Legislature(2001 - 2002)
04/19/2002 08:10 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
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 19, 2002
8:10 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair (via teleconference)
Representative Hugh Fate, Vice Chair (chairing)
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Jim Whitaker
COMMITTEE CALENDAR
HOUSE BILL NO. 519
"An Act authorizing priority treatment under the Right-of-Way
Leasing Act for an Alaska North Slope natural gas project;
expanding the scope for the kinds of gas development projects
that may become qualified projects under the Alaska Stranded Gas
Development Act; extending the deadline for submitting
applications under the Alaska Stranded Gas Development Act;
exempting an Alaska North Slope natural gas project from state
property tax and all municipal taxes during construction; and
providing for an effective date."
- MOVED CSHB 519(O&G) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 519
SHORT TITLE:NATURAL GAS PIPELINE: SPECIAL PROVISIONS
SPONSOR(S): RLS
Jrn-Date Jrn-Page Action
04/16/02 2952 (H) READ THE FIRST TIME -
REFERRALS
04/16/02 2952 (H) O&G, RES, FIN
04/16/02 2952 (H) REFERRED TO OIL & GAS
04/19/02 (H) O&G AT 8:00 AM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE PETE KOTT
Alaska State Legislature
Capitol Building, Room 204
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 519 as chairman of the House
Rules Standing Committee, sponsor of the legislation.
PAT POURCHOT, Commissioner
Department of Natural Resources
400 Willoughby Avenue, Fifth Floor
Juneau, Alaska 99801-1724
POSITION STATEMENT: Testified on HB 519, noting that he chairs
the governor's Natural Gas Cabinet; spoke against granting this
tax "holiday" or waiver outside a negotiated process, but in
support of sections that reactivate and expand the Alaska
Stranded Gas Development Act.
LARRY PERSILY, Deputy Commissioner
Office of the Commissioner
Department of Revenue (DOR)
P.O. Box 110400
Juneau, Alaska 99811-0400
POSITION STATEMENT: Testified on HB 519; proposed changes;
conveyed DOR's preference for reauthorizing the Alaska Stranded
Gas Development Act instead of waiving $500 million in taxes;
explained how the broadness of "related facilities" may impact
the fiscal note.
DAVID MARQUEZ, Attorney
for VECO Corporation
18546 Osprey Circle
Anchorage, Alaska
POSITION STATEMENT: Urged passage of HB 519.
RHONDA BOYLES, Mayor
Fairbanks North Star Borough (FNSB)
P.O. Box 71267
Fairbanks, Alaska 99707
POSITION STATEMENT: Testifying as mayor and a businessperson,
called HB 519 imperfect but "one leg of a three-leg stool"; said
a waiver during construction is reasonable, but so are
discussion of both recoupment during operation and
"socioeconomic impact aid"; said municipalities deserve a seat
at the table regarding long-term tax structuring.
BILL ALLEN, Chairman and Chief Executive Office (CEO)
VECO Corporation
3601 C Street
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 519 and answered
questions.
PAMELA LaBOLLE, President
Alaska State Chamber of Commerce
217 Seward Street
Juneau, Alaska 99801
POSITION STATEMENT: Urged passage of HB 519.
JACK CHENOWETH, Assistant Revisor
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
State Capitol
Juneau, Alaska 99801-1182
POSITION STATEMENT: As drafter of HB 519, Version L, answered
questions regarding possible later recoupment and the meaning
and implications of "related facilities".
KEN KONRAD, Senior Vice President
BP Exploration (Alaska) Inc.
P.O. Box 196612
Anchorage, Alaska 99519-6612
POSITION STATEMENT: Testified in support of HB 519; suggested
that some technical modifications may be needed to ensure there
is no legal challenge regarding use of in-state capabilities.
JOE MARUSHACK, Vice President
ANS Gas Commercialization
Phillips Alaska, Inc.
P.O. Box 100360
Anchorage, Alaska 99510-0360
POSITION STATEMENT: Testified in support of HB 519, noting that
minor clarifying changes may be needed.
ACTION NARRATIVE
TAPE 02-23, SIDE A
Number 0001
VICE CHAIR FATE called the House Special Committee on Oil and
Gas meeting to order at 8:10 a.m. Representatives Fate, Ogan
(via teleconference), Dyson, and Guess were present at the call
to order. Representatives Chenault, Joule, and Kohring arrived
as the meeting was in progress.
VICE CHAIR FATE informed members of a legal interpretation [from
Tamara Cook, Director, Legislative Legal and Research Services]
that for purposes of making a quorum, a member on teleconference
can be counted [for all business except moving a bill from
committee].
HB 519-NATURAL GAS PIPELINE: SPECIAL PROVISIONS
[Contains discussion of HB 38 during Commissioner Pourchot's
testimony; contains discussion of SB 360 at the end of Mr.
Marquez's testimony]
Number 0092
VICE CHAIR FATE announced that the committee would consider
HOUSE BILL NO. 519, "An Act authorizing priority treatment under
the Right-of-Way Leasing Act for an Alaska North Slope natural
gas project; expanding the scope for the kinds of gas
development projects that may become qualified projects under
the Alaska Stranded Gas Development Act; extending the deadline
for submitting applications under the Alaska Stranded Gas
Development Act; exempting an Alaska North Slope natural gas
project from state property tax and all municipal taxes during
construction; and providing for an effective date."
Number 0102
REPRESENTATIVE DYSON moved to adopt the proposed committee
substitute (CS), version 22-LS1651\L, Chenoweth, 4/18/02, as a
work draft. There being no objection, Version L was before the
committee.
Number 0241
REPRESENTATIVE PETE KOTT, Alaska State Legislature, presented HB
519 as chairman of the House Rules Standing Committee, sponsor
of the legislation. He explained that there is a window of
opportunity to diversify Alaska's economy. This bill provides
some incentive for building a gas pipeline during this window,
which he suggested will close after perhaps two or three years
because other markets will be available. He reminded members
that the producers have formed a working group to look at [a
pipeline] and have concluded that the economics aren't right,
regardless of what route is chosen.
REPRESENTATIVE KOTT noted that it remains to be seen what will
happen with netback provisions in federal statutes. He pointed
out that at the state level, however, Alaskans can collectively
support a gas pipeline, which will mean a lot to the state's
economy, especially since there is an earnest search underway
for additional revenues to fill a $1-billion budget gap.
Number 0459
REPRESENTATIVE KOTT referred to Section 1 of the bill, which
adds a findings-and-intent section that substantiates the
variety of reasons the bill is needed. He recalled that in ten
years in the legislature, he'd never before seen a bill that
comprehensively lists the intent with substantive findings.
REPRESENTATIVE KOTT characterized this as a simple idea:
providing a tax "holiday" on property and sales taxes along the
right-of-way if this project goes forward. He alluded to new
language in Section 4 of the bill, paragraph (7), and indicated
it is based on a date established by the commissioner [of
revenue] during the construction phase and ends December [31] of
the second full calendar year in operation. He added that it
could be seven years, for example, or twelve, depending on the
length of the construction phase; he suggested the producers
could provide a better idea regarding that.
