Legislature(1997 - 1998)
03/03/1998 10:08 AM House O&G
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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
March 3, 1998
10:08 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
02/24/98 (H) MINUTE(O&G)
02/26/98 (H) O&G AT 10:00 AM CAPITOL 124
02/26/98 (H) MINUTE (O&G)
03/03/98 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
ROGER MARKS, Petroleum Economist
Department of Revenue
550 West 7th Avenue, Suite 570
Anchorage Alaska 99501
Telephone: (907) 276-1363
POSITION STATEMENT: Testified on HB 393.
DR. PEDRO VAN MEURS Independent Consultant
Van Meurs & Associates
115 Sierra Morena Court, S.W.
Calgary, Alberta
Canada T3H 2X8
Telephone: (403) 246-7088
POSITION STATEMENT: Testified on HB 393.
ACTION NARRATIVE
TAPE 98-16, SIDE A
Number 0001
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and
Gas meeting to order at 10:08 p.m. Members present at the call to
order were Representatives Hodgins and Ryan. Representatives
Kemplen, Bunde, Brice, Rokeberg and Ogan arrived at 10:09, 10:10,
10:12, 10:18 and 10:23 a.m., respectively.
HB 393 - DEVELOP STRANDED GAS RESOURCES
Number 0112
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
called on Roger Marks to testify.
Number 0156
ROGER MARKS, Petroleum Economist, Department of Revenue, stated
that he would give an introduction to Dr. Pedro van Meurs and how
the history of the oil and gas taxes in this state applies to
Prudhoe Bay gas. The current tax system that is in place is not
appropriate for this resource. He referred to a tax time-line and
gave a brief history of the economics of Alaska's hydrocarbon
resources.
Number 0300
MR. MARKS stated that in 1968 the Prudhoe Bay discovery was
announced and in 1973 the TAPS construction was authorized. In
1974, because of the Arab oil embargo, Cook Inlet oil prices
increased from $3.50 a barrel to $12 a barrel. In 1977, Prudhoe
Bay oil began flowing and in 1979 the Iranian revolution increased
oil prices to $40 a barrel. He stated that the tax structure
reflected the economics of the resources.
Number 0380
MR. MARKS stated that there are three main taxes; property,
production and corporate income tax. He stated that the production
tax was enacted in 1955 in anticipation of a possible Cook Inlet
discovery and was 1 percent of value for both oil and gas. The tax
was then brought up to 2 percent in 1967, for both oil and gas due
to a bad flood in Fairbanks. This tax was then increased to 3
percent due to the favorable economics of the McArthur River
Granite Point, Beluga River Trading Bay and Middle Ground Shoal
fields. He pointed out that in 1970 there was a feeling that the
taxes should reflect more the economics of the resource, the higher
the well productivity of a field the higher the tax rate would be.
He stated that for oil, a stair-step rate was put in place; the
first 300 barrels a day was taxed at 3 percent, the next 700
barrels at 5 percent, the next 1,500 barrels at 6 percent and
anything over 2,500 barrels a day was taxed at 8 percent. He
stated that the gas tax remained at 4 percent. The tax was passed
on to consumers and there wasn't an interest in increasing the
utility rates for consumers at that time.
Number 0529
MR. MARKS stated that in 1972 the oil production tax was modified
to include a cents-per-barrel floor. In that way it adds
protection against low prices, the state would still get a minimum
amount for the resource. In 1973 there was a provision put in to
enact a royalty credit against the severance tax when the cents per
barrel floor was invoked, in order to offset that credit and to
keep the tax rates the same as they were before, the oil tax rates
were increased. The stair-step rates were increased slightly to
keep the effective rate the same.
Number 0583
MR. MARKS stated that in 1977, when Prudhoe Bay started up, there
was a concern that we had two vastly different oil provinces, the
North Slope which was very prolific and proceeded to be very
profitable after the Arab oil embargo, coupled with Cook Inlet,
which had older fields and less profitable fields. The idea was to
have a common tax structure that would apply to both provinces.
What the legislature did, was increase the nominal severance tax
rate up to 12.25 percent, but that was subject to the economic
limit factor, (ELF). This took the stair-step curve and made it
into a smooth curve by giving 300 barrels, per well, per day, tax
free for each field, and then every barrel over the 300 paid the
12.25 percent. The intent was to increase the tax rates on the
profitable Prudhoe Bay field and at the same time decrease taxes on
Cook Inlet, or at the most have the Cook Inlet taxes stay the same.
Number 0672
MR. MARKS stated that the gas prices were tied to the oil prices
which was up in Cook Inlet. Three-fourths of the gas was either
being exported in the form of liquefied natural gas, (LNG), or used
as rental gas to move over to Swanson River to reinject that
reservoir, the consumers were only consuming about one-forth of it.
