Legislature(1997 - 1998)
02/24/1998 10:03 AM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 24, 1998
10:03 a.m.
MEMBERS PRESENT
Representative Mark Hodgins, Chairman
Representative Scott Ogan
Representative Norman Rokeberg
Representative Joe Ryan
Representative Con Bunde
Representative Tom Brice
Representative J. Allen Kemplen
MEMBERS ABSENT
All members present
OTHER HOUSE MEMBERS PRESENT
Representative Kubina
COMMITTEE CALENDAR
HOUSE BILL NO. 393
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 393
SHORT TITLE: DEVELOP STRANDED GAS RESOURCES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S)
02/11/98 2281 (H) OIL & GAS, FINANCE
02/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV)
02/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER
02/19/98 (H) O&G AT 11:00 AM CAPITOL 124
02/19/98 (H) MINUTE(O&G)
02/24/98 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
GEORGE FINDLING, Business Development Advisor
Gas Commercialization Group
ARCO Alaska, Inc.
700 G Street
P.O. Box 100360
Anchorage, Alaska 99510
Telephone: (907) 263-4174
POSITION STATEMENT: Testified in support of HB 393.
WAYNE LEWIS, Vice President
Yukon Pacific Corporation
1049 West 5th Avenue
Anchorage, Alaska 99501
Telephone: (907) 265-3100
POSITION STATEMENT: Testified in support of HB 393.
DAVID BROOKS, Manager
Alaska Gas, BP Exploration (Alaska) Inc.
P.O. Box 196612
Anchorage, Alaska 99519
Telephone: (907) 564-4201
POSITION STATEMENT: Testified in support of HB 393.
BEVERLY MENTZER, Business Development Manager
EXXON Company USA
P.O. Box 2180
Houston, Texas 77252-2181
Telephone: (907) 713-656-6145
POSITION STATEMENT: Testified on HB 393.
WILSON CONDON, Commissioner
Department of Revenue
P.O. Box 1110400
Juneau, Alaska 99811
Telephone: (907) 465-2300
POSITION STATEMENT: Testified on HB 393.
ACTION NARRATIVE
TAPE 98-12, SIDE A
Number 0001
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and
Gas meeting to order at 10:03 a.m. Members present at the call to
order were Representatives Hodgins, Ogan, Bunde, Brice and Kemplen.
Representatives Rokeberg, Brice and Ryan arrived at 10:07 p.m.,
10:08 p.m. and 10:11 p.m., respectively.
HB 393 - DEVELOP STRANDED GAS RESOURCES
Number 0058
CHAIRMAN HODGINS announced the committee would hear HB 393,"An Act
relating to contracts with the state establishing payments in lieu
of other taxes by a qualified sponsor or qualified sponsor group
for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date." He
stated that the committee would hear testimony from the producers.
Number 0151
GEORGE FINDLING, Business Development Advisor, Gas
Commercialization Group, ARCO Alaska, Incorporated, read the
following statement into the record: "Today, I would like to both
express ARCO's overall support for HB 393 and discuss how this
legislation fits into ARCO's plans for commercializing its very
large gas resource on Alaska's North Slope.
"First, Mr. Chairman, our North Slope Gas Commercialization
Manager, David Lawrence was unable to be here today. He hoped you
would understand, though when you learned that he is in the Far
East continuing efforts to facilitate the self assembly of a viable
sponsor group for an Alaskan LNG project. Let me expand on this
for just a moment.
Number 0219
"Several weeks ago, in January, ARCO sent out letters of inquiry to
determine the level of interest of those who could potentially help
advance a very large, complex, international LNG project in Alaska.
Basically, the letters requested, under provisions of
confidentiality, the opportunity for us to present a potential plan
and discuss alternative ways forward. Since then, we have received
many positive responses to the letters and have initiated
presentations. This week, David is leading an ARCO Alaska team to
the Far East for further presentations. I wish I could be more
forth coming and provide further details, but the formation process
is in the fragile early stages and we do not want to complicate it
by making representations for others. As is always our policy,
when there are developments which can be discussed, we will do so
pro-actively.
"I would like now to turn to the bill being considered by the
committee. Looking back, the legislature is to be congratulated
for enacting HB 250 last year. As you know, that bill created a
substantial and cooperative effort during 1997 by the state's gas
commercialization team and interested parties. This effort has
lead to the proposed legislation now contained in HB 393. I would
like to over view the bill and then briefly elaborate on how HB 393
supports ARCO's plans.
Number 0447
"First, I would like to make three main observations about HB 393.