Number 0581
REPRESENTATIVE KOTT noted that provisions in the bill identify
requirements to qualify as a project. In addition, a provision
calls for the greatest maximum use of Alaskans to be trained and
qualified for the various jobs, and calls for using Alaskan
businesses to the greatest extent possible under current law.
REPRESENTATIVE KOTT reiterated the desire to have a tax
"holiday" for property and sales taxes. Regarding whether there
would be a loss of revenue, he pointed out, there is nothing to
be taxed right now, and what will happen in the future is
unknown. He offered his belief that a little sacrifice on all
sides will be required.
REPRESENTATIVE KOTT compared the current situation to needing to
put money into a slot machine in order to get anything back. He
concluded, "If we want to get a pipeline built and we want to
get some revenues generated - which, in ... a conservative
estimate will be about 50 years, and it could be a lot longer
than that - we're going to have to put something in." He noted
that other testifiers could address technical aspects.
Number 0775
REPRESENTATIVE OGAN, speaking via teleconference, noted that the
Department of Revenue has characterized the bill as a tax
waiver, rather than a holiday; unlike the Alaska Stranded Gas
Development Act, this doesn't have a mechanism to recoup that
foregone revenue.
REPRESENTATIVE KOTT agreed it is a waiver of taxes as well, but
indicated he has heard the term "holiday" being used.
Number 0885
PAT POURCHOT, Commissioner, Department of Natural Resources
(DNR), came forward to testify, noting that he also chairs the
governor's Natural Gas Cabinet. He told members the
administration doesn't support the provisions of HB 519 that
provide a grant of up to $500 million in state and local
property taxes - as either a "holiday" or a waiver - outside of
a negotiated process that takes into account not only the
economic necessity of providing the incentives, but also other
issues of importance to the state.
COMMISSIONER POURCHOT reported that on the other hand, the
administration supports the provisions that reactivate and
expand the Alaska Stranded Gas Development Act, which was
proposed by the governor several years ago and enacted by the
legislature in 1998; he indicated those were in Sections 9 and
[10] of the bill. He noted that the governor has another bill,
HB 38, similar to those sections; it would move the "starting of
the operational date of that Act up" and also expand it to
include all kinds of natural gas projects, not just LNG
[liquefied natural gas], as the original Act provided for. He
told members:
We see that negotiating framework that's set up in the
Act, as expanded and reactivated in this bill, as a
way of bringing in economic information into the
decision making on whether to grant this type of
economic incentive or other types dealing with,
perhaps, severance tax, ways of valuation of gas, and
other things that the Stranded Gas Development Act
speaks to. ...
Also, that Act sets up a framework that would allow
the state to bring other things to the table.
Clearly, there's interest in issues like local hire,
access to gas, use of the state's royalty, that we
feel would be very much a logical and necessary part
of any kind of larger negotiation on incentives for
advancement of a gas line.
The Stranded Gas Development Act also has a mechanism
for bringing in municipal interests. And clearly,
when $250 or $300 million of potentially waived
locally property taxes are involved, there certainly
would be a role, it seems, for the municipal
governments involved.
Number 1065
COMMISSIONER POURCHOT continued:
This ... negotiated approach involving economic
information isn't new. We and the legislature
addressed that in the marginal-fields legislation
several years ago. It was addressed and discussed at
length in the Northstar legislation, of trying to
assess the economics of the project and how incentives
would or wouldn't help a project become a reality. So
we think that there are ways of providing state
incentives for the gas line. We want to approach
those ... in a framework that makes sense and looks at
all available information.
Number 1130
The particular tax incentive that's mentioned in this
bill - property tax "holiday" or property tax waiver -
was, indeed, something that was pointed to by our
consultants in a fairly comprehensive study by Pedro
van Meurs several years ago. He pointed to property
tax as being perhaps the most single significant tax
that should be looked at for possible ... change to
advance a gas line, in that it's ... a very regressive
tax and comes at a very inopportune time in a project
life, in that property taxes are being assessed during
construction and before revenues flow from a completed
gas line.
His ideas, however, ran not to an out-and-out grant of
... an exemption from all those taxes, but to change
the front loading, if you will, of those taxes to
perhaps a back-loaded system where the state, and
perhaps municipalities, could recoup deferred property
taxes down the road of a project when revenues were
flowing, and it would be less onerous to project
sponsors.
COMMISSIONER POURCHOT concluded by offering that there are
better ways to approach this, already used by the legislature in
its approach to similar issues. He indicated Larry Persily of
the Department of Revenue could address fiscal impacts.
Number 1253
REPRESENTATIVE JOULE asked whether Commissioner Pourchot has
received any of the producers' findings regarding the
construction of a [gas] line.
COMMISSIONER POURCHOT said no.
VICE CHAIR FATE thanked Commissioner Pourchot and called on Mr.
Persily.
Number 1291
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), testified via teleconference. He
agreed with what Commissioner Pourchot had said, then told
members:
What the [Alaska] Stranded Gas Development Act
envisioned and what it included when it was passed in
1998 was to authorize the state to negotiate a
contract for payments in lieu of taxes with a
developer of a gas project so that we could make it
more affordable at the beginning, at the early stages
- give them incentives by deferring or restructuring
the state's fiscal regime, so that during the
construction, when ... it's all outlay and there's no
revenue, during the early years where there's not a
positive cash flow, the state's take would be lower.
The project developer would be able to use the cash
that starts coming in, in the early years of
production, to recoup their expenses. But in later
years, when the line is more profitable, when cash
flow is positive and when prices are high, the state
would share in those benefits and would take a higher
percentage. So, it'd make the state system more
progressive, rather than regressive, which ... we are
now, as Commissioner Pourchot explained, by lumping
property taxes on.
For the committee, ... the assessment of property
taxes for [the] state and municipalities begin the day
that first piece of pipe hits the dock and gets
unloaded. So under the existing statute, it's
correct: whoever builds this project would pay
property tax on pipe, related equipment, from the
first day they start mobilizing for construction. It
would be years before there's positive cash flow.
So that part of the intent of this legislation we
agree with, because it does match the Stranded Gas
Development Act of 1998, which, by the way, expired
last year; it had a deadline of June 30, 2001, and no
one applied, as we know - no one offered to build a
gas line. So that Act would need to be reauthorized,
which this legislation does by extending the
application date to June 30, 2005.
Number 1440
MR. PERSILY continued:
What the Department of Revenue would prefer is, rather
than ... waiving $500 million or more in state and
municipal property taxes without getting anything in
return, we would prefer just to reauthorize the
Stranded Gas Development Act that says we can sit
down, figure out what is needed to make a project
economical, what is needed for someone to make the
decision to go ahead and lay out $10 or $15 or $20
billion - what the state can do to help with that -
and then, in return, when cash flow's positive, when
prices are higher, what the state can get back.