The reason was to increases the tax rate on gas by increasing the
nominal rate to 10 percent and subjecting that to an economic limit
factor of "3,000 MCF" per day, tax free. He stated that the ELF is
a decimal between zero and one, it's multiplied by the nominal rate
to give a lower effective rate. For instance, if the ELF was .5,
the effective tax rate would be .5 times the 10 percent or 5
percent.
Number 0739
MR. MARKS stated that in 1981, the tax rate was increased to 15
percent. The corporate tax rate was reduced in 1981 which was
offset to attempt to make those changes revenue neutral. The
severance tax rate was increased to 15 percent after the first five
years of production. And the application of the ELF was modified
at the same time; if the ELF was greater than .7 for the first 10
years of a field, it got bumped up to one. In 1989 the ELF was
modified to include the average well productivity of the field and
field size. This was done to offset some unintended consequences
of the 1981 corporate income tax and production tax changes.
Number 0823
MR. MARKS stated that the state, "20 mills" property tax was
enacted in 1973. Prior to 1973, municipalities could tax property
in their jurisdictions at a rate of up to "30 mills". Only
pipelines were subject to the property tax per the 1955 production
tax statutes. Production facilities could not be subject to a
property tax. He pointed out that there was a concern that if
communities could tax only the pipeline at "30 mills", it would be
a unfair tax burden on the pipeline compared to what the rest of
the community was being taxed. The way the "20 mills" property tax
was enacted in 1973, communities could tax both production
facilities and the pipeline at the mill rate that all other
property in the community was being taxed at. He explained that
the state would tax "20 mills", but what was paid to the
communities would be a credit against the state tax. For instance,
if Valdez had a "16 mills" rate, the first "16 mills" would go to
Valdez and the state would get the other "4 mills". This was also
an opportunity for the state to get some money for property in the
unorganized borough.
Number 0930
MR. MARKS stated that prior to 1978 the state's corporate income
tax was what is called apportionment. Apportionment is an attempt
to apportion world wide income to the state in order to tax that
income. Alaska, at that time, apportioned income based on
property, payroll and sales. The average of these three is the
apportionment factor and that factor times the worldwide income is
the deemed state income, which is subject to whatever the state's
income tax rate was. He pointed out that it created a couple of
problems for Alaska in 1978. The first problem was that with a
particularly profitable enterprise where the income per unit of an
apportionment, that you are getting, is high, since apportionment
is an artificial way to establish income, a lot of the income from
the profitable Prudhoe Bay field was sort of leaking out of the
state for tax purposes.
Number 1003
MR. MARKS stated that the other problem apportionment created was
that not a lot of oil was being sold in the state, it was being
sold outside the state. The sales factor was very low, therefore
the state was losing out by using those three factors. He
explained that it was felt that the Prudhoe Bay field and Alaska
operations were geographically segregatable from a lot of world
wide activity, separate accounting income tax was enacted in 1978.
This just looked at the activity, itself, for oil and gas and for
its operations, by company and for the state. Those would then be
segregated and taxed at the same nominal rate, 9.4 percent. He
explained that because only the oil and gas industry was segregated
for the tax or subject to that tax, the other industries in the
state were still on apportionment and litigation ensued. He stated
that by 1981 the state was running a high contingent liability if
it lost the litigation and so the state changed its corporate
income tax structure to modified apportionment. Before there was
property, payroll and sales, the payroll factor was replaced by
what we call the extraction factor. Therefore, even though the
state was not seeing much in sales because a lot of oil was being
extracted in the state, the apportionment factor was increased.
Currently this is the corporate income tax that the state is on.
Number 1141
MR. MARKS stated that the tax that is in place now, has always been
explicitly tied to the economics of the resource. The tax that
Prudhoe Bay gas is currently subject to, has evolved based on
either the economics of Prudhoe Bay oil, or the economics of Cook
Inlet gas, two vastly different resources. One of the differences
between Prudhoe Bay oil and Prudhoe Bay gas is the cost. He
explained that in world energy markets, BTUs are what is being
sold. He stated that the TAPS oil pipeline was built to carry two
million barrels a day down the pipeline. It is envisioned that the
gas pipeline will carry about two billion cubic feet a day. He
pointed out that 1,000 cubic feet of gas has about one-sixth the
BTUs of a barrel of oil. This equates to 3 million MCF versus two
million barrels of oil. He stated that oil has about six times the
BTUs being carried down and the cost of the pipeline is roughly the
same amount, therefore, Prudhoe Bay gas has a big problem on the
cost side compared to Prudhoe Bay oil.