"It provides the framework under which a competitive fiscal system
can be developed. In our view, the framework legislation opens the
door for cooperative action, in parallel with developments in other
aspects of the project, to help to try to make an Alaskan project
commercially viable. We see many important general provisions in
the bill. It will not place inordinate demands on the state's
staff because it allows the state to entertain applications from
only serious parties. It is balanced in keeping sensitive and
proprietary information confidential, yet provides for public
scrutiny of essential aspects leading to the fiscal system. It
promotes Alaska hire and in-state gas matters. It accommodates
current uncertainties in technology, project approach, development
timing and fiscal system development. Finally, it is also
important to recognize that HB 393 does not in itself, create any
unilateral and irrevocable commitments, which is appropriate at
this early stage of project maturity.
"Secondly, under this legislation, the fiscal system is provided by
long-term contract, and this can be very powerful in improving
competitiveness. The execution of a fiscal contract near to the
time of project sanction can give a level of fiscal stability which
is both leveraging to the economics and competitive with other gas-
rich provinces.
"Third, we would support the addition of language calling for
legislative approval of any contract. Not only is it appropriate
in such a unique and significant decision, but this process of
legislative action can significantly improve the durability and
stability of the fiscal system.
"Mr. Chairman, I would like now to turn to how the legislation
relates to the ARCO's plans. In our November testimony to this
committee, we described how ARCO is moving forward on a four point
plan to try to achieve economic viability of an Alaskan LNG
project. For reference, I can provide copies of the testimony.
Today, I would like to discuss the interrelationships between our
plans and the legislation.
"We see that the fiscal legislation both enables development to
continue and integrates well into our activities. Let's look at
those aspects in the context of a time-line.
Number 0627
"As we have said in the past, our current planning basis has the
start up of an LNG project in late 2007, if everything goes right.
And this makes 1998 important because a phased conceptual
engineering effort should get underway later in the year to stay on
track. This engineering is needed to establish confidence in and
further reduce estimated project costs, which are essential to the
project economics. It is also needed to develop the information
necessary to develop proposals to potential gas buyers and to
proceed with other project development activities.
"In order for this next stage of engineering to commence, a sponsor
group needs to be in place that can advance the project and share
in the costs. In our preliminary discussions with potential
sponsors, they have responded very positively to the prospects of
framework fiscal legislation like that of HB 393. For ARCO
specifically, we see passage as an critical signal of the long term
willingness of the state to help make the project competitive.
"Looking forward, HB 393 integrates well into our LNG project
development plans. As the technical work matures and the sponsor
group gels, the bill allows an application to be submitted for a
fiscal contract. In our view, and again using our planning basis,
the development of a fiscal contract should commence no later than
2000. Since the bill is written generally, it does allow for
flexibility in the timing of the application, the project structure
and the nature of the new fiscal system, which are three important
uncertainties right now. Under the bill, the fiscal contract can
be developed in parallel with the other major agreements, such as
sales and purchase agreements. Again, using our planning basis, it
is our view that the fiscal contract should be in place no later
than sometime in 2002. With that, the major agreements could be
consummated and project sanction could occur, sometime in the 2003
time frame.
"Mr. Chairman, now I must pause for an important reality check. As
I said above, a 2007 start-up is our planning basis. But keep in
mind that meeting such a start up requires that everything fall in
place, almost without a hitch. Most importantly, we ultimately
have to have a commercially viable project before it can be
sanctioned. Simply stated we are trying to turn what is today a
non-competitive project into a competitive project. It should be
recognized that this effort may not succeed: for example, in the
long term, we might not be able to get costs down or cost
uncertainty down; the federal government may chose not to provide
the essential fiscal modifications that I described in my November
testimony and the market may not be able to be developed at prices
that can sustain an Alaskan project. In the shorter term, we may
have difficulty attracting sufficient potential sponsors or we may
find some other insurmountable hurdle. The bottom line message is
that any time-line can change and that moving forward on each step
requires success in the previous steps. Nonetheless, ARCO
continues to be committed to trying to find a viable way forward by
pursuing critical technical, fiscal and commercial avenues.
"As we mentioned in our November testimony before this committee,
gas-to-liquids is our dark horse case for commercializing North
Slope stranded gas. Without negatively impacting our Alaskan LNG
development efforts, our Plano research group is trying to advance
the technology in parallel. Critical to this effort is our
licensing agreement with Syntroleum and our planned pilot test at
our Cherry Point refinery this year. We are pleased to see that HB
393 does not preclude this option for commercializing stranded gas.
"My final comments relate to commercial regulation, a topic that is
not directly the substance of HB 393. As you may recall, this
topic was addressed in 1997 by the gas commercialization team under
the auspices of HB 250. It was also addressed in our November
testimony before this committee. While ARCO anticipates that state
legislation is probably needed, we think more work needs to be done
to develop an appropriate proposal. We would anticipate that the
particulars of how instate gas will be handled will be part of that
commercial regulatory approach. While this topic is not ripe for
HB 393, we know that gas for local communities is a vital concern
that can not be forgotten. Therefore, we support the current
wording in HB 393 addressing this topic in the application process.
