the market
place, the State needs to be aggressive or they will lose
their opportunity. If this window of opportunity is lost,
it might never happen.
Senator Torgerson disagreed.
Representative Whitaker referred to the Alliance pipeline.
Senator Torgerson replied that pipeline had come online in
1998.
Representative Whitaker remarked that at that time, the
price of gas had gone through the ceiling. The demand was
significant and growing. The point being that the window of
opportunity is a moving target and the market could absorb
the gas.
DR. DOUG REYNOLDS, CONSULTANT FOR THE JOINT OIL AND GAS
COMMITTEE, ECONOMIST, JUNEAU, noted that in addition to the
federal legislation, the industry has indicated that they
need a 15% cost of return. If costs were higher, they could
get a lower rate of return. If the revenue side risk was
taken care of and the cost side addressed, from 12 years of
past data, Exxon Mobile has received a 12% rate of return.
Risks have been taken into account. If cost risks were
added back, a 13% rate of return would result.
Co-Chair Mulder inquired what type of cost risk Dr. Reynolds
was referring to.
Dr. Reynolds replied that a +/-20% cost risk, noting that a
100% cost risk was not possible. From costs of similar
projects around the world, most costs are lower.
Co-Chair Mulder asked if any other pipelines had to run
through the Alaskan-type terrain.
Dr. Reynolds advised that in Russia, there was mountainous
and permafrost terrains. There have been studies done and
they have a "good feel" for their numbers. He added that
everything should be on the table during the negotiations.
Representative Whitaker referenced the Trans Alaska Pipeline
System (TAPS) and asked if there was sufficient data to
determine a reasonable cost estimate.
Dr. Reynolds explained that the problem regarding TAPS was
that the situation was changing and that there was work that
needed to be done to appease environmental concerns.
Additionally, it had to be above ground. The TAPS pipeline
is significantly different than any other oil pipeline
system. The proposed pipeline would be more similar to
other types of constructed pipelines.
Representative Whitaker commented about the problems
associated with thawing Arctic concerns.
Dr. Reynolds agreed.
Co-Chair Mulder questioned Dr. Reynolds's credentials.
Dr. Reynolds advised that he had studied oil energy economy
and was a mechanical engineer. He noted that he had not
built a pipeline. He noted that he spoke "purely" from the
studies he had read on pipeline construction. He stressed
that he had not been involved and that neither had Co-Chair
Mulder and that the State was currently involved in
expensive negotiations with the industry.
Representative Hudson summarized that before the Committee
was two initiatives for the natural gas industry to put
together a portfolio in the interest of the industry and the
State. He added that one would use the Alaska Railroad's
tax-free bonding capabilities.
Dr. Reynolds noted that they had looked at that and that it
would depend on how the project would be financed. There
would be some savings. He added how that affects the rate
of return would be difficult to measure.
Representative Hudson asked if there had been any project
within the last ten years where governments negotiated with
producers and provided an advance incentive.
Dr. Reynolds replied that there were a number of huge
projects in which the government did provide incentives. He
did not know the exact incentive. In response to
Representative Hudson, Dr. Reynolds explained that he had
only studied the finances of this particular project and not
the negotiation process.
PAT KAUFFLAN, SENATE RESOURCES COMMITTEE, SENATOR JOHN
TORGERSON, advised that the North Star unit was a similar
process of negotiation as the present one facing the
Legislature. Through that process, a negotiation transpired
between the producers and the Administration. During the
process, the State received a great deal of information
regarding financial and engineering information and the
volume of reserves. The State then went to outside experts
to verify what was a fair arrangement. The deal was
negotiated using the net profit share and presented to the
Legislature for approval.
Representative Whitaker questioned if it would be an issue
if a tax holiday were not given.
Mr. Kaufflan replied that was logical.
Representative Whitaker referenced the EIA projections
through 2020, which was the base from which the numbers
came. He did not understand if the floor could provide an
economic advantage.
Mr. Kaufflan replied that the floor price was not
established in the current federal legislation based on the
lower 48 prices. That number was based on a price in
Alberta. Historically, that price has been lower than the
one in the lower 48 states.
Representative Whitaker thought that it would be more
advantageous given that floor price.
Mr. Kaufflan replied that would be so if the starting price
were calculated as the price in the lower 48 states.
Representative Whitaker asked if that would be an economic
advantage and would affect the rate of return.
Dr. Reynolds advised that to take the legislation at $3.25
cost in 2010 in Alberta, would translate to $2.56 cents in
2002 dollars. He reiterated that the $3.25 price shown in
the Alberta scenario would amount to roughly $2.55 dollars.
In 2002 dollars, it would amount to little advantage.
Representative Croft noted that the advantage would lower
the construction costs and the tariff and it would make the
well head value higher. At $.125 cents for each, the State
would only be getting a ¼ of their money back.
Co-Chair Mulder agreed that was correct if it was done on a
continuum basis, however, he thought that the one time up
front would eventually be made up.
Representative Croft did not agreed that the numbers would
balance out.
Co-Chair Mulder stated that the producers had indicated that
the difference in the end would be negligible over the life
of the project. He admitted that he did not know the
modeling and how long it would take to pay.