Number 1205
MR. MARKS stated that the fundamental differences between oil and
gas is how they are marketed. A barrel of oil in a tanker could be
sold at the world market price that day. Gas is different. He
explained that everyone in the world uses gas and if they had
access to gas by a pipeline they would use that gas rather than
using gas that comes in the form of LNG, because LNG costs more.
Therefore, LNG can only be sold in markets where there is not
pipeline access. There is a much more limited market for LNG than
oil or pipeline gas and because of the high cost of making an LNG
project, no one will sell liquefied natural gas unless they have
long-term contracts.
Number 1272
MR. MARKS stated that the difference between North Slope gas and
Cook Inlet gas is that an 800-mile pipeline is not needed to get
the Cook Inlet gas into a marketable form. It is needed for North
Slope gas. He stated that the bottom line is that because of the
differences in these resources and because the current tax system
is tied either to Prudhoe Bay oil or Cook Inlet gas, we see the
current tax system as being inappropriate for this resource. He
stated that if the tax system is not changed the probability of the
project happening will be reduced even more.
Number 1349
CHAIRMAN HODGINS asked if was basically correct that we could
tailor taxes according to the commodity and decide what is the best
trade-off between getting this product on the market and what the
people from the state of Alaska will receive in revenues.
Number 1369
MR. MARKS replied that there is a tradition in this state of
tailoring the tax system to reflect the economics of the resources.
Number 1381
CHAIRMAN HODGINS asked if Dr. van Meurs, did any economic analysis
on some of the other technologies, such as gas-to-liquids and the
types of regulatory changes we would have made in that.
Number 1407
MR. MARKS replied that Dr. van Meur's contract did not look at the
gas-to-liquids technology. He stated that his own perception is
that every gas-to-liquids project around the world is loosing money
before taxes, therefore we do not see it as a tax issue.
Number 1435
CHAIRMAN HODGINS asked that in regards to the gas-to-liquids,
unless there is a technology break through there is nothing we can
do tax-wise to make our North Slope gas viable at this time.
Number 1446
MR. MARKS stated that one would have to look at the most
appropriate tax for that resource at that time. In the future, as
the economics evolve, it would then be appropriate to do that.
Number 1468
REPRESENTATIVE JOE RYAN referred to the stair-step tax and the
larger production from each well was getting the larger tax. He
asked if that was to encourage the producers to not deplete the
field too quickly or was it just a straight up tax.
Number 1490
MR. MARKS replied that was to do both. With a stair-step tax, the
more prolific well productivity, there is a more economic field and
a higher tax rate and vice versa. He stated that with the stair-
step rate there was a floor of 3 percent, the first 300 barrels
paid 3 percent. One of the deficiencies of that was pointed out,
which led to the enactment of the ELF, was when a point is reached
late in the field life where more than 300 barrels is needed to
cover the operating costs. He explained that if only 100 barrels
were needed to cover the operating costs and 3 percent was being
paid on the first 300, a premature shut-down of the well would
occur. He stated that what ELF did was to make it so well
productivity got down to zero the tax rate would be at zero,
therefore the burden of the tax would not cause a premature shut-
down of the field.
Number 1555
REPRESENTATIVE RYAN referred to a supreme court ruling regarding
Barkley's [ph] bank and the state of California over apportion
taxing that influenced a lot of tax relief laws. He asked if his
understanding was correct that ELF could be characterized as the
tax allowing the producers to take the capital money to produce the
well.
Number 1626
MR. MARKS replied that the intent of ELF is that depending on the
size of the field and the well productivity decline, the tax rate
will go down. He stated that the 300 barrels is very arbitrary
because it does not reflect the actual costs, or what the price of
oil is. He explained that the intent of the legislation in 1977,
was that one needed the revenue from 300 barrels a day to cover the
operating costs. Therefore, the first 300 barrels a day would be
tax free. If the 1,000 barrels a day are produced then the first
300 would be tax free, and tax would then be paid on the remaining
700 barrels, the ELF would be .7. He reiterated that intent of ELF
is so that the burden of the tax itself, would not cause a field to
shut down.
Number 1693
REPRESENTATIVE NORMAN ROKEBERG referred to the modified
apportionment income tax in 1981 and asked what component, payroll
or sales replaced extraction.
Number 1707
MR. MARKS responded that ordinally it was payroll, property and
sales and the modified apportionment replaced payroll with
extraction.
REPRESENTATIVE ROKEBERG asked why wasn't sales replaced.
Number 1723
MR. MARKS replied that he did not know. He stated that the sales
did include the TAPS' tariff and in that way the income of the
pipeline company was being captured to the sales factor but a lot
of production activity was not being captured.
Number 1747
REPRESENTATIVE ROKEBERG asked if it would be possible to apply the
formula used for ELF, to the royalty to create a sliding scale.