"In closing, ARCO is committed to trying to commercialize it's ANS
[Arctic North Slope] gas as evidenced by our proactive plans. We
think that the prospects of success in this effort can be
substantially improved by a cooperative effort with the state. By
that measure, HB 393, is an essential step in development and we
make this statement of support for the bill.
"Mr. Chairman, thank you for the opportunity to testify. I would
be happy to address your questions."
Number 0832
WAYNE LEWIS, Vice President, Yukon Pacific Corporation, stated that
Yukon Pacific Corporation is a business unit of CSX Corporation a
$17 billion transportation company, whose headquarters are in
Richmond, Virginia. CSX also owns Sea Land, a major container
shipping company serving Alaska. He stated that they agree with
virtually all of Mr. Findling's testimony. The area of
disagreement falls in their time-line. He believed it to be
passive given the work that is already done. He commended ARCO'S
efforts to assemble a project sponsor group. The absence of a
sponsor group is the single biggest handicap, that the project
suffers from. That change will be vital and they welcome the
efforts of ARCO.
Number 0922
MR. LEWIS stated that Jeff Ownerfeld is in Washington D.C. to help
lay the ground work for the federal counterpart of the bill. He
stated that the state's consultant, Dr. Pedro van Meurs advised the
committee that the effort on the federal level should be directed
primarily towards the change in the federal tax law to allow an
accelerated depreciation schedule for a North Slope source LNG
export project. He explained that this change together with the
progressive and aggressive post-government attitude embodied in HB
393 will enhance return on equity and reduce risk to all investors.
The combined efforts by the Governor, the legislature and local
governments, send a clear and forceful message to the markets and
to the competitors that Alaska is committed and unified in this
undertaking.
Number 1050
MR. LEWIS asserted that Yukon Pacific strongly endorses HB 393. He
stated that the bill provides a rigorous qualification process for
proposed project sponsors and proposed qualified projects. At the
same time, this legislation recognizes the critical role of the
state and local governments to directly influence the outcome or
success of a new Alaska LNG project, proposing to serve Asian
markets around the year 2005 and for many decades thereafter. He
stated that the legislation recognizes close cooperation and
coordination by the host governments, through their combined
resource ownership and taxing interest. He stated that it is
essential just as it has been essential to the success of all major
LNG projects stretching from Qatar to Indonesia. He stated that
direct government participation at a variety of levels and in many
ways is the norm and not the exception in world scale LNG projects.
Number 1142
MR. LEWIS stated that 30 years ago, Alaska, with the Phillips
Marathon LNG project and the Unocal fertilizer plants did the same
thing as today. He stated that these are the biggest gas
developments anywhere in Alaska, although the state did not take a
direct equity interest in the projects at the time. He pointed out
the that project sponsors were granted a 10- year tax holiday which
was fundamental to the development of these now highly successful
enterprises. He stated that John Horne, Vice Chairman of Marketing
Yukon Pacific Corporation, was the key player in the Phillips
Marathon LNG project. He stated that Mr. Horne told him that the
financial commitment involved in that project was the largest
commitment that company had ever made to a single project at that
point. The fundamental decision in the state's decision was the
state's tax holiday for that project.
Number 1319
REPRESENTATIVE JOE RYAN drew Mr. Lewis's attention to page 5, line
29, and asked if he thought is was rather broad language. He asked
where the interest for the state's share and the state's fiduciary
responsibility as exercised by this body come in to play, under
such broad terms.
Number 1368
MR. LEWIS responded that Yukon Pacific Corporation, heartily
endorses an amendment to this legislation which would provide for
legislative approval of any contract negotiated under the
provisions of this bill. Regardless if it is a North Slope gas
project or a Cook Inlet gas project. He stated that Representative
Ryan is right that, they do not know now what a contract will look
like between a project sponsor group and the state of Alaska. This
is because they need to better define the cost of a North Slope
project. He pointed out that there may not be a lot that is
required of the state if the cost can be lower significantly. He
stated that he thought this process which empowers the commissioner
of revenue to learn the details and negotiate a deal to be the best
way to do this. He felt it would be best for the contract to come
before the legislature after it is negotiated and not before.
Number 1448
REPRESENTATIVE RYAN stated that he heard testimony that this was
going to financially be a difficult project to put together as
investors were looking at a 17 percent return over the life of the
project and for various other conditions and uncertainties with
markets and developments. He stated that now things have changed
as people are stating that it looks like a good deal. He asked
what he thought of the proposition of the state becoming a partner
under the following conditions: The state will have a royalty
share, issue a gas index bond and sell it as a hedge to the gas
buyers, and the return on their equity portion, to lower the risk
for other investors, would be what the stock market has been for
the last 60 years, 8.5 percent. He explained that this is
considerably lower that the 17.5 percent of the market, considering
they are going to pay taxes and royalties on the project.