The state - and particularly the municipalities - will
face some heavy costs during the construction cycle.
We all remember from the oil pipeline: police, fire
[protection], schools, roads. To give away property
tax and sales tax for all those years, which this
legislation does, is going to place a burden on the
state and particularly on municipalities. And we
would prefer just to go back to the original wording
of the Stranded Gas Development Act, which allows us
to negotiate a contract for payments in lieu of taxes.
Number 1524
MR. PERSILY offered concluding remarks and recommendations:
We feel this is premature, and we would strongly
recommend a change in that property-tax-waiver
provision to include an opportunity for the state to
share in the potential benefits from a highly
profitable project, as part of any package for tax
relief, provide an opportunity for the affected
communities to participate in those tax-relief
discussions, and some sort of needs test so that the
state doesn't give up more in tax revenue than is
needed. I think any project developer would be
willing to admit that they would be happy to pay their
fair share, a reasonable share. But taking it down to
zero for six or seven years, in our opinion, does not
meet that fair-share test.
Number 1558
MR. PERSILY explained why the fiscal note may be higher than the
amount submitted:
The legislation, in granting the tax waiver, we think
is very broad in terms of defining the North Slope
natural gas project as the pipeline and any related
facilities. That could include an awful lot besides
just the pipeline, compressor stations, conditioning
plant on the North Slope. What if wells are converted
from oil to gas, petrochemical construction - you
could end up giving away more than the $500 million-
plus than we had estimated in the fiscal note.
Number 1597
REPRESENTATIVE JOULE asked whether Mr. Persily was indicating he
might change the fiscal note if there is a broader application.
MR. PERSILY reiterated part of his earlier explanation, adding
that the department has only recently come to realize the
potential broadness of "related facilities". He said the fiscal
note for [Version L] probably would be expanded, therefore,
"because the potential for more lost revenue is very real."
Number 1656
REPRESENTATIVE OGAN alluded to the analysis section of the DOR's
fiscal note submitted by Mr. Persily the previous day; he said
he shared some of those concerns. Before reading it, he
explained, he'd been under the impression that [HB 519] follows
the Alaska Stranded Gas Development Act, with which he is
familiar from being a member of both this committee and the
House Resources Standing Committee for eight years; he recalled
the arduous task of reviewing the Pedro van Meurs study and
spending hundreds of hours in hearings. Speaking of that Act,
he remarked, "I was a little uncomfortable with it then, but I
had a good feeling about it because there was an ability, on an
upside, to recoup the money." He said [HB 519] departs from
that philosophy because there is no recoupment. He asked Mr.
Persily whether he also interprets this as a waiver of taxes.
MR. PERSILY replied, "Yes, that's how we interpret it. There's
no ability to recoup, no ability to negotiate anything."
Number 1774
REPRESENTATIVE OGAN referred to [feasibility] studies by the
producers. He recalled requesting, early in the year, that the
producers bring forth their economic models to the committee,
which hadn't happened. He asked Mr. Persily whether he'd seen
any economic models from the studies of that working group
[which consists of the three large producer companies: BP
Exploration (Alaska) Inc.; Phillips Alaska, Inc.; and ExxonMobil
Corporation].
MR. PERSILY responded, "I myself haven't. We have had our
economist here see some sketchy models. But no, the producers
have not shared everything with us."
REPRESENTATIVE OGAN said that distresses him somewhat "because
they're asking for a big chunk here, with no ... models." He
offered his understanding that all three companies in the
working group must agree [in order to provide information], but
that one company wouldn't; therefore, he would ask testifiers
which company hadn't agreed, and why they won't show the models.
VICE CHAIR FATE requested that Mr. Persily be available to
answer questions. He noted that Mark Myers, Director, Division
of Oil & Gas, DNR, was online to answer questions as well.
Number 1901
DAVID MARQUEZ, Attorney for VECO Corporation, came before the
committee to urge passage of HB 519, noting that VECO
Corporation is an Alaskan company headquartered in Anchorage.
He told members:
VECO Corporation is an engineering, construction, and
oil and gas service company that has been active in
the Alaska oil patch for several decades. It has also
been a good employer and an active member of the
greater Alaska community, participating vigorously in
philanthropic and community activities.
VECO urges passage of this bill because it believes
that Alaska desperately needs a gas pipeline for its
economy. VECO has seen and experienced, over the last
15 years, significant reductions in the oil industry
workforce in this state, with the most recent one
being announced within the last few weeks by Alyeska
Pipeline Service Company. Coincident with all these
reductions has been the elimination of contractor
positions staffed by employees of VECO. VECO needs a
gas pipeline to keep its Alaska employees employed,
and hopefully even to increase its workforce.
Number 2010
MR. MARQUEZ continued:
Despite the high costs and huge risks of this project
for the development of the Alaska North Slope natural
gas pipeline, VECO believes that it is still possible
to achieve this dream. Some producers have indicated
that work will continue when three legislative actions
are taken: first, federal enabling legislation;
second, federal legislation that helps reduce the risk
of gas prices' cycling to low levels; and third,
Alaska legislation that provides both an incentive and
tax certainty and clarity.
As to the federal legislation, some have questioned
why federal assistance should be provided if the State
of Alaska is unwilling to step forward. House Bill
519 will send a clear signal that the state is willing
to participate. It grants a temporary exemption to
the project from local and state property taxation
under the 20-mill property tax (under AS 43.56) for a
period from commencement of the project's construction
through the first two years of operation of the
pipeline. The bill also calls for expeditious
priority treatment by state officials and agencies in
support of development and construction of this
project.
The bill puts back into the action the Alaska Stranded
Gas Development Act that expired last June. This
legislation was enacted after a very substantial
effort, as Representative Ogan described, by the
legislature, the administration, and the industry to
encourage the development of an LNG project to
commercialize Alaska North Slope gas. House Bill 519
makes it applicable to a North Slope gas line as well
as an LNG project, and extends until June 2005 the
deadline for filing an application for a contract with
the state. Such a contract would be approved by the
legislature and would contain provisions addressing
the issues of tax-and-royalty clarity and certainty,
and other issues important to the parties.
Number 2113
MR. MARQUEZ continued:
A little more on the temporary property-tax exemption
provided in the bill: it does not apply to any taxes
currently being collected, so present revenues will
not be affected by this bill. Only if a pipeline is
built and the state enjoys the benefits of that
development will the investment of this temporary tax
exemption be made. It is temporary and lasts only for
the period of construction and the first two years of
operations. At its expiration - if this bill, in
fact, encourages the producers and a pipeline is built
- the state and local governments will have a pipeline
on which to levy taxes for many years; a new industry,
a gas industry, will have been created; in-state use
of gas will be possible; and Alaskans will be
employed. If it is not built, there will not be any
of these.