Number 1770
MR. MARKS responded that in theory one could. He stated that there
might be some institutional challenges given how the lease form is
constructed.
Number 1782
REPRESENTATIVE ROKEBERG asked if it is just a rumor that there are
some arithmetic problems under ELF calculations.
Number 1789
MR. MARKS replied that arithmetically it is working fine, however
it is certainly not the perfect tax.
Number 1802
REPRESENTATIVE ROKEBERG asked if there is any distinction made
between oil and gas petroleum corporations and other corporations
as far as corporate tax.
MR. MARKS replied the non-petroleum corporations have payroll in
their extraction factor. The modified apportionment is modified
because it uses extraction instead of payroll and it only applies
to oil and gas petroleum corporations.
Number 1837
CHAIRMAN HODGINS said, "I know that some of the oil and gas
industry holdings are classified as property and some of them are
classified as real and could you just give us a real quick little
primer on the possibility of which is which. Oil lines versus
platforms versus refineries versus LNG plants?"
MR. MARKS replied that he could not at the moment but would get it
to the committee.
Number 1878
CHAIRMAN HODGINS stated that it needs to be understood that there
are differences between real and property tax based on how we are
going to levy them. He stated that in regards to the oil pipeline,
a precedent was set by giving tax holidays and asked if anything
was learned from this that could be applied to the gas line.
MR. MARKS asked what tax holidays he was referring to.
Number 1913
CHAIRMAN HODGINS stated that he thought some sort of tax relief was
offered for the oil pipeline, but maybe he is mistaken.
Number 1919
MR. MARKS replied that the oil pipeline was taxed quite
regressively and front-end loaded.
Number 1950
REPRESENTATIVE CON BUNDE stated that the bill discusses an equity
position from municipalities and asked what the perspective is on
that factor.
Number 1974
MR. MARKS responded that Representative Bunde should talk to "them"
about that as "they" have not gone into detail about what "they"
mean by that. He stated that replacing a front-end loaded
regressive property tax would just be an equity gift that doesn't
get very far in helping the project.
Number 2000
REPRESENTATIVE BUNDE asked if he knew of other areas in the U.S.
where the municipalities have an equity position in a project that
involves statewide resources.
MR. MARKS replied that he could not think of any.
CHAIRMAN HODGINS asked Mr. Marks to present Dr. van Meurs.
Number 2022
MR. MARKS stated that Dr. van Meurs, for about 25 years, has been
helping other countries around the world establish their fiscal
terms and negotiates tax terms with producers. He stated that he
has consulted for about 80 countries and publishes a compendium of
oil and gas fiscal terms around the world which is the standard
desk reference for anyone who is looking at what comparative fiscal
terms are.
Number 2071
DR. PEDRO VAN MEURS, Independent Consultant, Petroleum Fiscal
Systems, stated that it is great to be here with a very innovative
and proactive document, with respect to the development of LNG for
Alaska. He stated that he thought the document is very innovative
in a sense it is a very concrete response to the competitive nature
of this business. He stated that the fiscal terms for LNG are
negotiated and tailored to the specific nature of the project. He
pointed out that the existing fiscal terms in Alaska were really
not appropriate for this type of project but with the bill, Alaska
establishes the power to tailor LNG terms to the specific nature of
the project in order to compete with other countries in the world.
The bill is a innovative approach to authorizing the government to
negotiate a contract with a wide range of conditions and criteria,
but with no specific fiscal features established in the law. He
stated that it is an interesting document that would place Alaska
in the best possible position to try to develop a competitive
project.
Number 2160
DR. VAN MEURS stated that the important criteria for a new fiscal
structure would be to make the fiscal terms progressive and back-
end loaded which are included as criteria in this bill. He stated
that they are very important criteria because they are the types of
criteria that will create a fiscal structure that would be
competitive for the situation in Alaska.
Number 2180
DR. VAN MEURS referred to the competitiveness of Alaska to other
projects, particularly in Ras Laffan and Qatar and stated that the
bill would permit the state to negotiate to overcome the 2 percent
differential and become competitive. He explained that back-end
loaded means that it is not only an effort on the state to allow
investors to recover their investment early in the project, it
involves shifting the risk. He stated that the important aspect of
a project of this nature, is the dissolution and nature of the
risk. He stated that by back-end loading and by making the project
progressive, the state and the promoters of the project share the
risks, and consequently the fiscal structure contemplates a
shifting of the risk, to a degree from the project promoters to the
state. All of this is very significant in bringing this project
about because we are not only competing on the profitability, we
are competing on price risk and cost overrun risk.