Number 1526
MR. LEWIS responded that if the state did invest, it should only be
because it is a good deal, as any investor would approach a
project. He stated that he did not have a very good answer to his
question.
Number 1557
REPRESENTATIVE RYAN stated that at no time would he advocate the
permanent fund investing in this project, the bonds would be sold
using the royalty gas as collateralizing the bonds. He stated that
1.5 would be a reasonable return.
REPRESENTATIVE ALAN KEMPLEN stated that the legislation gives the
framework for which the sponsor group can present their proposal to
the state. He asked if it would be appropriate to have, in the
framework, a section asking any proposed applicants to address the
issue of state participation and how they would propose the state
could participate in the project.
Number 1633
MR. LEWIS stated that he could not speak for the other producers or
proposed investors but he thought it was an excellent idea.
Number 1650
REPRESENTATIVE NORMAN ROKEBERG stated that he has some major
concern with the terms of the bill that would have an affected
municipality sitting at the table and bargaining with them. He
asked how Mr. Lewis felt about that from a business perspective.
Number 1681
MR. LEWIS responded that it is similar to the question of how
government entities whether it is the state or municipalities, take
an equity position in the project. He stated that the mechanism
for that has only vaguely been discussed in terms of property tax
relief in exchange for an equity position in the project. He
stated that they do not have the answers. He stated that the
cooperative spirit that everybody needs to go forward is in place
and how to build on that is the question they are asking.
Number 1739
REPRESENTATIVE ROKEBERG stated that one of his concerns is the more
players there are, the tougher it will be to make a deal. He
stated that as he understands the bill allows equity as one of the
alternatives but really speaks to the issue of "in payment of lieu
of". He asked Mr. Lewis how he perceived this.
Number 1809
MR. LEWIS responded that his model is the Pedro van Meurs' model
which really speaks to the position on the question of front-end
loaded systems and how to levelize those payments so that the
project is not penalized in its early years.
Number 1812
REPRESENTATIVE ROKEBERG stated that Mr. Lewis has lived in the
municipality of Anchorage for thirty to forty years and asked if he
would define an affected municipality to be including the
municipality of Anchorage, particularly in light of the history of
the past pipeline construction and the impacts on Anchorage.
Number 1831
MR. LEWIS responded that he would define municipality as a
potentially affected municipality.
Number 1831
DAVID BROOKS, Manager, Alaska Gas, British Petroleum (BP)
Exploration (Alaska) Inc., read the following statement into the
record: "In this position I am responsible for managing BP's
initiatives to commercialize North Slope gas. Those initiatives
include the possible liquefied natural gas export project and the
development of economic technology for the conversion of gas-to-
liquid hydrocarbons, the so called gas-to-liquids technology.
"I have been with BP for 23 years and involved in the gas business
for 16 years. Prior to moving to Alaska last November, I was
commercial manager of BP's business unit in Abu Dhabi, which is in
the Middle East where BP is a partner in two oil concessions and a
5 million ton per year LNG project, the Abu Dhabi Gas Liquefaction
Company.
"Prior to my assignment in Abu Dhabi, I led the commercial side of
BP's participation in the Australian North West Shelf LNG project.
Today, I would like to briefly give BP's views of the proposed
Alaska Stranded Gas Development Legislation.
Number 1899
"This legislation is clearly the logical next step following the
Gas Commercialization Report which was published earlier this year.
In passing we would like to comment that we were encouraged by the
Report and pleased to have been able to contribute to its
development. For the record we would like to compliment the
authors of the report on a very professional piece of work which
addressed the key issues in what is a complex area.
"We also welcomed the opportunity to work with the state's team in
developing this legislation and I am able to confirm that BP is
supportive of it.
Number 1925
"We believe the legislation would offer sponsors of stranded gas
projects an opportunity to negotiate fiscal contracts with the
state thereby increasing the certainty in respect of the level,
methodology and rules for calculating the state's taxes and
royalties over the life of the project.
Number 1942
"We believe that the establishment of a fiscal contract between the
project sponsors and the state based upon the profitability of the
project and the principles set out in the legislation would enhance
the international competitiveness of the project and reduce the
fiscal risks, one of the key objectives identified by the state's
consultant as necessary to improve the economic attractiveness of
a North Slope gas development.
"We recognize that as the legislation is discussed there may be
issues and questions which may arise. We look forward to working
with the members of the legislature as they consider the merits of
this legislation.
"Thank you for this opportunity to comment and explain BP's views."
Number 1986
REPRESENTATIVE ROKEBERG asked what his perception is of having the
municipalities involved and what type of an impact and arrangements
would be needed to create a viable sponsor group.
