Legislature(1997 - 1998)
03/05/1998 10:03 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 5, 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
COMMITTEE CALENDAR
HOUSE BILL NO. 380
"An Act relating to a temporary reduction of royalty on oil and gas
produced for sale from fields within the Cook Inlet sedimentary
basin where production is commenced in fields that have been
discovered and undeveloped or that have been shut in."
- HEARD AND HELD
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 380
SHORT TITLE: REDUCE ROYALTY ON COOK INLET OIL & GAS
SPONSOR(S): REPRESENTATIVES(S) HODGINS
Jrn-Date Jrn-Page Action
02/04/98 2218 (H) READ THE FIRST TIME - REFERRAL(S)
02/04/98 2218 (H) OIL & GAS, FINANCE
02/26/98 (H) O&G AT 10:00 AM CAPITOL 124
02/26/98 (H) MINUTE(O&G)
03/05/98 (H) O&G AT 10:00 AM CAPITOL 124
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
03/03/98 (H) MINUTE(O&G)
WITNESS REGISTER
PATRICK CARTER, Legislative Assistant
to Representative Hodgins
Alaska State Legislature
Capitol Building, Room 110
Juneau, Alaska 99801
Telephone: (907) 465-2283
POSITION STATEMENT: Testified on CSHB 380( ).
KEN BOYD, Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, Alaska 99503
Telephone: (907) 269-8800
POSITION STATEMENT: Testified on CSHB 380( ).
JAMES EASON, Independent Consultant
8611 Leeper Circle
Anchorage, Alaska 99504
Telephone: (907) 337-3515
POSITION STATEMENT: Testified on CSHB 380( ).
KATHRYN THOMAS, Owner
Construction Service Company
P.O. Box 3005
Kenai, Alaska 99611
Telephone: (907) 776-5515
POSITION STATEMENT: Testified on CSHB 380( ).
JIM SYKES, Representative
Oilwatch Alaska
P.O. Box 1533
Anchorage, Alaska 99510
Telephone: (907) 277-8910
POSITION STATEMENT: Testified on CSHB 380( ).
KEN TURNAGE, General Manager
Oil Field Service Company
P.O. Box 1140
Kenai, Alaska 99611
Telephone: (907) 283-2400
POSITION STATEMENT: Testified on CSHB 380( ).
GEORGE FINDLING, Business Development Advisor
Commercial Gas Development
ARCO Alaska Incorporated
P.O. Box 100360
Anchorage, Alaska 99510
Telephone: (907) 263-4174
POSITION STATEMENT: Testified on HB 393.
MARY MARSHBURN, Special Projects Coordinator
Department of Revenue
550 West 7th Avenue, Suite 570
Anchorage, Alaska 99501
Telephone: (907) 343-9267
POSITION STATEMENT: Testified on HB 393.
PAUL FUHS, Lobbyist
Yukon Pacific Corporation
10652 Porter Lane
Juneau, Alaska 99801
Telephone: (907) 790-3030
POSITION STATEMENT: Testified on HB 393.
ACTION NARRATIVE
TAPE 98-18, 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, Rokeberg and Bunde.
Representative Kemplen arrived at 10:10 a.m. and Representatives
Ryan and Brice arrived at 10:17 a.m.
HB 380 - REDUCE ROYALTY ON COOK INLET OIL & GAS
Number 0059
CHAIRMAN HODGINS announced the committee would hear HB 380
"An Act relating to a temporary reduction of royalty on oil and gas
produced for sale from fields within the Cook Inlet sedimentary
basin where production is commenced in fields that have been
discovered and undeveloped or that have been shut in."
Number 0010
REPRESENTATIVE CON BUNDE made a motion to move the proposed CSHB
380( ) before the committee.
Number 0156
CHAIRMAN HODGINS asked if there was an objection. Hearing none,
CSHB 380( ) was adopted before the committee for discussion
purposes.