Number 2254
DR. VAN MEURS stated the bill is a proactive way of placing Alaska
in the international competition in the Pacific area. He stated
that the time-line is very important. The negotiations for a
contract of this nature will be complex and it will take some time
to arrive at a detailed contract to be considered. In order for
this project to start off production in the year 2007, steps have
to be taken now to permit the process to take place; to negotiate
the contract, to develop the market, to make the market contacts
and put a package together that will be satisfactory. The
construction of the project will take five years.
Number 2304
DR. VAN MEURS stated that the bill comes at a very important time
in the Asian market. He explained that Alaska has had trouble
competing with Malaysia and Indonesia, who actually provided
significant subsidies and low cost financing to the development of
LNG projects at a very high state involvement, sometimes in the
investments. He pointed out that the interesting development is
that both Malaysia and Indonesia are in much tougher financial
shape, and we may actually see a structural change whereby Malaysia
and Indonesia are forced by International Monetary Fund, (IMF) to
be required to compete on our terms. Consequently projects now
have to compared to be more on the inherent economics of the
project. He stated it is important to place Alaska in the
international arena because the Alaska project, is a project that
is 100 percent financed privately. He referred to the Australian
project, which is also 100 percent financed by private capital and
is the front runner. He stated that it is important to let the
world know that Alaska has a project, contrary to other projects in
the world, does not require state capital or concessionary
financing by the state in order to be competitive and will compete
on the basis of a fiscal package that is to be negotiated depending
on the circumstances.
Number 2434
DR. VAN MEURS stated that over the last few months there has been
a strong interest expressed by the project developers, as they are
actively participating in the development of this bill. He stated
that this project would bring significant benefits to the state
during construction and would establish an infrastructure for the
state that may help the state for decades in the future.
TAPE 98-16, SIDE B
Number 0019
MR. VAN MEURS stated that the infrastructure is in place that opens
up the possibility for a whole new gas exploration industry and a
whole new set of possible incremental investment that could be
beneficial for the state for many decades to come. He stated that
he would be glad to answer any questions the committee may have.
Number 0033
CHAIRMAN HODGINS stated that he thought that the "hurdle rate" has
now been lowered because of the economic impact of Asia and asked
how long would that have to last or positively affect our project
on the world market.
Number 0043
DR. VAN MEURS responded that he did not see that the "hurdle rate"
was lowered very much. He stated that due to the crisis in Iraq,
the financial crisis in Southeast Asia and the political
difficulties in Indonesia; Alaska and North America are a very safe
place to invest. He stated that probably the "hurdle rate" in
Alaska could be somewhat less than in other countries because of
the perception of a lower country risk.
Number 0117
CHAIRMAN HODGINS asked if he would be more optimistic about the
project at this point.
Number 0120
DR. VAN MEURS responded that he would be more optimistic because
the investors now realize that the two main competitors of Alaska;
Malaysia and Indonesia, actually have more problems attached to it
than was perceived only four months ago. It doesn't seem that the
current measures Indonesia is taking, are putting the country on a
path of great stability. However, Korea seems to be taking steps
that might bring the country back into shape. He stated that he is
quite optimistic that the country will emerge strong and have a
market for Alaskan gas.
REPRESENTATIVE RYAN referred to Malaysia's finance minister, Mr.
Abraham who talked about the initial public offerings (IPO) that
were being privatized and that certain families made tremendous
fortunes on the IPOs. He referred to Indonesia and the strong army
presence that it has in the country, making it not a good place to
invest. He stated that in Alaska it has always been very easy for
investors to a business here quite profitably, especially compared
to the other jurisdictions with their problems. He stated that he
is happy that a couple of producers have shown an interest.
Number 0283
REPRESENTATIVE ROKEBERG asked if he could expand on the reasoning
behind back-end loading of risks.
Number 0318
DR. VAN MEURS stated that the main fiscal instrument that can be
used to reduce project risk is the fiscal style that is suggested
in the bill. Price risk is attached to this project. He explained
that a huge investment that is needed requires a relatively strong
price, so there is a risk. He stated that there is also a cost
overrun risk because there is so much capital involved in the
development of this project. These risks are even higher than with
competing projects because the other projects are smaller and the
portion of capital in its total is less. He stated that the cost
of projects can be implemented somewhat quicker in other parts of
the world, so that the price risk is also of a different structure.
He stated that in order to make the Alaska project competitive we
have to address the cost overrun risk and the price risk. He
stated that we need to build a fiscal structure that minimizes
those risks as much as possible. He stated that the idea of a
progressive system presented in the bill, is that if the costs turn
out to be high, and the price turns out to be low, then the tax
burden would be modest. He stated that if the price turns out to
be high and the costs turn out to be low then the benefit to the
state should be very significant. Consequently, the fiscal terms
have become a function of the cost and the prices. He stated that
it is a way of risk sharing that does not exist in the current
fiscal set-up. He pointed out that by moving from the current
system to this system, the state by implication is sharing the
price risk and the cost overrun risk.