Number 2020
MR. BROOKS replied that the work that was done on the gas
commercialization report identified that the fiscal regime is very
front-end loaded and regressive, it suggested a more progressive
regime, perhaps profits related. One of the consequences of this,
which is recognized in the report is that it gives rise to the
issue of property tax. He stated that he has met with two of the
mayors in Anchorage to discuss this issue, they were concerned that
they were excluded from the previous negotiations on the TAPS and
felt that they were making a point to be included in the
negotiations for a gas pipeline. He explained that they felt an
innovative way of approaching this problem was necessary. He
stated that he would welcome any suggestions that would help in any
way to combine all the parties together so that everyone is
satisfied with the outcome of the project.
MR. BROOKS stated that in respect to the negotiation the
legislation envisions a fiscal contract under which the parties in
the LNG project, would pay a sum in lieu of taxes. How the tax is
allocated amongst the various government bodies should be discussed
between those government bodies. He agreed that the more people
there are at the table the slower the negotiations would be,
however that should be seen as a mechanistic issue rather than a
principle issue.
Number 2122
REPRESENTATIVE ROKEBERG asked if the impacts of the development in
the Northwest shelf of Australia, could be applied to this project.
Number 2142
MR. BROOKS replied that there were significant impacts, as it was
the largest investment in Australia and has been used to develop a
gas market in the Northwest shelf area. One of the differences is
the gas field is 120 miles off the Northwest shelf of Australia,
the infrastructure had to be mostly funded by the project.
Number 2182
REPRESENTATIVE RYAN stated that there are a lot of uncertainties
to the cost of the project, he asked if there are any more
certainties at this time.
Number 2243
MR. BROOKS replied that the development of the LNG market and the
uncertainty of the financial situation in the Far East is still a
factor. At the moment there are low oil prices and a reduction in
LNG demand. He stated that Korea has dropped in 1998, 1.5 million
tons of LNG and are not prepared to make forecasts of their LNG
demand until April of this year. He stated that in Japan the
supplies of LNG are fixed from April through March and their
discussions are ongoing. Japan will meet their contractual
obligations but will not do any more than that. He explained that
they would hope to see some growth with Taiwan. The demand for LNG
is there in the future, it is probably just pushed back a few
years. He stated that he will be in Taiwan and may be able to give
more information upon his return.
Number 2369
REPRESENTATIVE RYAN asked what his assessment is of the market in
China.
MR. BROOKS replied that if the energy demand from China is huge,
they rely a lot on coal brought down from the North of China. It
is BP's view that China is a developing LNG market but are not sure
if they are ready for a large LNG project. He projected that in
the next 10 to 15 years China would start to import 1 to 2 million
tons of LNG a year and build up to 15 tons. He asserted that
Alaska should aim towards their market.
Number 2427
REPRESENTATIVE KEMPLEN asked what his assessment is of ARCO's time-
line.
Number 2442
MR. BROOKS replied that BP needs to work hard on the project to
reduce the costs, once this is achieved then BP can place the
project before the buyers. He stated that they are considering
ARCO'S ideas.
TAPE 98-12, SIDE B
Number 0015
REPRESENTATIVE KEMPLEN stated that in regards to the contracts when
Alaska is looking at developing their contract for natural gas with
the notion of certainty, any contract should have the type of
flexibility so that there is an allowance for scheduled periodic
review of the demand for natural gas in order to accommodate
changes in the market place. He stated that within the time frame
of the project, China will certainly be a buyer of LNG and any
contract would have to have the flexibility to accommodate that
increased demand. He asked if that was correct.
Number 0076
MR. BROOKS stated that he was talking about the Abu Dhabi Gas
Liquefaction Company Project and it is underwritten by a 5 million
ton per year contract through Tokyo Electric Power Company. He
explained that they have committed to buy 5 million tons of LNG a
year for 25 years. He stated that there is no flexibility other
then a minor 10 percent downward flexibility. He stated that the
company found that they could produce more than 5 million tons, so
they sold it on a three-year basis to Korea on an exemption that a
technical electric power company will come along and take the whole
of the gas project. He stated that LNG projects are underwritten
by one or two major sales contracts which define for the life of
the contract the obligation of the project to supply a quantity of
LNG and a balancing obligation of a buyer to purchase that quantity
of LNG. He stated that other then the downward flexibility there
is no flexibility in those contracts. He stated that the gas is
effectively pre-sold. Contracts can not be changed it is a fixed-
term contract.
Number 0175
REPRESENTATIVE KEMPLEN asked if it was correct that in order to
make the project economically viable the more the cost should be
reduced, as it would then reduce the amount of LNG that a firm
commitment is needed in order to make this project go. He stated
that anything beyond that becomes profit and there is more
flexibility to take advantage of opportunities in the marketplace.
Number 0208
MR. BROOKS stated that he would agree with his line of reasoning
but in respect to this project it would cost over $15 billion and
in order to produce adequate profit to remunerate that cost, 14
million tons of LNG would need to be sold. He stated that the
results of the work done as part of the gas commercialization
report showed that is not currently economic as 14 million tons
does not remunerate $15 billion. He stated that the first step is
to reduce that $15 billion until there is a level where the risks
and the rewards balance. He agreed that at that point the extra
LNG is then a profit.