Number 0175
PATRICK CARTER, Legislative Assistant to Representative Hodgins
presented the changes in the committee substitute. He stated that
the entire bill was rewritten and the concerns of the Division of
Oil and Gas were addressed. He stated that a 40 million barrel cap
was adopted on what would be subject to the 5 percent royalty
reduction. It was also adopted that nothing above 35 billion cubic
feet of gas production would be subject to the 12.5 percent.
MR. CARTER stated that the committee substitute lists the fields
that are covered to be: Falls Creek, Nicolai Creek, North Fork,
Point Starichkof, Redoubt Shoal and West Foreland.
Number 0454
KEN BOYD, Director, Division of Oil and Gas, Department of Natural
Resources, testified via teleconference from Anchorage that CSHB
380( ) "addresses the fields that I thought would apply but I would
still asked the question, why would these fields be excluded." He
stated that he is still waiting to hear the analysis that lead to
the numbers. He stated that the relief for oil seems to be the
same for both oil fields. He stated that he would like to hear how
the numbers were developed.
CHAIRMAN HODGINS announced that the committee would hear from Mr.
Eason.
Number 0577
JAMES EASON, Independent Consultant, stated that he is speaking on
the behalf of Forcenergy and is prepared to explain the issues that
Mr. Boyd has listed as his concerns. He referred to his letter
written to Senator Halford relating to the Division of Oil and Gas'
comments on SB 256, HB 380's companion bill. In the letter he
pointed out the four principle concerns that the division has
raised. The first being the lack of a provision that would account
for changing conditions. Another concern being why the royalty
rates of 5 percent and the term of ten years, were selected. The
question of which fields would apply. The question of the economic
needs of all the lessees in the legislation being the same.
Number 0800
MR. EASON stated that the 5 percent was chosen as a floor to
provide consistency with the state's existing law in royalty
reductions. It also provides the same floor established by the
legislature two years ago in 1996, with the adoption of the
discovery royalty legislation in the Cook Inlet basin. It assures
that there is a reasonable royalty to the state regardless if these
things are developed. The term of ten years are in regards to the
production profiles and that any meaningful royalty relief has to
occur over a set number of years because of the way the oil and gas
fields are produced.
Number 0910
MR. EASON stated that in response to Mr. Boyd's concerns on the
production of the upside potential, CSHB 380( ) reflects what he
believes is the proper approach for trying to anticipate and
protect the states interest if these fields appear or turn out to
be larger than expected. He explained that he understood the
concern that lessees might attempt to use the legislation in a
manner which the legislature did not intend the legislation to
apply, he understood this concern. The only way to avoid this
concern is to list the fields that the legislation applies to,
those that have been discovered before 1988 and have been shut-in
from that time.
Number 1018
MR. EASON referred to previous testimony that in situations of
royalty reduction there is no fiscal impact to the state because
the presumption is the production of oil or gas would not occur.
He stated that it has some merit. He stated that when he looked at
the economic analysis of the fiscal impacts that the division
believes this bill will have, is that in his opinion they did not
rigorously follow the rules for estimating production declines nor
did they consider the benefits that come to the state balanced with
what they characterize as a "loss" of royalty revenue. He
suggested to refer to the fiscal analysis and his letter. He
stated that he assumed the most optimistic numbers from Mr. Boyd's
fiscal analysis; that two oil fields have 10 wells each, and 1,000
barrels a day of production. At the starting point they would
yield over 3 million barrels. The division's analysis projects
that same volume for 10 years and multiplies it by an assumed $10
per barrel takes the 12.5 percent royalty and compares that to the
5 percent royalty the state would have, and shows the difference as
a loss. He stated that the Cook Inlet oil field does not produce
at constant rates. He stated that unless there are programs to
increase and maintain the initial rates the fields begin to decline
immediately. He stated that it is difficult to define the decline
rate. He referred to an exhibit that the minimum decline rate
would be a about 16 percent a year. He explained that he kept
everything the division suggested but adjusted for the decline rate
and the results is then a "loss" of royalty of 14.1 million per
field rather than the Division's estimate of 27 million per field.