Number 0454
REPRESENTATIVE ROKEBERG asked how the state of Alaska can get into
this contract in such a way that the returns will be based on the
price sensitivity. He asked if we should bargain a preset,
determined profit and/or margin over the project costs. He stated
that he assumed that given what it takes to build a LNG project,
usually the price is set on a long-term basis as far as delivery is
concerned. He stated that there would be a margin of profitability
for the sponsors and also a share of that for the state for
whatever taxes we end up doing. He asked how we would focus on
that.
Number 0522
DR. VAN MEURS responded that the project promoters will negotiate
a price, but the price will be linked to crude oil or other agency
indicators. He stated that the price is not a guaranteed fixed
price. He stated that the price is linked to crude oil and will go
up and down with crude oil in the same way or depending on the
formula negotiated in the contract. That is what creates the price
risk. He stated that the promoter will not go into the project
unless they feel that they have a sufficient margin and that the
profitability on average, looks acceptable. There is the price
risk that if crude oil prices slip significantly that LNG prices
will slip with it and that is a significant price risk. He stated
that in regards to the fiscal terms, in order to make this project
less risky, would be to say that if the price drops we will be a
little bit easier on our take and if the price increases we will be
a little bit tougher on our take, which can be done through a wide
variety of formulas. He stated that it could be a simple formula
based on price and cost. He stated that it could be a percentage
of the margin. This bill leaves the various models open and it
depends on the specific sponsor group, as to what specifically will
be negotiated and what seems to be the most appropriate formula.
He pointed out that all of the formulas will have that
characteristic, that the system is generally progressive and
generally back-end loaded.
Number 0637
CHAIRMAN HODGINS asked it the balance of trade helps with countries
such as Asia, that are trying to get more products into the U.S. so
they would be more inclined to purchase more things from us, such
as LNG.
Number 0668
DR. VAN MEURS replied that he did not believe that the balance of
trade will have a direct impact on this project, however, nor would
the countries like it very much if it were an offset project, it's
very difficult to negotiate. However, the President of the United
States has indicated to China, Korea and Taiwan, that the United
States likes the balance of payment addressed. And the U.S. would
welcome measures that Asian countries would take to bring the
balance of payments differential. This project is a golden
opportunity to do this.
Number 0712
REPRESENTATIVE ROKEBERG asked if Dr. van Meurs looked at what other
types of industries could be spawned from the installation of the
gas pipeline in using gas as feed stocks.
DR. VAN MEURS stated that he did not, his contract related to the
fiscal and economic aspects of the project.
Number 0078
REPRESENTATIVE ROKEBERG asked if he had visited Southeast Asia or
Jakarta.
Number 0794
DR. VAN MEURS replied that he had been to Kuwait during the almost
impending new Gulf war but not to Jakarta.
Number 0859
REPRESENTATIVE ROKEBERG referred to Dr. van Meurs testimony
regarding price sensitivity. He asked if there could be a BTU
driven formula; things besides price to bargain on.
Number 0912
DR. VAN MEURS replied that it would be an issue of the project
sponsors to negotiate a price. Traditionally in LNG contracts
there has been floor prices. However, recently, particularly Korea
has objected to signing contracts with floor prices. Consequently,
the factor that the world oil price seems to be on a declining
trend for at least a few months, or even a few years in addition to
the governments unwillingness to accept floor prices, affects this
project negatively.
REPRESENTATIVE ROKEBERG asked if demand was a factor in Korea.
Number 1004
DR. VAN MEURS responded that demand was not. He stated that in
regards to the short term, Korea has canceled all of their spot
contracts, a drop of about 2 million tons. Their long-term
projects are still valid. The projection now is that Korea will
grow 6 percent this year. He stated that there is hope for a
positive economic growth and if it materializes it is hopeful that
the long-term trend will come back. He agreed that in the short
term there is a negative impact on demand.
Number 1064
REPRESENTATIVE BUNDE stated that he would like to hear Dr. van
Meurs reaction to the municipalities in Alaska taking an equity
position in private industry and how it relates to the investment
climate.
Number 1088
DR. VAN MEURS replied that the bill leaves wide open what kind of
financial compensation the municipalities can receive in lieu of
the removal of the property tax, there is no obligation to go into
an equity position. He explained that his view is that this equity
position, in whatever form in this project, is a risk investment
and the communities making the equity investment would have to
consider their options very carefully. The bill does not oblige
them to make equity investments, it simply gives them the option,
and if some of the communities feel that it is advantageous to
them, then the bill does not preclude it.