Number 0257
REPRESENTATIVE KEMPLEN asked when did he see the costs being nailed
down.
Number 0275
MR. BROOKS stated that they are just finishing a technical program
with the gas owners and are looking at where and how they will go
forward. He stated that March is when they hope to have a
decision.
REPRESENTATIVE KEMPLEN asked that the nailing down of the cost
comes with the conceptual engineering.
MR. BROOKS responded that yes is part of ARCO's proposals. He
stated that an aggressive cost reduction program needs to be done.
Number 0318
REPRESENTATIVE TOM BRICE stated that given the need to justify the
base project, he asked how much confidence does the bill give Mr.
Brooks, in terms of providing a stabilized fiscal system on the
state's behalf.
Number 0347
MR. BROOKS stated that he sees the bill as enabling legislation.
It would enable the project sponsor to negotiate with the state a
fiscal contract. The fiscal contract would provide the fiscal term
certainty. He stated that there are questions as to whether or not
that certainty can be achieved and there are differing views. He
stated that BP believes that it is possible and would like to see
a fiscal contract negotiated and test whether the certainty is
available perhaps by taking the issue to the supreme court.
Number 0391
REPRESENTATIVE BRICE asked if BP would see this legislation not as
the end all of the project but as part of the catalyst to ensure
that this long process continues and accelerates.
MR. BROOKS stated that is an element in removing the risks in the
project.
Number 0407
REPRESENTATIVE RYAN referred to an article about LNG demand and
shipping and the 100 percent increase of demand that is predicted.
He stated that these projections would indicate that the market is
there and there should not be difficulty in arranging the
contracts. He asked if the predictions seem reasonable to him.
Number 0479
MR. BROOKS replied that he could not comment on the article but
would be interested to know the dates that the reviews were done
because the demand is constantly changing. In general terms he
would agree that there is a market for LNG. He explained that the
object is to get an economic project, as it does not matter the
size, if an economic project can not be presented. He stated that
the buyers are the ones who will choose which project to go ahead
with, at the moment BP's project is not on the table because it is
not economic. He stated that there is twice as much LNG supply
chasing the amount of demand. He reiterated that the project first
has to be economical and then the talks with the buyers can begin.
Number 0560
REPRESENTATIVE ROKEBERG asked if BP has taken a position on ARCO's
statement to get primary engineering underway this year.
Number 0586
MR. BROOKS replied that they have been meeting with ARCO and they
are considering their proposal and will give their answer in March
as requested.
Number 0642
REPRESENTATIVE CON BUNDE stated that the Constitutional Budget
Reserve (CBR) is a vital reserve account. This year they are
looking at using a quarter to one-third of the CBR and asked how
the potential drain of the CBR would affect his negotiations on a
contract for the buyer.
Number 0700
MR. BROOKS responded that the buyer, when looking for projects,
look for an economic project. Once contracted the buyer needs the
certainty that the product will be there. He stated that with LNG
projects there is a tied buyer and tied supplier. This is why the
buyer would be interested in understanding the fiscal system in
Alaska. He stated that in the Abu Dhabi project they developed a
pricing contract which supported the price of LNG at very low oil
prices and provided it at a discount at higher oil prices, this is
called an S curve. He stated that an S curve protects the project
revenues and the taxes that the project pays.
Number 0850
REPRESENTATIVE BUNDE asked if there are mechanisms built into
reduce the risk of the buyer.
Number 0862
MR. BROOKS responded that the price is fixed as going between
certain oil prices, outside of those figures it would be a
renegotiation. He stated that there is a linear portion of the
pricing curve where the LNG is priced proportionately to crude oil.
He stated that it supports the revenues to the LNG project.
Number 0919
REPRESENTATIVE RYAN commented if there is a discount on the high
end would the taxes be correspondently discounted.
Number 1002
BEVERLY MENTZER, Business Development Manager, Exxon Company USA,
stated that she is responsible for the commercialization of Exxon's
significant Alaska gas reserves. She read the following statement
into the record: "Exxon has a keen interest in commercializing the
North Slope gas reserves and is very pleased to see the effort and
progress that has been made by the state in progressing the
development of a long-term stable and appropriate fiscal regime.
We believe it will take a combination of fiscal and regulatory
modifications and certainty, favorable market terms and significant
cost reductions for a North Slope gas project to be competitive and
commercially viable.
"Enabling legislation is a good start, since it provides the basis
for the negotiation of a binding fiscal contract that enhances the
competitiveness and commercial viability of an Alaska gas project
while meeting with the long-term fiscal interests of the state.