Just a year or so ago, when gas prices were very high,
everyone thought the pipeline was just around the
corner. Now, reality has set in again, and the
project's enormous risks and costs make it very
doubtful that it will be built unless action is taken
to keep the project alive. VECO, together with Fluor,
performed the study for the producers that ... has
been referenced. VECO recognizes the great risks
involved with the project, but believes that if the
state takes action to reduce the risks and costs, we
can make it happen.
There may be concern that this will be viewed as a
giveaway and that, instead, the state should negotiate
with the gas owners before any incentives are given.
VECO feels a sense of urgency. If action is not taken
this year, the only opportunity for a significant
boost to the state economy may be lost. If we take a
year or two or three to negotiate any incentives, the
opportunity may be lost as the producers move on to
other projects. There will be time in the coming
years under the Alaska Stranded Gas Development Act to
negotiate, but VECO believes concrete action must be
taken this year to keep the project going.
Number 2239
MR. MARQUEZ continued:
Further, the bill requires that the producers must
meet certain conditions to be eligible for the
temporary tax exemption. First, it must be a pipeline
that follows the southern route. The bill lists six
other conditions, including compliance with the
federal Acts relating to the natural gas pipelines.
Amendments [to those Acts] ... would be favorable to
Alaska and are being currently considered with the
pending federal enabling legislation. And [the bill]
includes Alaska ... hire, buy, and build.
The Alaska Stranded Gas Development Act, which this
bill reopens, provides the opportunity for tax-and-
royalty certainty and clarity that will benefit both
the state and the producers. The state and the oil
owners were locked in long, costly, and antagonistic
disputes over issues relating to the determination of
taxpayers' liability for severance tax and royalty.
VECO has been informed that the producers strongly
desire that such disputes be avoided as to gas [and]
that the risk associated with [tax-and-royalty]
uncertainty and lack of clarity is one more risk that
... burdens this already risky project.
The stranded gas Act provides a good process for the
state and producers to negotiate such clarity and
certainty; in fact, it offers the opportunity to
negotiate what tax regime would be in the long-term
fiscal interest of the state, while accommodating
affected municipalities and the project sponsors under
a wide range of economic conditions, potential
structures, and marketing arrangements. And the
legislature has the power to authorize execution of
the contract. The Act gives the municipalities an
important role through the formation of a municipal
advisory group.
Number 2323
MR. MARQUEZ concluded:
In summary, House Bill 519 is crucial and contains
perhaps the only chance left to try to keep the
possibility of a gas line project alive for the next
few years, or it may be decades before the opportunity
arises again. VECO also wants to make it very clear
that it does not consider this to be a "producer
bill." This is an Alaska bill that provides for a
short-term investment by Alaska that will pay off in a
project that could be shipping gas for a hundred
years.
Listening to the previous testimony, ... it seems
clear that we agree that an incentive is necessary for
this pipeline [and] that the most leveraging incentive
would be ... an exemption from the property tax. And
really, this bill comes down to the philosophy of
timing. VECO believes that it is very important that
a signal be sent, this year, that Alaska wants this
pipeline. The Stranded Gas Development Act provides
the opportunity to negotiate later, and we believe the
producers will want to use that bill in order to
attain tax certainty and clarity. And the whole tax
regime can then be addressed.
VICE CHAIR FATE reminded testifiers they could either fax
written testimony or provide it in person [to the committee
aide].
Number 2428
REPRESENTATIVE OGAN told Mr. Marquez he appreciates his
testimony and supports doing whatever possible to "jump-start"
this project. He referred again to the analysis in the DOR's
fiscal note, however, and said there is no way to recoup revenue
[when there are profits] under this bill. He also referred to a
previous recommendation by Pedro van Meurs to "give a tax
holiday on these ad valorem taxes." Representative Ogan
indicated there previously had been no objection by the
producers to the state's having the ability to recoup money
later; to his reading, though, this bill lacks that ability. He
asked Mr. Marquez whether VECO Corporation would object to the
concept of letting the state recoup lost revenues later on, when
the pipeline is operating and making money.
MR. MARQUEZ answered:
I disagree with you, in your analysis of the bill,
because ... if this tax exemption - temporary tax
exemption - is granted, I think that will send a
signal that could very well spur continuation of work
on this pipeline. I also think that it's very
important for the producers ... to achieve tax
certainty and tax clarity, and the same for royalty.
So, I believe that they will, right away, want to come
in and use the Stranded Gas Development Act in order
to obtain important tax clarity and tax certainty.
When that happens, it seems to me, under the Alaska
Stranded Gas Development Act that you worked so hard
on - and as a former employee of ARCO Alaska, Inc., I
appreciate all the hard work you put into that bill -
that will present the opportunity for everything to be
on the table, and for the whole tax regime for the
pipeline to be negotiated. And I think that would be
possible, for there to be a recoupment later.
VECO's position is, let's grant this incentive. Let's
send a signal and negotiate later, rather than
spending a year or two or three ... negotiating now,
perhaps at some point arriving at some sort of
incentive, but perhaps missing the train - the train
has left the station because these large producers
have other projects that they'll turn their attention
to.
Number 2613
REPRESENTATIVE OGAN said he agreed wholeheartedly with Mr.
Marquez's last statement and was willing to seriously look at
doing that. He respectfully disagreed, however - based on the
DOR's information, especially - that there is an ability to
negotiate later to recover some of the money. He proposed that
the current committee should work on that issue to make sure
members know what will happen if this bill passes.
Number 2648
VICE CHAIR FATE inquired about Mr. Marquez's assessment of
whether this bill is needed before or after the proposed final
amendments to the energy legislation before Congress.
MR. MARQUEZ offered his understanding that Congress would be
turning attention to aspects of gas development in that energy
legislation, but said he believes it is likely that a final
package of energy legislation would be enacted after the end of
Alaska's legislative session. He said that is why VECO
Corporation would like Alaska to send a signal before
adjournment of this current session, so that the rest of the
country can see that Alaska wants this pipeline. He added that
the federal legislation may not pass - including going to a
conference committee - before summer or later.
Number 2723
REPRESENTATIVE GUESS noted that Senator Torgerson has put a lot
of time into the Joint Committee on Natural Gas Pipelines, and
that [the Senate Resources Standing Committee] has just
introduced a bill [SB 360] similar to [HB 519] in some ways.
She asked Mr. Marquez why the legislature should favor this
approach in HB 519, which offers an incentive because it isn't
economic otherwise, versus the approach of [SB 360], which says,
"Show us it's not economic before we give you an incentive."
MR. MARQUEZ responded:
I think one of the issues with Senator Torgerson's
bill is the test in which you have to show, by clear
and convincing evidence, that without whatever benefit
is being sought, the project would not be economic. I
think that's a very vague test. I think it may be
even an insurmountable test. But ... I can predict
that it'll be a test that will discourage the
producers from wanting to take that on and seek the
benefits.