Number 1231
MR. EASON stated that there is a critical piece of analysis missing
from the Division's fiscal impact. He said "That is, they did not
acknowledge the value of the 5 percent accumulated under the
decline curve, that might not otherwise occur, at least based upon
the fact that after 30 years it has not occurred yet. And when you
do that you find, as you look at the table under the column of 5
percent, you find a 'loss' of 14.1 million under the 7.5 percent
sharing for the company, and a gain of 9.4 million in royalties
that the state would not otherwise receive, based upon the history
of these fields." He stated that there are also other factors,
including the development and extension of new infrastructure, and
the prolonging of all production in Cook Inlet by the increased
deliverability of oil and gas. He stated that they are important
factors although difficult to quantify especially since we can't
guarantee that any field on the list will be developed. However,
if they are developed these benefits will happen.
Number 1329
CHAIRMAN HODGINS stated that years ago on the Kenai, there were
thriving industries for the oil field and in the last five years
there has been a decline. The intent of the bill is to stimulate
some of economic development by going into field where no income
has been received. He stated that by lowering the royalty rates
some of those field can get going again. He reiterated that there
is of course no guarantee.
Number 1394
REPRESENTATIVE BUNDE stated that he would have a concern that if
this was extended to other fields that there might be the incentive
for some oil companies to cease production in an attempt to fall
under this bill to receive decreased royalties. He stated that it
is important to limit it to certain shut-in fields.
Number 1469
KATHERINE THOMAS, Owner, Construction Service Company, testified
via teleconference from Kenai that this bill is of a great interest
to the Kenai Peninsula.
Number 1502
JIM SYKES, Representative Oilwatch Alaska, testified via
teleconference from Anchorage, that Oilwatch is an non-partisan
organization, that works for open government and fairness on
matters of commonly owned oil and gas resources. He stated that
the changes in CSHB 380( ), he feels are good. He agreed that this
would have to be limited in scope so oil companies do not delay
production in order to get the royalty relief. He asked what
independently verifiable information is there that proves the
producers really need the lower royalty rates. He stated that in
the case of Cook Inlet gas, the majority of Alaskans depend on it
for electricity and heat, creating the market. However, currently,
two-thirds of Cook Inlet gas is exported, mostly to Japan. It is
projected that Cook Inlet gas will run out in the year 2007 from
the wells that are currently in production. He referred to
Representative Kott's letter questioning the renewal of the export
license as the "energy security of Southcentral Alaska should not
be risked." He stated that this concern is in line with the
federal law, Section 3A of the Natural Gas Act, prohibiting exports
that cause regional shortages. He stated that the current supplies
would last an additional decade if exports of Cook Inlet gas
ceased. He stated that the bill does not put any restriction on
the use or export of the natural gas.
Number 1669
MR. SYKES stated that the number 35 million cubic feet should be
reduced by a third. He suggested that there be a royalty break for
five years instead of ten years and "the 7.5 percent benefit at the
front end be added back in following that five year sunset, so that
industry can profit from the lower rate for the five years that it
takes to get the production on line." He asserted that the state
should recover what is reasonably due, therefore, after five years
the royalty rate should be raised to 15 percent for a period of ten
years before it returns 12.5 percent. He stated that the state
should not provide additional corporate welfare where there is no
need. He stated that the legislature should recognize its
obligation to the citizens of Alaska without commonly owned natural
gas resources.
Number 1784
KEN TURNAGE, General Manager, Oil Field Service Company, testified
via teleconference from Kenai that CSHB 380( ) provided the
incentive for industry to develop fields that are proven but not
processing and will provide royalties to the state and jobs for the
Kenai residents. He asserted that the resources are just laying
there, and they should be developed.
Number 1854
MR. BOYD stated that he would like to comment on Mr. Eason's
testimony. He stated that the 5 percent is the floor for new
fields in the current law but in this legislation the 5 percent is
not the floor it is the only number that there is. He stated that
under HB 207 there is a great flexibility and the number can vary
with time. He stated he did not feel just because the fields have
yet to be developed, a huge royalty relief must be provided. The
technology changes have been dramatic in the past ten years as
field within fields are being found. The economics of the fields
have changed and the time factor is not a good criteria for a
royalty reduction. He stated that the discovery royalty bill
passed last year, only allows the discovery royalty in the
discovered horizon and does not give a royalty relief to the entire
field.