The state's current fiscal system is not favorable for development
of a gas project because the system is regressive, front-end loaded
and can be unilaterally changed by the state at any time. These
facts have been supported in different ways by feed-back from the
market, the state, the state consultant and producers.
"A competitive project needs to have a long-term stable and
appropriate fiscal regime. The fiscal terms should be a function
of the profitability of a project, balance state share with
investor risk and reward, provide incentives for profit improvement
under a range of economic conditions, and be clear and unambiguous
in their implementation. Fiscal certainty should be provided
through a contract that specifies the terms for the life of the
project.
"With regards to HB 393, Exxon believes it provides reasonable
guidelines and boundaries for the development of a fiscal contract.
Additionally, we would support language that provides the
legislature with the means to review and approve any proposed
contract terms developed by the Administration.
"The passage of fiscal legislation is an appropriate and important
step for the state of Alaska to take. We commend the state for all
the effort that has brought us to this point; HCR 1, HB 250 and the
work by the Department of Revenue, Department of Law, Department of
Natural Resources and Department of Labor, throughout the interim
and we hope you continue to make progress in this effect.
"I would be glad to respond to any questions now."
Number 1146
REPRESENTATIVE ROKEBERG asked if Exxon had taken a position on
ARCO's plan to get the preliminary construction underway this year.
Number 1159
MS. MENTZER replied that they are talking with the producers and
have yet to draw a conclusion on their future work plans.
Number 1169
REPRESENTATIVE ROKEBERG asked if Exxon planned to respond by March.
MS. MENTZER stated that they did intend to respond.
Number 1188
REPRESENTATIVE KEMPLEN stated that BP brought in David Brooks, a
person with extensive experience in developing natural gas
projects, which indicates to him a sincere commitment by the
corporation to look at the practical issues involved in the
project. He asked if Exxon has plans to bring a similar person to
Alaska.
Number 1241
MS. MENTZER replied that Exxon does not have plans to bring a
similar person up to Alaska, they do not have a large work force in
Alaska since they are not an operator in Alaska. She stated that
there are 40 people who are working on this effort, it is most
effective to come up to Alaska as needed and assured the committee
that the project is getting quite a bit if attention.
REPRESENTATIVE RYAN asked how if Exxon, is not an operator in
Alaska, able to own gas in the Prudhoe Bay fields.
MS. MENTZER stated that it was through the leasing process.
Number 1349
CHAIRMAN HODGINS asked Commissioner Condon to answer some
questions.
Number 1367
REPRESENTATIVE ROKEBERG referred to the issue of legislative
approval and asked if he participated in any of the discussions on
HB 207.
WILSON CONDON, Commissioner Department of Revenue, replied that he
did not.
REPRESENTATIVE ROKEBERG stated that the issue of legislative
approval was debated and was satisfactorily resolved in regards to
HB 207. He advised that the commissioner look at this.
Number 1464
COMMISSIONER CONDON replied that the language in HB 393 tracks the
the language of HB 207. He stated that formal legislative
approval, either required or as result of the executive branch, is
very important for this arrangement.
Number 1522
REPRESENTATIVE ROKEBERG asked what the mechanism was for approval.
Number 1540
COMMISSIONER CONDON stated that he did not know, but the
legislature is given an opportunity to review the pertinent
material. He stated that unlike HB 207 the Governor does not sign
off on the deal.
Number 1629
REPRESENTATIVE ROKEBERG asked if a formal legislative approval
would get in the way of project completion or the time-line.
Number 1686
COMMISSIONER CONDON replied that he did not think it would get in
the way of a time-line because the time span is so great.
Number 1769
REPRESENTATIVE ROKEBERG asked if this particular contract would be
negotiated, approved and executed prior to other major steps being
made or parallel to the other major steps.
Number 1788
COMMISSIONER CONDON replied that they believe that a fiscal
contract and its development will be an effort that goes in
parallel with respect to moving the project forward.
Number 1827
REPRESENTATIVE ROKEBERG stated that it seems that the communities
are invited to the table but it is not defined as to who they are,
nor is the scope of their ability to effect the negotiations
defined, other then to state that they would be "receiving payment
in lieu of".
Number 1910
COMMISSIONER CONDON replied that the bill does not put the
communities at the negotiating table it imposes the obligation on
the commissioner of revenue in putting together a set of fiscal
terms and then sharing the payments that come out of those terms.
He stated that it is something that the committee may chose to
change.
Number 2009
REPRESENTATIVE KEMPLEN referred to the need to reduce risks and
provide more certainty for the participants of this project. He
asked if any thought was given to reducing the risk for the public
sector. There is the notion of back-end loading a lot of the
benefits and if something were to happen to the major principals
in the sponsor group, and the new player asked for a re-negotiation
of the contract, would there be a way to minimize the risk that
would occur.