I think the scheme that Representative Ogan and others
spent a long time working out in the Stranded Gas
Development Act provides for a ... good test, and that
is whether whatever is being proposed is in the long-
term fiscal interests of the state. And the Stranded
Gas Development Act sets forth all sorts of different
factors that need to be balanced and considered. And
I think that scheme ... is a good scheme, and one
that's ready to go, and I think ... that the parties
will want to ... use that scheme. And I'm not sure
that they're going to want to use that scheme when
facing the ... test of clear and convincing evidence
that it's otherwise uneconomic, because I'm not sure
they'll understand how they can meet that test.
Number 2825
RHONDA BOYLES, Mayor, Fairbanks North Star Borough, testified
via teleconference, noting that she also is a businessperson.
She thanked the committee for its hard work over the last 12 to
14 months. She told members although HB 519 isn't perfect, it
is "one leg of a three-leg stool" requiring federal, state, and
municipal support. She said it certainly asks for clarity and
certainty, which as a businessperson she believes are critical.
It also asks for economic incentives through a waiver of
municipal property taxes for a limited period of time. "That
certainly is not unreasonable," she said. "In fact, I believe -
as leaders in our state and leaders in the boroughs,
municipalities - we have an obligation to provide an environment
that is conducive to economic development, and that would mean
economic incentives."
MS. BOYLES emphasized how critical this project is to Interior
Alaska, and stressed the need for gas and its long-term
benefits. Without a gas line, there wouldn't be those long-term
property taxes being collected. She suggested discussion
regarding recouping property taxes during the operation phase is
appropriate. She also referred members to Article 6 under AS
43.82 and said discussion regarding socioeconomic-impact aid is
appropriate as well.
[Not on tape because of the tape change, but written in the
committee secretary's log notes, was Ms. Boyle's remark that
most important, she believes municipalities deserve a seat at
the table regarding long-term tax structuring of this project.]
TAPE 02-23, SIDE B
Number 2980
MS. BOYLES concluded as follows:
I can tell you, pitting the municipalities and the
state and the producers, in ... determining assessed
values of the TAPS [Trans-Alaska Pipeline System]
asset, is an inappropriate mechanism to deal with.
The municipalities need ... a seat at the table now.
And although you do a wonderful job representing us, I
don't think it needs to be said that there's a trust
factor ... between municipalities and the state
legislature, and I think an even more obvious lack-of-
trust factor between the legislature and the
producers. And in a business partnership, lack of
trust doesn't make for a good project.
So, I think we need to set our political agendas
aside. We need to facilitate this gas project. We
need to bring natural gas to the state of Alaska. And
I would ask you to continue to lead our state and its
citizens into the next decade with some fiscal
certainty, additional jobs, and the benefits that this
huge project would bring to us.
Number 2878
REPRESENTATIVE KOHRING thanked Ms. Boyles and said he agreed
with her. He suggested this is the kind of legislation needed
to spur development in the industry, and said it fits in with
his own budget proposal for major cuts over a ten-year period in
government bureaucracy, coupled with major expansion in the oil
and gas industry. He suggested this bill would go a long way
towards helping the state's fiscal situation, "not to mention
growth in our economy from jobs and just dollars flowing in the
economy through construction of this nature."
Number 2819
BILL ALLEN, Chairman and Chief Executive Office (CEO), VECO
Corporation, came forward to testify in support of HB 519. On
his behalf, Rick Smith, Vice President of VECO Corporation, read
the following:
Mr. Chairman and members of the committee, it is a
pleasure to be here with you today, and I appreciate
the opportunity to speak with you on an issue of the
utmost importance to Alaska.
I know most of you personally. Over the years, we
have had the chance to work together on many issues
important to Alaskans: creating jobs and local hire,
improving education, encouraging business and economic
development, to name just a few.
I'm here today to tell you that in my opinion, no
single issue is more important to Alaska's future than
the legislation you now have before you. Alaska is
truly at a crossroads. Many of our traditional
industries are struggling - often through no fault of
their own. Our oil resources are declining, our
timber, mining, and fishing industries are on the
ropes - because of factors largely beyond their
control.
But the bottom line is that as those traditional,
mainstay Alaskan industries struggle, Alaska
struggles, and Alaskans find themselves out of work
and unable to provide for their families. In
addition, as our state's economy shrinks, so does your
ability to ensure better schools, better communities,
and a better quality of life for all Alaskans.
Mr. Chairman, I believe the legislation before you
offers an opportunity for Alaska to control its own
destiny. We know that the North Slope has enough
proven reserves of natural gas to fill a pipeline to
capacity for the next 50 years - 35 trillion cubic
feet, and that's just the known reserves. Estimates
suggest there may be much more, perhaps enough to keep
the pipeline - and the jobs and revenues it will
create - operating for the next 100 years.
Number 2623
Unfortunately, before Alaska can realize any of those
benefits, a pipeline must be built. A few years ago,
like most Alaskans, I was enthusiastic about the
prospects for the gas line. With prices soaring, it
looked as if the pipeline was just around the corner.
Well, we know what happened next. Just as quickly,
prices dropped, and the economics suddenly changed.
After months of study, it's now clear that without
some economic incentives, private industry is not
going to be willing to risk the billions of dollars
necessary to construct the gas line at this time. The
project simply does not "math out" at current and
foreseeable prices, unless some of the construction
and startup risks are offset.
We know that we have some of the largest known gas
reserves in the world. We know that we have reliable,
private-sector partners who can help Alaska develop
and market our vast, untapped resource. But we also
know that Alaska is not the only place in the world
where natural gas exists. And as with other
industries, international competition increases every
year.
Number 2562
I guess more than anything, I am here today to urge
you to act quickly to seize a unique opportunity that
can help ensure Alaska's future. I believe the window
of opportunity is still open, if we act now to help
make this project a reality. I also strongly suspect
that if that window shuts, it may never open again.
In the past several weeks, I have talked with senior
officials from the production companies. They have
indicated a willingness to proceed, providing federal
and state legislation is passed to help offset some of
the project's tremendous risk. They also seek
reasonable assurances of stability in our tax and
economic climate.
In that regard, for the past several months members of
our congressional delegation have worked to enact
federal incentives to help make the gas line a
reality. But ... as with any Alaska resource
development issue, they are fighting a difficult,
uphill fight, and they need our help.
Number 2504
Last week, [U.S.] Senator Murkowski called me and said
that opponents of the gas line are now pointing out
the absence of state action on the issue - and using
that point to try to defeat our delegation's efforts
in D.C. "If Alaska does not care enough to offer
incentives," they say, "why should we?"
Senator Murkowski and the rest of our delegation have
indicated that passage of HB 519 will go a long way
toward demonstrating Alaska's commitment to this
project. It will send a clear signal to Washington
and the producing companies that Alaska is ready to
step up to the plate to help build Alaska's future.
Number 2465
I have been asked what this legislation will cost
Alaska. My answer has been very simple - absolutely
nothing, because without this legislation, the gas
line will never likely be built. You can't tax
something that doesn't exist. So, any taxes
potentially deferred by this legislation would never
have been realized anyway.