Number 1926
MR. BOYD stated that in regards to the fiscal note it states that
"If one adopts the division's (Indisc.) well production rate ..."
but that is not what he did." He stated that he provided two
numbers and the lower number 500 barrels a day number was just
meant to provide a range. He stated that on page 2 of the
analysis, the example shows a decline but if the numbers are
averaged the production would not change at all. He questioned
what the difference is, the number he is providing is exactly the
same as Mr. Eason's number. He stated that he understood the issue
of declining fields and does not have any idea that the Redoubt
Shoal field will decline at the same rate as the Hemlock fields.
He stated that the value of oil is kept constant at $10 because the
future price is unknown and it could change, therefore a range of
values need to be considered. He asserted that there is no
requirement for anybody to build anything in this bill.
Number 2009
CHAIRMAN HODGINS asked how he would suggest the legislature
stimulate increased interest in Cook Inlet.
MR. BOYD replied: in Cook Inlet there has been two state sales
resulting in $4 million in bids, the Redoubt Shoal field and the
North Middle Ground field has established their units, Forcenergy
has bought all of Stewart's Petroleum's assets, Unocal proposed the
formation of the pioneer unit, there are 3 coal-bed-methane wells
being drilled in the Mat-su valley, there have been at least three
seismic programs in Swanson River Field, Forcenergy is building a
gas well at Coffee Creek and intends to build others, and Phillips
has plans to drill. He stated that they have provided for a good
lease-sale program, a discovery royalty program and have fair and
equitable leasing terms. He stated that the new technology has
provided companies the ability drill better wells.
Number 2078
CHAIRMAN HODGINS asked if he would suggest that all the resources
in the fields listed in CSHB 380( ), be left in the ground and that
no revenue is gotten out of those wells.
Number 2088
MR. BOYD stated that he has not suggested anything of the kind, he
suggested that no one has shown that royalty relief is needed to
develop these fields. He referred to Point Starichkof and stated
that he had no reason to believe that it would not be drilled next
year. He asked if there is no market for the gas, what is the
point of displacing 12.5 percent gas with 5 percent gas.
Number 2121
REPRESENTATIVE ROKEBERG stated that he had a few questions to re-educate himsel
benefits to the state would accrue if the royalties were reduced.
He asked if the severance tax would come into play.
Number 2154
MR. BOYD stated that the Division of Oil and Gas does not do taxes.
He stated that there would be a small severance tax but someone
from the Department of Revenue could better answer that question.
Number 2165
REPRESENTATIVE ROKEBERG stated that he assumed there would be some
property and corporate taxes and the state would be getting some
other benefits.
MR. BOYD replied that he believed that to be true.
Number 2180
REPRESENTATIVE ROKEBERG asked if in the history of the state of
Alaska if the division has ever entered into an agreement to reduce
the royalty for any oil and gas field.
Number 2191
MR. BOYD stated yes. Oxidental Petroleum did and Unocal is
currently looking at what can be done under HB 207. He stated that
there were others, and he could provide that to the committee.
Number 2226
REPRESENTATIVE ROKEBERG stated that when Oxidental Petroleum did
get the royalty relief they shut the field in because of prices.
Number 2236
MR. BOYD stated that they did not shut the field in, they sold it
to British Petroleum, who has now tripled the production at Melody
Point.
REPRESENTATIVE ROKEBERG stated that there was a shut-in of the
field and then it reopened. He asked if the state has granted any
royalty reductions.
MR. BOYD replied that the state has had one application from Unocal
which would grant a partial royalty reduction on some of the fields
that were applied for.
Number 2270
REPRESENTATIVE ROKEBERG stated that Mr. Boyd's answer is no.
MR. BOYD stated that is correct.
REPRESENTATIVE ROKEBERG stated that is the point he wanted to make,
because it is the perception that the legislature has granted
significant royalty reductions. He asserted that they are creating
statutes to provide for that, but point in fact there have not been
any royalty reductions.