Number 2126
COMMISSIONER CONDON replied that the legislation requires that the
commissioner deals with changing of parties and that adequate
security provisions be provided in the fiscal contract. The
contract would be constructed in a way that the state is exposed to
the risk of the project but not to the risks that the sponsors
otherwise engage in, for example business trouble outside the
project. However, there is talk to take some of the risks, that
they would not be taking under the present fiscal system.
Number 2264
REPRESENTATIVE KEMPLEN asked that one way to reduce that risk would
be for the state to become an equity investor in the project.
Number 2277
COMMISSIONER CONDON replied that currently, he did not see how the
state becoming an equity investor in the project changes the risks
in the project. He stated that it may be that investing in the
project is a wise thing to do and provides a return to the state
but the state's investing in the project would not change the
economics of the project.
Number 2366
REPRESENTATIVE RYAN referred to Article 2, and the specific state
cuts and asked why is the front-end so broad but the shares and the
concessions that will be given is so definite.
TAPE 98-13, SIDE A
Number 0031
REPRESENTATIVE RYAN asked why the criteria is so broad and nothing
is spelled out as to what is required of the sponsors.
Number 0108
COMMISSIONER CONDON responded that he could not disagree more. He
stated that the bill spells out clearly that a sponsor would have
to be very serious about the project before one proceeds. He
stated that if Representative Ryan had ideas that would make it
more specific he would be willing to consider them. He stated that
the bill makes it difficult for a someone to sue us for failing to
negotiate. Applications will not be reviewed from just anybody.
Number 0304
REPRESENTATIVE RYAN stated that one of the guidelines is "capable
of subject to applicable commercial regulation and technical and
economic consideration". He pointed out that an attorney could
have a field day determining what the technical and economic
considerations are. He stated that he wondered why the legislature
would want to give the commissioner this broad authority.
Number 0374
COMMISSIONER CONDON stated that the provision relates to the
delivery of gas to communities that are in proximity to the
project. He stated that they would welcome a more precise
definition if one can be developed that deals with what kinds of
arrangements are going to be made for negotiating with potential
project sponsors to impose an obligation on them to provide gas to
communities along the pipeline. He stated that due to economics
they need to be sensitive to requirements which have unknown
obligations that go with them to provide gas to communities many
years from now in unknown amounts. He stated that in attempting to
make provisions for delivery of gas to communities, we impose
uncertainty on the project, we are then working against ourselves.
Number 0530
REPRESENTATIVE ROKEBERG referred to Article 6, page 23, and asked
if this lays out the authority of the affected communities because
there are references to affected communities elsewhere in the bill.
He asked if there are other portions of the bill relating to
authority in dealing with the affected communities.
Number 0601
COMMISSIONER CONDON responded that it is the only provision in the
bill that provides for dealing with local communities. There are
other provisions that authorize the substitution of some payment in
lieu of locally imposed taxes.
Number 0643
REPRESENTATIVE ROKEBERG asked when would the payment in lieu of
taxes start.
Number 0666
COMMISSIONER CONDON replied that would be a term in the deal.
REPRESENTATIVE ROKEBERG referred to subsection 3, line 23, that the
commissioner in bargaining on the behalf of a municipality should
provide for a term for equity participation "or other interests."
He stated that there is no authority to bargain for an up-front
lump-sum payment if there was a true impact. He asked if their
hands are tied by this.
Number 0763
COMMISSIONER CONDON replied that he did not believe their hands are
tied. The major social cost of this project would be imposed on
the state and its communities during the construction and it is
also the time when the project is not going to be generating any
revenue. He stated that they might decide that because of the
costs that the project would impose, and the reality that the
project might not be able to afford to make substantial payments,
that the project is not worth it. He stated that he did not think
that would be the decision when the opportunities and long-term
revenues are looked at. He stated that it might very well be that
the public would have the absorb the costs in the first place in
order to make the project a reality.
Number 0876
REPRESENTATIVE ROKEBERG referred to Article 6 and asked if he could
draw attention to the language that gives him the flexibility that
may be necessary.
Number 0880
COMMISSIONER CONDON replied that whatever the payments are that the
state is going to require from the project sponsors in lieu of
taxes is open-ended and there is nothing in Article 6 that
determines what the structure of those payments is going to be. He
stated that the authority to make periodic payments to affected
municipality in a fair and reasonable amount gives the commissioner
the authority to direct up-front payments if there are any in
payment in lieu of taxes to the municipality.
Number 0951
REPRESENTATIVE ROKEBERG referred Article 6, line 10(b) and stated
that his hands are tied as there is no choice due to the way the
bill is drafted. He asked if this was correct.
Number 0981
COMMISSIONER CONDON stated that he did think he had a choice but he
would look at it again.
Number 1039
CHAIRMAN HODGINS stated that the bill is going to be held over and
recommended that the committee bring any changes that they would
like to see in the bill to him.
ADJOURNMENT
Number 1039
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and
Gas meeting at 11:55 a.m.
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