On the other hand, I believe the true cost to Alaska
lies in doing nothing. If this legislation does not
pass and the gas line is not built, what will that
cost Alaska? The gas line will create thousands of
new jobs and billions in new revenue and economic
activity. It can help provide a stable economic
climate for Alaska at least well into this century -
and long after you and I are gone. At a time when
Alaska is desperately seeking new economic
opportunities, I suggest to you that the best
opportunity is very close at hand, if we will simply
reach out and grasp it.
Number 2394
REPRESENTATIVE OGAN concurred with Mr. Allen's testimony, saying
he would like to see the legislation move along as well. He
then asked whether VECO Corporation would object if the bill
were amended to add a way for the state to possibly recoup the
foregone revenue later on, if prices are up and profits are
being made.
MR. ALLEN referred to HB 393 [which became the Alaska Stranded
Gas Development Act in 1998]. He said from what he could see
from that Act, that could be negotiated. He suggested that
would begin fairly quickly once there is federal legislation.
Speaking of the producers, he said, "I don't know why they
wouldn't do that."
REPRESENTATIVE OGAN pointed out that there is a difference of
opinion between the DOR's reading of the bill and how it is
being portrayed by the producers. He said he'd like to sort
that out. He asked whether Jack Chenoweth, the drafter of the
legislation, was available.
VICE CHAIR FATE indicated the committee aide would contact Mr.
Chenoweth.
Number 2176
REPRESENTATIVE KOHRING thanked VECO Corporation for its efforts
with this legislation and contributions to the economy in terms
of jobs, local hire, and so forth. He suggested perhaps the
bill could be moved from the current committee, with the House
Resources Standing Committee then being asked to look at
Representative Ogan's concerns.
Number 2124
PAMELA LaBOLLE, President, Alaska State Chamber of Commerce,
came forward in support of HB 519. She offered the following
testimony:
The Alaska State Chamber represents 35 local chambers
and 700 businesses, most of whom are small businesses
deeply concerned with the economic future of Alaska.
... As the voice of Alaska business and the leading
advocate for business headquartered here in Juneau,
we've always appreciated the opportunity to address
bills of importance to the economic development of the
state.
Our legislative priorities are developed at the
grassroots level by our membership, through a several-
month-long process of proposal, review, and debate.
And among our top priorities - one of our five highest
priorities - is urging the legislature and the
governor to encourage the producers to proceed with
development of a southern gas-line route through
Alaska.
The chamber speaks in favor of HB 519 and urges its
passage. Alaska absolutely needs a gas pipeline. For
our members to have their businesses thrive or even
just remain viable, Alaska's resources must be
developed. It sometimes seems that people outside our
state have a much greater say in what happens in our
state than we do. With the defeat of ANWR [the
opening to development of the Arctic National Wildlife
Refuge] in Congress just yesterday, there are no other
large developments on the horizon that will spur the
growth of our economy in the near term.
Our executive committee meets monthly around the
state, often in smaller communities; we were just in
Petersburg yesterday. And as a result, we are very
concerned with what we're seeing happening in the
state's economy - little or nothing. ... We would like
to know what the state plans to do to encourage
economic growth, to try to have a hand in our own
destiny.
While the final results of the producers' study
haven't been released yet, it should be apparent to
everyone that this is a project of enormous cost and
risk. The state and local governments would benefit
greatly, for years to come, if we can encourage the
producers to take the risks inherent in this huge
project and develop the North Slope gas resources by
building a project through Alaska.
Number 1975
MS. LaBOLLE continued:
The temporary tax exemption provided by this bill
should be looked upon as an investment by the state
and the municipalities, to encourage the producers to
go forward with a project that will create jobs,
benefit municipalities, [and] spur economic
opportunity for businesses that will start a whole new
industry - a gas industry for Alaska.
By revitalizing the Alaska Stranded Gas Development
Act and having it apply to this project, the state and
producers can create a contract that will assure tax
clarity and certainty, and protect vital interests of
the state and affected municipalities.
How often does the state have an opportunity to take
such a bold step to encourage large-scale economic
growth? Several states and cities around our nation
have offered to businesses tax incentives to ...
encourage them to invest. This state should be less
concerned with perhaps giving away too much, and more
concerned with not missing a significant opportunity
for economic growth, perhaps the only one in the next
few decades.
VICE CHAIR FATE thanked Ms. LaBolle and informed members that
Mr. Chenoweth was online to answer questions.
Number 1891
REPRESENTATIVE OGAN noted DOR's position that [the bill] doesn't
allow recoupment of foregone revenue and is basically a tax
waiver; however, other testifiers suggest there is an ability
under the Alaska Stranded Gas Development Act [if renewed] to
negotiate and possibly recover some of that. He asked Mr.
Chenoweth, drafter of the bill, for his opinion.
Number 1837
JACK CHENOWETH, Assistant Revisor, Legislative Legal Counsel,
Legislative Legal and Research Services, Legislative Affairs
Agency, responded via teleconference:
I think there's probably some truth to ... both
positions. The bill as offered ... does put off-
limits the property and other associated efforts in
conjunction with the gas line ... for the period of
gearing up and during the first period of
construction, for a period, as I recall, of up to two
years - and we're talking about the property-tax levy
that can be reached under [AS 43.56].
But the bill also loops in the stranded gas Act, in
its last two sections. And as you may recall, from
the effort with the stranded gas Act several years
ago, other provisions in that Act - if ... the Act is
brought into play - do provide for some sort of a
contractual arrangement which ... might provide for a
recoupment, after the fact, of taxes that are not paid
... early in the life of the project.
Number 1776
REPRESENTATIVE OGAN asked whether, then, enough of the Alaska
Stranded Gas Development Act is incorporated into HB 519, as
written, so that there possibly could be recoupment if gas
prices were high, for example.
MR. CHENOWETH answered that the amendment in Section 9 of HB 519
broadens the purposes for which the stranded gas Act can be
brought into play, and the amendment to Section 10 extends the
period in which applications may be made to take advantage of
that Act. He pointed out that the contract-development
provisions of AS 43.82.200, and the sections that follow, talk
about the use of periodic payments and similar kinds of
arrangements to cover taxes generally identified as being
associated with oil and gas production, transportation, and so
forth.
Number 1673
REPRESENTATIVE JOULE referred to Section 4, new paragraph (7),
page 6, lines 25-26, which reads in part, "for purposes of this
paragraph, 'Alaska North Slope natural gas project' has the
meaning given in AS 38.35.240." He noted that the reference is
to the definition [in Section 3(b)], and includes "related
facilities". He asked what that means and what the potential
implications are.
MR. CHENOWETH noted that the cross-reference to "Alaska North
Slope natural gas project", on page 6 [line 6] of Version L, is
to AS 38.35.120(a)(1)(B). He said that definition talks in
terms of all the facilities of a total system of pipe intended
to transport, deliver, store, or provide for further or onward
transportation of natural gas. Mr. Chenoweth said:
This language was taken from another bill, the idea
being, I think, in fairness, that what ... they are
trying to cover or bring under the umbrella is all of
the facilities that ... might be involved in a
potential natural gas pipeline project: gathering
lines; gas fabrication plants and things of that sort;
and then down at the other end, if ... you're talking
about LNG, the facilities at ... at tidewater or
whatever it might happen to be. ...