Number 1183
REPRESENTATIVE BUNDE stated that the municipalities really do not
have any risks because if they go bankrupt, they come looking to
the state for help.
Number 1197
REPRESENTATIVE GENE KUBINA stated that British Petroleum came in
with the proposal to change the North Star project and asked if he
was suggesting that profit be taxed.
Number 1228
DR. VAN MEURS stated that he was not an expert on the North Star
situation but understood that it was based on bids that were based
on profit. This situation is not off a bid. He stated that he
believed that a progressive fiscal system has to take into account
the profitability of the project. The project sponsors would like
to see a fair return on their investment and the state has to be
sensitive to that desire in order to bring the project forward.
Whether the precise formula will be based on profitability or some
broader criteria, remains to be seen.
Number 1284
REPRESENTATIVE KUBINA stated that we are looking at price relative
to the cost of everything. He stated that the state's take would
increase because once it is over the 14 million metric tons mark,
the profits would increase.
Number 1320
DR. VAN MEURS replied that is correct. It is important to
understand that this is a project-by-project concept in order to
compete with a similar concept in other countries. The project
could be defined as a 14 million ton deal, with whatever fiscal
incentive given only applying to that 14 million tons. He stated
that if there is an incremental investment that involves further
transports throughout the line so that the average costs of
transportation, or the incremental costs of transportation, are
considerably less, or if there are different kinds of gas resources
becoming available, that is a whole new project and the fiscal
terms of that project will be negotiated with the best interest of
the state, as outlined, based on the characteristic of the
incremental project. He stated that he agreed that there is great
scope that the incremental projects will see a much better take for
the state than the initial project that has to establish the basic
infrastructure.
Number 1384
REPRESENTATIVE KUBINA stated that he felt because we were in a rush
to get the oil pipeline going, we maybe lost out on some of the
benefits there. With this gas line, when converting from a gas to
a liquid there's a huge amount of waste heat that could provide a
vast amount of electricity shipped back to the Railbelt to benefit
a lot of people. He asked if he has heard anybody talk about any
of these issues and if it would play a part in these contracts.
Number 1442
DR. VAN MEURS responded that the bill leaves open a wide variety of
possibilities to enter into a contract. The bill has stringent
criteria and if the commissioner doesn't believe the project is
effective to the state then there will not be a contract, it is up
to the sponsors to demonstrate that a project is beneficial. He
stated that there is a wide scope for add-ons to this project of
which the communities along the line, could greatly benefit.
Number 1535
REPRESENTATIVE ALAN KEMPLEN stated that there are a lot of dynamic
forces at play in regards to the LNG contracts and trying to lock
down certainty in a very uncertain world. He asked if because of
the uncertainty in the market place, if LNG contracts have ever
been renegotiated or altered because of economics of political
circumstances.
Number 1638
DR. VAN MEURS replied no. He agreed that we are facing high risk
and a variable market which is why the fiscal system has to be
flexible so it can respond to whatever comes out of the market.
The LNG contract have been reasonably stable, however it is
definitely the case that a number of countries have taken steps to
adjust terms over time. He stated that Australia, Indonesia,
Malaysia and Qatar have adjusted their terms in some way but it was
mutual. He stated that in general, the world terms have been
reasonably stable and since other nations have more flexible
systems than Alaska there was not a great need to adjust terms. He
stated that the inflexibility of the current fiscal system would
need frequent adjustment if you wanted to optimize the take for the
state and for Alaskans. The fiscal structure will have to enhance
the possibility of having a stable agreement over the time-period.
That is the reason it is contemplated that there will be the fiscal
stability in production sharing agreement and other agreements
around the world. He pointed out that it is understood that if the
two parties, voluntarily, are prepared to renegotiate something,
they can. The intention is to negotiate a contract that is stable,
but inherently flexible so that it responds to the widest set of
circumstances.
Number 1833
REPRESENTATIVE KEMPLEN referred to the economic rent in the bill
and asked if an equity investor would have a higher probability of
capturing the economic rent. He asked how quasi-public
corporations, separate from the state, participate in the projects
and how would the markets interpret that.
Number 1931
DR. VAN MEURS responded that the great advantage for Alaska right
now is that Qatar, Malaysia, Abu Dhabi, and the large number of LNG
exporting countries, in the past, captured economic rent by co-
investing. In other words, they made a very favorable deal,
allowing the investor to pay only a small fraction of the economic
rent and then co-invest it. The style of capturing economic rent
in the above mentioned counties, was to participate strongly
through a state company, up to as much as 60 to 70 percent. He
pointed out that the current situation indicates that those nations
have over extended themselves and it is unlikely that this will
happen to the same degree in the future, which is an advantage for
Alaska. He stated that the bill does not define any particular
sponsor group. Whether the state of Alaska should use the
participation route as a way to capture economic rent, it could
only be done with the permanent fund which would not be in line
with the current objectives of that fund. He stated that the bill
does not prohibit a sponsor group with a quasi-public entity along
with them.