Number 2286
REPRESENTATIVE ROKEBERG stated that he is concerned with the issue
that relates to pools, horizons and fields. He asked if he could
explain the differential between the three and the impact of this
bill if another zone was found through a known zone.
Number 2325
MR. BOYD stated that a pool can be described as having a number of
different colored sponges stuck on a stick, the sponges would
represent a pool, all the sponges together would be the field. He
stated that zones and horizons are terms. He referred to having
two colored sponges, the oil pool would be the deep sponge and the
gas pool would be the shallow sponge, his question is if there were
two wells drilled into that oil pool in the 1960s, would it mean
that it was discovered in 1960's and would have then applied to the
bill prior to the committee substitute. He stated he was asking
that if a shallow gas well was opened up does that mean that both
pools would get the relief.
Number 2427
REPRESENTATIVE ROKEBERG stated that in the bill and in the proposed
committee substitute it used the term "leases and unitized",
therefore the entire field within the unit would qualify. He asked
if that would be his interpretation.
Number 2461
MR. BOYD responded that it would be his as well.
REPRESENTATIVE ROKEBERG asked if Forcenergy wanted to go back into
Redoubt Shoal field and drill through the known reserves into a new
pool, would it still be eligible for the royalty reduction.
MR. BOYD responded that would be his interpretation.
TAPE 98-18, SIDE B
Number 0049
REPRESENTATIVE ROKEBERG asked what are the proven reserves at the
Redoubt Shoal field.
Number 0054
MR. BOYD stated that there is older seismic data there but
Forcenergy had done a 3-D survey which is better than his data.
Number 0082
REPRESENTATIVE ROKEBERG asked how the use of the 40 million barrels
of oil and the 35 billion cubic feet gas stacks up in terms of
North American and in Cook Inlet.
Number 0088
MR. BOYD replied that he could not answer for North America and he
does not know the size of the oil field but the division has added
up all the gas reserves and the entire amount is approximately 47
billion cubic feet. Individually, he believed the highest one to
be 20 billion cubic feet.
Number 0116
MR. EASON stated that he had a few comments to make. He referred
to the division's fiscal note analysis. It is 3.65 million barrels
per year as an initial production rate. He compared that relative
to the producing oil fields in Cook Inlet. He stated that the
fifth largest oil field in Trading Bay Field has reserves of about
100 million barrels. It is estimated that it only has 2 or 3
percent of its reserves left. He stated that numbers that he spoke
of previously would result in a rate of 37 percent the size of
Trading Bay field.
Number 0167
MR. EASON referred to Mr. Boyd's comment that the bill would not
require the development of any infrastructure. He stated that he
could not conceive how Redoubt Shoal or Point Starichkof fields
without the well, production facilities and the platform, could
operate. He stated that by definition the infrastructure is
guaranteed if in fact the bill has the ability to provide the
incentive to develop. He stated that the legislature has done a
lot to provide incentives in adopting the area wide leasing
standards. He agreed that technology is changing and that there is
exploration activity in Cook Inlet but there is the continued
decline of oil and gas production as Cook Inlet is about 90 percent
depleted of oil based on the division's estimates. He stated that
somewhere between 2005 and 2007 year range, there will be a demand
for gas.
Number 0293
MR. EASON stated that he believed that the six fields are unique
and he believes that if they can be developed the benefits will
benefit both parties and attract investment into the inlet.
Number 0364
REPRESENTATIVE KEMPLEN referred to the 40 million barrels of oil
and the first 25 billion cubic feet of gas produced in an oil or
gas field. He stated that those are relatively small fields and
asked if that was correct.
MR. EASON stated that small and large are relative terms in oil and
gas. In West Texas they would be considered as huge fields but in
respect to Cook Inlet they are not huge fields. They are not
insignificant numbers, they are not fully delineated as to the
potential of the fields.
Number 0460
REPRESENTATIVE SCOTT OGAN asked if HB 207 was only applicable to
pools of oil.
Number 0471
MR. BOYD replied that it wasn't for either oil or gas but was for
the discovered pool.