Because we are tying ... the definition of taxable
property to this definition, we are providing a
broadened definition for the project as it relates to
... particularly the property tax that may be imposed
under [AS] 43.56 by the state, and under the other
provisions that allow a local government to come in
... and levy the tax.
At one point, there was some discussion about whether
gathering lines and things on the fields ahead of the
point of entry into a gas pipeline should or should
not be covered ... by this provision. I think the way
it's drafted, in the absence of any kind of a specific
exception, it would be given a broad reading and those
sorts of facilities would be covered under this
definition and, therefore, made subject to the
pipeline property tax, rather than the exclusive tax
of ... a particular local unit of government.
VICE CHAIR FATE thanked Mr. Chenoweth and called on Mr. Konrad.
Number 1435
KEN KONRAD, Senior Vice President, BP Exploration (Alaska) Inc.,
came forward to testify, noting that he is Vice President of Gas
for his company. He offered the following testimony:
I am here this morning to testify in support of House
Bill 519. Creating a supportive government framework
is an essential ingredient towards developing a
successful ANS [Alaska North Slope] gas project. An
international project of this magnitude brings many
inherent risks. Governments, working constructively
with industry, can play a major role in reducing these
risks by setting clear and predictable rules under
which a project would be undertaken.
BP, with our partners, has previously laid out key
government actions that would facilitate future
investment on this massive undertaking: a clear and
efficient U.S. federal regulatory process - progress
is being made with Alaska gas provisions currently
part of this pending U.S. Senate energy bill; an
efficient and predictable Canadian/First Nations
regulatory process - BP continues to be very active
working in Canada to establish such a process, and
progress is indeed being made; and, finally, [a]
simple, clear, and predictable fiscal framework in
Alaska such that the massive, long-payout investments
being contemplated can be undertaken with the
knowledge that the rules won't change.
House Bill 519 would be a positive step towards
achieving the necessary fiscal framework in Alaska.
The bill is modeled after House Bill 393, which was
passed in 1998. As we did in 1998, BP continues to
support the content and approach inherent in the
stranded gas Act, which this legislation refreshes,
updates, and makes available for a gas pipeline
project.
Number 1328
MR. KONRAD continued:
House Bill 519 and the stranded gas Act, in
combination, would first demonstrate leadership and
intent by the legislature to provide stable fiscal
terms that encourage development of ANS gas while
fully and fairly compensating the people of the state.
Second, it would establish a protocol, beginning with
an application and followed by a process to exchange
information between investors and the state. It would
empower the state to enter into a contract negotiation
to achieve clear and simple tax and royalty terms;
these terms would need to be subsequently approved by
both the executive branch and the legislature.
It provides a process with the state and investors
while providing for municipal input. It provides for
contract review, approval, [and] termination
provisions, inclusive of municipal input; legislative
authorization; and judicial review. It also provides
for ... prioritization of state agency support for a
qualifying project. In aggregate, it sets out a
thoughtful ... and a workable framework through which
important fiscal issues [are] subject to subsequent
approval by ... this legislature.
The bill also encourages Alaska hire, training, and
purchasing. BP has and continues to support the use
of in-state capability. However, some technical
modifications may be considered to ensure the bill's
language does not draw legal challenge.
Passage of HB 519 would send a positive message to
investors and provide a framework to achieve fiscal
clarity, simplicity, and predictability. BP is fully
supportive.
Number 1240
REPRESENTATIVE OGAN asked Mr. Konrad, "Are you going to build a
gas pipeline."
MR. KONRAD answered, "I hope so. We're busting a gut to try and
make it happen, and I think we're probably as close as we've
ever been in the last 30 years - or, indeed, closer."
Number 1199
REPRESENTATIVE OGAN offered his understanding that two of the
three producers are agreeable to providing economic models, but
that one isn't. He asked, "Are you one of the producers that's
agreeable to providing it?"
MR. KONRAD said his company is happy to work with the state, but
the essence of this bill is to set out a framework for
predictability and stability. He explained:
Economic models may be part of that, but I think the
bigger piece of predictability and stability is
knowing what the rules are. Models assume what the
rules are, but, of course, the rules are much more
fluid than whatever you put in a model. ... But BP has
... shared information with the state on other
activity, including ... the activity we had around
Northstar, so I think that's a bridge we've already
crossed.
Number 1084
REPRESENTATIVE OGAN asked whether, in the working group, BP was
agreeable to letting the results of that working group and the
economic models that were produced be known before the
legislature.
MR. KONRAD answered:
We're planning to roll out information on the project
here very, very shortly - or the update on the project
- and if there's further information that needs to be
provided, then we're happy to provide it, as long as
it's ... not proprietary. ... Economic models in
themselves are not proprietary, and I don't think
there's a fundamental issue around that.
REPRESENTATIVE OGAN asked whether there is an agreement in the
working group that all three must agree [if the producers are]
to provide the economic models.
MR. KONRAD replied that some people have been struggling with
the issue of confidentiality. "As I said, BP has done that
before on other projects," he added, "and I don't foresee that
being a problem on this project."
REPRESENTATIVE OGAN asked whether BP, then, isn't one of the
producers that would object to releasing information discovered
in the working group.
MR. KONRAD answered, "I'm not actually sure what you're talking
about. ... I haven't heard people saying that there's one
company for this ... or not. We've historically shared
information with the state, and we don't have a problem with ...
sharing it in the future."
Number 0954
REPRESENTATIVE OGAN expressed frustration about not receiving
information, including economic models, requested in January.
"I'm supportive of this legislation because I think it's the
right thing for Alaska and it'll help," he remarked. "But ...
it would give me ... a lot less heartburn to vote 'yes' on this
if the producers and the working group [were] more forthcoming
with the information that we requested and haven't gotten."
MR. KONRAD responded:
The reason this project isn't economic yet is because
the risks outweigh the rewards, and we've tried to
identify, as clearly as we can, ... three of the key
risks, which is regulatory risk in the U.S.,
regulatory risk in Canada, and fiscal risk in the
state of Alaska. And those are the ... key elements
around reducing the risk of the project. Clearly, we
have a job to do, to reduce costs and reduce risks
around costs and manage the costs, but ... that's kind
of our job, and that will take an enormous future
investment and ... engineering to do that.
What we want is a framework in place. ... We've spent
$125 million. We go to the next phase, it's going to
be quite a bit larger ... than the first phase. And
just knowing that there's a predictable framework out
there, ... that the rules aren't going to change, that
... really has been the essence of our requests around
fiscal stability in the state of Alaska.
Number 0820
REPRESENTATIVE OGAN concurred, but said legislators would like
more information in order to be able to explain to constituents
why the legislature is providing these incentives.