Number 2128
REPRESENTATIVE KEMPLEN asked if it was correct that those Middle
East countries did capture their fair share of economic rent, it
was just that they overextended themselves.
Number 2149
DR. VAN MEURS replied that it only works if you are lucky. Qatar
is a good example of the problem. They participated 60 percent in
the Ras Laffan project and with the decline in the crude prices and
a slower Korean market, the rate of return may not be great,
consequently they may not capture any attractive share of an
economic rent. He stated that it depends on how the deal is
structured as to what the outcome will be.
Number 2228
REPRESENTATIVE RYAN asked if the gas contracts are subject to
variations in the spot market.
Number 2251
DR. VAN MEURS replied no, the long-term LNG deals are tied to the
crude prices, and the Alaskan project can not come about unless
there is a long-term contract with respect to the supply because
otherwise the investment cannot be justified. Separately, from
that, a spot market has developed for smaller volumes. He
explained that in most of the plans that he builds has some surplus
capacity, so there is the possibility for occasional spot cargos.
It is probable that the spot market will gradually expand, but it
would not be possible to develop an Alaska project on the basis of
the spot market.
Number 2368
REPRESENTATIVE RYAN asked how the Australian LNG project is
progressing.
Number 2382
DR. VAN MEURS replied that the interesting development over the
last few months is that the Australian project is entirely
privately financed, so it does not depend on state considerations.
He stated that the Australians now have a project that stands on
its own on the basis of reasonable economic criteria and looks good
compared to Indonesia, Malaysia and Qatar. Australians are
suddenly quite optimistic that their project will have an edge, in
the same manner that an Alaska project would have an edge.
TAPE 98-17, SIDE A
Number 0020
REPRESENTATIVE ROKEBERG asked if he thought Qatar was lucky or
unlucky now.
DR. VAN MEURS replied unlucky now.
REPRESENTATIVE ROKEBERG asked if most of the co-investment schemes,
particularly in the Third World usually assume that the co-
investing country actually provides a capital investment to the
project and shares it with their other private partners. He asked
how those schemes usually come together.
Number 0090
DR. VAN MEURS responded that the countries contributed their own
share, but it was typically along with some other arrangements and
each case is different in this respect.
Number 0213
REPRESENTATIVE ROKEBERG asked if it is possible for the state of
Alaska to back load their tax deferrals in the form of equity of
downstream basis or timing.
Number 0266
DR. VAN MEURS replied that some countries have replaced equity
participation for royalties, but usually not for corporate income
tax. The concept does exist, but whether it is beneficial for the
host nation is open to question, because what you are doing is
buying a share of the economic rent through your co-investment,
that otherwise you could have obtained largely for free by properly
negotiating a fiscal system.
Number 0342
REPRESENTATIVE ROKEBERG asked that wouldn't it have the advantage
of freeing up the capital requirement in the front-end for the
sponsor investor groups by deferring those capital needs until
later.
Number 0398
DR. VAN MEURS replied yes. He stated that there is the issue of
does the project need capital. There would not be a shortage of
capital for the project, if the project could be designed in terms
of risk and profitability in an attractive manner. He stated that
he does not think Alaska has a situation where we need more
capital. He stated that state participation could take a large
number of forms. The actual options are very limited and it is
questionable whether it will help as much as defining a sensible
fiscal system and a risk profile that is acceptable.
Number 0504
REPRESENTATIVE ROKEBERG stated that bribery, it seems, could take
up to 20 percent of the deals in these Third World countries. He
asked if we could bargain for the state to participate to have a
small percentage degree in the equity by having deferred their
taxes, and picking up equity after a point in time.
Number 0552
DR. VAN MEURS replied that the advantage in Alaska is that there is
no corruption, like that and investors look positively on that
factor.
Number 0613
REPRESENTATIVE ROKEBERG said, "We need to look at as a committee is
we could defer that in lieu of taxes till, at that point, where you
pick up an equity interest."
Number 0666
REPRESENTATIVE KEMPLEN stated that for local municipalities one
could see a deferral of property taxes for an equity interest in
the project, and that they create a quasi-public corporation to
manage that equity interest.
Number 0727
CHAIRMAN HODGINS stated that the committee was out of time and he
would hold HB 393 over.
ADJOURNMENT
Number 0861
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and
Gas meeting at 11:58 p.m.
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