Mr. Kaufflan explained that there were two concerns, the
first being the time-value-money issue and that when running
the models, the answers are not always obvious.
Representative Croft asked what information Senator
Torgerson would like to see from the producers to confirm
the numbers.
Co-Chair Mulder MOVED to RESCIND action taken in adopting
Amendment #4.
Representative Croft OBJECTED.
Recess: 4:05 P.M.
Reconvened: 4:15 P.M.
Co-Chair Mulder restated the MOTION to RESCIND.
Representative Whitaker OBJECTED.
Representative Whitaker explained that Amendment #4 agrees
that a deferral would be a reasonable course to follow. He
stated that the holiday was a more reasonable approach. He
pointed out that Senator Torgerson had spent $1 million
State dollars to determine what a "reasonable" course would
be. He remarked that there has not been enough information
provided to make this decision. He warned that 15 years of
free money might never be paid back. Representative
Whitaker emphasized that the House Finance Committee had
made a decision that there should only be a deferral for the
State's best interest.
Representative Croft spoke against the motion. He pointed
out that that all the tariff rates indicate a profit. He
commented that the industry wrote the federal legislation to
produce a result that made a profit at the low end. If that
legislation passes, the industry will have taken the market
risk out of their court. He surmised that any business
would like that deal. Rescinding action on the amendment
gives away the people of Alaska's money and that the
Legislature would not be a good trustee in doing that.
Representative Croft emphasized that such an action would be
bordering on "insulting" to force the municipalities to give
it away without having sufficient data to indicate it is
appropriate.
Representative Davies commented that it would be a problem
to change the legislation to a tax holiday. He noted that
at each meeting, each producer had been asked about a tax
holiday and the question was "stone-walled". He pointed out
that Senator Torgerson's letters had never been responded
to.
Representative J. Davies pointed out that a gas pipeline
would significantly impact Fairbanks. When giving away that
amount of money, there should be at least a spreadsheet to
show how the money would be given away. The industry should
not be faulted for asking for a tax holiday; however, the
State should be equally aggressive asking for the industry
to step forward and help build the pipeline under terms that
are profitable to the State of Alaska and its' citizens.
The idea of rescinding action taken on Amendment #4 would be
irresponsible. He stressed that there has not yet been an
appropriate analysis and that the idea is premature.
Representative Lancaster shared concerns with Senator
Torgerson regarding the amendment. He thought that the oil
industry was not willing to share information to help make a
better determination for the State. He reiterated that the
tax holiday should be negotiated.
Representative Hudson referenced Amendment #4, stating that
it was in the State's best interest. After the numbers are
determined, then the forgiveness consideration should be
considered.
Co-Chair Mulder acknowledged that the Legislature was the
trustee for the State of Alaska to keep it. He claimed that
the Legislature is attempting to stimulate the wavering gas
pipeline. If there were federal support for the pipeline,
the removal of the amendment would provide an incentive to
get the enterprise over the "hurdle". He asked why wait.
He commented that "not that much money was being left on the
table".
TAPE HFC 02 - 97, Side B
Co-Chair Mulder continued, that the proposal is a non-
economic deal even with the incentives. He stressed that
the Legislature needs to get the producers on "our" side and
that the State might need to sacrifice to achieve that goal.
The deferral will not work and would accomplish nothing.
The deferral is a loan with unspecified repayment terms.
Vice-Chair Bunde interjected that the bill as amended does
nothing. Gas would be "money in the bank". He claimed that
the producers would have no reason to go forward without the
proposed tax holiday.
Co-Chair Williams acknowledged that the "tax holiday"
concern was an important issue. The State of Alaska and the
Governor are negotiating and the State is seeking middle
ground. Co-Chair Williams noted that the House Finance
Committee would not be the last place that the amendment
could be addressed. The amendment indicates that the
Finance Committee supports the bill. He commented that he
did support the bill with or without the amendment and
concluded that when negotiating, there must be "give and
take".
Representative Whitaker acknowledged that the Committee was
beginning negotiations with the industry. He noted that
without the amendment, there would be a significant amount
"taken off the table". He pointed out that giving the
industry a tax holiday would not be a good way to begin the
negotiation process. He strongly recommended not to rescind
previous action taken on adopting Amendment #4. He
emphasized that Amendment #4 sends a clear message to the
producers.
A roll call vote was taken on the motion.
IN FAVOR: Bunde, Foster, Harris, Moses, Williams,
Mulder
OPPOSED: Whitaker, Croft, Davies, Hudson, Lancaster
The MOTION PASSED (6-5).
Co-Chair Mulder MOVED to report CS HB 519 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal notes.
Representative Whitaker OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Moses, Bunde, Davies, Foster, Harris, Hudson,
Lancaster, Mulder, Williams
OPPOSED: Whitaker, Croft
The MOTION PASSED (9-2).
CS HB 519 (FIN) was reported out of Committee with a "do
pass" recommendation and with new fiscal notes by the
Department of Revenue, Department of Natural Resources and
the Department of Community & Economic Development.
ADJOURNMENT
The meeting was adjourned at 4:34 P.M.
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