REPRESENTATIVE OGAN asked that if there was a shut-in well in a
field, would the entire field get the royalty reduction.
Number 0521
MR. BOYD stated that was his interpretation.
Number 0540
REPRESENTATIVE OGAN asked if there could be a list of the shut-in
pools and wells in each field. He stated that maybe royalty
reduction on just the pools should be looked at.
Number 0570
CHAIRMAN HODGINS stated that the idea behind the bill is to
stimulate someone opening the field and discovering oil and getting
revenue into the state. The idea is to find more oil and bigger
pools.
Number 0596
MR. EASON stated that the bill is self-limiting because the field
would have to be brought on to production before 2004 in order to
qualify. Once the field is brought on the reduced royalty is only
on what is produced for the next ten years. He stated that the
incentive would be to develop the field fully and quickly. He
referred to the Redoubt Shoal field and its previous attempts at
drilling. Additional reserves or pools being discovered can not be
ruled out but past evidence suggests that it is unlikely, in
regards to the Redoubt Shoal field.
Number 0737
REPRESENTATIVE RYAN stated that he would like to know who the
players are, and what their economic situations are before he is
comfortable with handing out this royalty.
Number 0798
CHAIRMAN HODGINS stated that the information is in his committee
packet.
Number 0857
REPRESENTATIVE ROKEBERG stated that he wanted to offer out some
questions. He stated that he was concerned with the ten-year
period. Overproduction or fast production could ruin the structure
and be at odds with the conservation commission. He suggested that
a "right to extend provision" be looked at. He referred to AS
38.05.180(e)(4)(A) that states a second royalty reduction can not
be obtained, therefore, it needs to be applied to the bill. He
stated that a provision of assignability needs to be addressed.
There needs to be a review of the ethicacy of a price parameter on
the bill. He stated that if the committee is listing the fields in
the bill then the committee needs to look at the geologic history
on the fields. He stated that HB 380 is taking a provision of HB
207 and simplifying it, and the committee needs to be cautious.
Number 1019
CHAIRMAN HODGINS stated that he would hold CSHB 380( ) over.
HB 393 - DEVELOP STRANDED GAS RESOURCES
Number 1047
CHAIRMAN HODGINS stated that the committee would now 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 asked
Mr. Carter to present the changes.
Number 1057
MR. CARTER stated that the marked-up version of HB 393 includes
Representative Kemplen's concerns that he submitted to the
committee. He stated that throughout the bill "stranded" has been
removed because it was not industry nomenclature to use the term
stranded gas. On page 2, some of the findings have been either
removed or amended. He specifically referred the committee to page
2, lines 24 through 28, and the insert that states "Experimental
research is being conducted on gas-to-liquids (GTL) technology. If
this research result in a commercially viable technology, and after
economic analysis, by the state of Alaska, of the application of
this technology it is shown that local, or state tax or regulatory
changes are necessary to commercialize an Alaska project utilizing
this technology, then this technology may be considered in regards
to this legislation." The reason is it is difficult to establish
what is economic and at this stage it has not been proven that GTLs
are economically viable in this state.
Number 1261
MR. CARTER stated that on page 6, line 21 the word "economic has
been added before proximity and he suggested that the committee
work on a definition for economic proximity. He stated that
through the bill "department" has been changed to "commissioner".
He stated on page 9, line 21 the year 2004 has been changed to the
year 2000.
Number 1415
MR. CARTER referred to page 15 and stated that at a future meeting
, a representative from the Department of Law would be present and
the qualifications for an Alaskan resident will be more clearly
defined. He referred to page 23 and stated that the section
regarding the affected municipalities this may be changed after the
next meeting with the pipeline mayors. Page 25, line 13 now reads
"qualified project means a gas that qualifies for development under
the terms of this legislation as determined by the commissioner of
revenue."
Number 1594
REPRESENTATIVE ROKEBERG referred to the GTL insertion and asked if
the legislation would then be applicable to any future GTL
contract.
Number 1616
CHAIRMAN HODGINS replied that it is enabling legislation, that
would allow negotiation and if the GTL technology is viable for the
North Slope Gas then a negotiation could start under this insert.
Number 1649
REPRESENTATIVE ROKEBERG stated that it would then go through the
same pipeline that is already there. He asked why their needs to
be this relationship to a new tax regime if the existing pipeline
is already there.
Number 1674
CHAIRMAN HODGINS replied that there would be some costs in building
the GTLs technology and the tax regime may or may not become part
of the economic analysis for that. He asked if anyone from the
industry would care to comment.
Number 1713
GEORGE FINDLING, Business Development Advisor, Commercial Gas
Development, ARCO Alaska Incorporated, stated that whatever kind of
investment that would commercialize stranded gas would be eligible
for some kind of fiscal contract and what the nature of the
contract would look like is entirely open. It is clear that it
would be a different kind of fiscal regime for a GTL. The idea is
to raise the economic viability of whatever the alternative is.
REPRESENTATIVE ROKEBERG stated that the scope of technology and
investments for GTLs would be entirely different than for a
liquefied natural gas (LNG). He agreed that it needs to be
encouraged.
Number 1847
MR. FINDLING stated that he does not see the technology to be that
different. He stated that the approaches are the same in that it
is trying to commercialize or make economically viable gas
resources that are commercially available right now. ARCO's base
case development plan is LNG but they are working on the option of
GTLs. The question he sees is, should the option of GTLs be kept
open for the state of Alaska, with the recognition that the base
case is still LNG. He asserted that the answer should be yes. He
stated that ultimately the fiscal regime would have to be approved
by the legislature and if they did not like it, it would not have
to be approved.
Number 1976
REPRESENTATIVE ROKEBERG stated that he agreed with him but he is
not sure that under the time-frame of the legislation if it could
work. He asked what is the level of technology for GTLs at this
point and how much would a GTL plant cost.
Number 2056
MR. FINDLING stated that he did not know the cost of a GTL project
but in a sense they do not know the cost of an LNG project either.
He stated that the most reliable estimate right now is $15 billion,
which does not work. He stated that he does not see the project as
either choosing an LNG or GTL project. He stated that there is
enough gas for both and what they are trying to do is keep the
options open for the state of Alaska in whatever form the gas can
be commercialized.
Number 2128
REPRESENTATIVE ROKEBERG stated that he agreed but what is being
talked about in the bill is entering into negotiation in the
contractual agreement to lower the tax regime, and that is the
distinction.
Number 2152
MR. FINDLING replied that he sees this as framework legislation
that sets out the framework under which a fiscal system could be
developed that would make the project more competitive in a
combination of other things. In that sense the fiscal system is
not defined yet because it has to work in combination with other
aspects.
Number 2209
REPRESENTATIVE ROKEBERG stated that is his point. Since it is
enabling legislation on an LNG pipeline. The legislature is moving
towards enabling industry to form a sponsor group. The time-frame
would have an impact on that. He asked if the committee would
prefer to see a longer time-frame in case the GTL technology proved
to be beneficial and apply an reduced taxing scheme to the
production of that down, the existing pipeline.
Number 2312
MR. FINDLING replied that moving it to the year 2000, could stall
the ability to do GTL based on the technology. It is unknown as to
if the GTL technology is going to work. He stated that to him it
is framework legislation for an investment that commercializes gas
within the state.
Number 2428
REPRESENTATIVE RYAN referred to a presentation on GTLs and stated
that he was told that there was a 60 percent loss of gas in the
conversion process and the net of the liquid would be 40 percent.
He asked if that was correct.
Number 2472
CHAIRMAN HODGINS replied that his recollection is that it would be
30 to 40 percent.
TAPE 98-19, SIDE A
Number 0018
REPRESENTATIVE RYAN reiterated that there are a lot of unknowns to
the project, but the industry is asking for the state's money and
favorable interest rates. He stated that the residency
requirements are lax which would mean that anyone can come to
Alaska to get a job. The intent language binds the state in many
ways. He stated that he is uncomfortable with the bill because of
all the unknowns.
Number 0222
CHAIRMAN HODGINS stated that every portion should be looked at and
until the committee gets some hard figures it is difficult to
decide what can be done with reductions. He stated that it is
still a profit for profit operation as both the private and public
interests will profit if the project goes through. He stated that
it is of the utmost importance to have local hire.
Number 0351
REPRESENTATIVE OGAN stated that social economic effect of increased
population, needs to be looked at. He stated that when deferring
taxes and royalties, how is the gap filled in the mean time.
Number 0441
REPRESENTATIVE ROKEBERG stated that he has concerns of Article 6 in
the bill. As Article 6 is right now he does not feel he could
support any of it. He stated that as it stands currently, the
affected parties are those that are contiguous to the existing TAPS
pipeline. He was concerned about having the other mayors involved
than just the pipeline mayors.
Number 0593
MARY MARSHBURN, Special Projects Coordinator, Department of
Revenue, stated that the commissioner is working on the
ratification language. She stated that they are in discussion with
the municipalities and have heard the multiple comments of the
committee. She stated that the department is concerned with the
deletion of the word stranded from the bill. The concern is that
the bill would then apply to any gas in the state, economic or
uneconomic.
Number 0721
REPRESENTATIVE RYAN asked if the bill applies to the known gas
reserves on the North Slope or is it for all gas reserves that are
yet to be discovered.
Number 0737
MS. MARSHBURN replied that it would apply to any gas within the
state of Alaska yet to be discovered.
Number 0764
PAUL FUHS, Lobbyist, Yukon Pacific Corporation, stated that there
needs to be a term, if not stranded, to justify why this action is
being taken. He suggested that the work of Dr. van Meurs be
included as well because his research on the necessity of fiscal
terms is why we are here. He stated that he did not think there
was a reason to exclude the GTL wording. He stated that there is
a need for both LNGs and GTLs and room for both. He stated that
the access along the gas line is an important consideration. He
stated that many communities will be affected, and it is important
to recognize that the state is taking away the right to tax oil and
gas properties in the pipeline corridor.
Number 0959
REPRESENTATIVE RYAN stated that his concern is that it is difficult
to change something once it is passed and he stressed that a lot
more information is needed so irreversible mistakes are not made.
Number 1011
REPRESENTATIVE ROKEBERG stated he did believe that there needs to
be some kind of "in lieu of payment", the question is just how to
structure it properly. He stated that there is the problem of what
is an affected community. He stated that the North Slope borough
can not make the case that they are directly impacted, but they
would have the right to tax. He suggested that the municipality of
Anchorage and the Mat-su valley are going to have greater impacts
than the North Slope borough, so to say that one borough has the
right to tax over another is questionable. He asked where the true
impacts are, and that there are no monies going to those
communities that are truly impacted. There needs to be payment to
the communities that are impacted.
Number 1179
MR. SYKES stated that he would like to respond to the difference of
LNG and GTL. He stated that the LNG project is perhaps a $100
billion project, after construction and operating costs, there is
the potential to tax $75 billion. The difference with GTLs is that
it provides only feed stock and oil companies use it as feed stock
for diesel which is not taxable, therefore there is only the
potential to have $15 billion worth of feed stock and almost no
potential to make money under the present technology. He explained
that he asked Dr. van Meurs why anyone would support a GTL project,
Dr. van Meurs replied that the LNG project may not be feasible as
the world does not need Alaska's gas as there is great competition
and low gas prices. This would be a fall back position in regards
to GTLs.
Number 1326
MR. SYKES stated that the potential for an anti-trust may want to
be considered, and how to ensure that there is competition in the
transportation of the gas. He stated that they are also concerned
with Article 6 and they have heard that bonding schemes are an
option but should the government ask its municipalities to bond for
private industry when the purpose of bonding is for things that
require a public purpose. Another concern is the commissioner of
the Department of Revenue's scope and latitude to negotiate. There
should be a requirement for full public disclosure and clear
guidelines.
Number 1420
CHAIRMAN HODGINS announced that HB 393 would be held over.
ADJOURNMENT
Number 1432
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and
Gas meeting at 12:00 p.m.
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