MR. KONRAD said:
It would fully be BP's intent to enter into
negotiations with the state around fiscal stability
... as quickly as possible. So, it's fully our intent
to do that, and those negotiations could go ...
wherever they went. But, at the end of the day, there
would ... need to be a mutual agreement.
I think the second thing ... to observe is that to the
extent there were a property tax holiday, that ...
would lower the tariffs ... on the line for the life
of the line, because ... those taxes would not become
... part of the capital costs ... of the line. Hence,
with lower tariffs over the life of the project,
royalty receipts would be higher over the life of the
project, and ... severance tax receipts would be
higher over the life of the project. So there is an
inherent, natural recoupment....
REPRESENTATIVE OGAN and VICE CHAIR FATE thanked Mr. Konrad.
Number 0699
VICE CHAIR FATE called an at ease at 9:40 a.m. He called the
meeting back to order at 9:44 a.m.
Number 0635
JOE MARUSHACK, Vice President, ANS Gas Commercialization,
Phillips Alaska, Inc., came before the committee to testify in
support of HB 519, noting that his primary responsibility is the
development of Phillips' ANS gas resources and that Phillips is
committed to achieving its goal in a timely and economic
fashion. He read from his written testimony, with a few
changes, as follows:
As you know, we have been focusing this year on those
areas that we believe are most likely to result in an
economically viable gas pipeline project to the Lower
48. We have completed our joint analysis of the work
the producers initiated last year, [and will be]
setting up a time to review the results with you.
Phillips is ready to start discussing these items, and
we're waiting on partner approvals.
[For] several months, however, most of Phillips' gas
emphasis has been directed at the federal level to
achieve the congressional legislative changes to
advance our project. [These] include federal
legislation that creates permitting certainty - and I
believe you are well aware of the current federal
legislation that's in the [U.S.] Senate bill.
The second - and perhaps the most important - thing
that will help us achieve a project is a federal tax
mechanism to help mitigate the unacceptable market
risk of a project of this magnitude. I understand you
are probably aware of current drafts of this mechanism
that provide downside mitigation, but also provides
repayment of any credit, if used, and that is
currently assessed by the U.S. government as having
zero cost. This piece of legislation is, in Phillips'
view, a most critical element in moving the project
forward. It shares the benefits that the Lower 48
consumers will see from ANS gas coming to the market,
while addressing the risk inherent in such a large and
costly project.
Phillips is also pursuing additional federal ...
issues such as accelerated depreciation and perhaps an
investment tax credit on part of the assets.
Number 0438
MR. MARUSHACK continued:
Given achievement of the federal legislation - and at
this point, it is not a certainty - it is important to
the economic viability of the project to progress
fiscal matters at the state level.
Fiscal matters include fiscal certainty. And what we
really mean is, we need to know - with a fair degree
of specificity - how our taxes and royalties will be
calculated and administered. We would also like to
address potential opportunities to gain assurances
that those taxes and royalties won't change once we've
made our investment. We believe that strategic
participation by the state in mechanisms to improve
the economic viability of the project are important.
While there may be a need for minor clarifying
language, we are encouraged by the committee's
consideration of HB 519 that proposes both a temporary
property tax abatement and the revival of an existing
statutory process by which pipeline project sponsors
can work with the state to gain the kind of fiscal
certainty and clarity that will reduce risks and help
the project move forward. [The temporary] property
tax abatement is an important signal to the U.S.
Congress that Alaska has stepped up to try to make a
project happen.
By itself, an ad valorem holiday is not [of]
sufficient size that it can singularly make a
challenged project economic. However, it is an
important step in a series that along with other
actions at the state/federal level, [and] actions from
the producers, including potential technological
improvements, we believe can reduce the risk and
improve the project economics.
Number 0297
REPRESENTATIVE OGAN asked, "Are we going to build a pipeline?"
MR. MARUSHACK replied that he doesn't believe anybody will know
to a certainty whether a pipeline will be built for several
years. He added:
However, what I can tell you is this: If we achieve
the federal legislation that we need, the enabling
legislation, the tax mitigation, and the tax
mechanisms we need, and we can achieve the state
fiscal certainty that we need, Phillips is committed
to moving forward with the process, to initiate the
permitting process and try to make this project
happen. So what I'm telling you is, if these things
can happen, we are committed to ... finding partners
and investing several times more than the $125 million
we've already invested in this project to make it
happen.
The reason that you may think I'm hedging on you on
this is ... it'll take a long time to work through all
the permits, all the procurement, all the design
factors [to] make sure we have a project. ... Just
like every other project I've ever worked on - we will
not know for absolute certainty that we're going to
build the project until the steel is landed and we're
welding it.
Number 0177
REPRESENTATIVE OGAN again mentioned the economic models from the
working group, as well as his understanding that it will require
all three producers' signing off on releasing the information,
but that one producer will not. He asked whether Phillips is
one of the working group members that wouldn't sign off on it.
MR. MARUSHACK answered:
[Phillips Alaska, Inc.] is committed to working and
providing information to the legislature and the
administration on what we've accomplished through this
$125-million process. We're in the ... process of
putting that information together. As I said, I think
it's in a pretty good [position] to go forward. ...
All of us have internal approvals that need to be ...
secured, and those are happening right now. I ... do
understand your frustration in not seeing the data
sooner. And let me say that ... in our view, it has
not been anything that has been a result of not
wanting to get the information or anything sinister
like that.
I can tell you that my view is, the federal issues are
the most important things to move the project forward,
in that if those don't happen, I don't know how we
move a project forward. So we have been focusing a
tremendous amount of hours and effort on trying to
work those federal issues. I apologize that that has
resulted in us not getting you the information [in] a
more timely fashion, but I am committed to getting you
that information, also....
TAPE 02-24, SIDE A
Number 0001
REPRESENTATIVE OGAN thanked Mr. Marushack and told him he
appreciated the answer, although it would give him more comfort
on passing legislation to see some numbers and justification.
He said he was willing to let the legislation move forward,
however, because he believes it in the state's best interest.
Without a pipeline, it is a rhetorical question about how much
tax will be collected from it, he added.
Number 0092
REPRESENTATIVE DYSON moved to report from committee CSHB 519
[version 22-LS1651\L, Chenoweth, 4/18/02] with individual
recommendations and the accompanying fiscal note.
REPRESENTATIVE OGAN informed members that although he'd had some
concerns about the ability to have "payback on the upside," that
concern had been addressed fairly well by Mr. Chenoweth.
Number 0162
VICE CHAIR FATE remarked, "We've discussed this with the
sponsor, and we'll still be looking at ... omitting Section 2
from this particular bill." He said it would be discussed with
[Representative Kott] as the bill moves forward to the House
Resources Standing Committee.
Number 0173
VICE CHAIR FATE asked whether there was any objection to the
motion. There being no objection, CSHB 519(O&G) was moved out
of the House Special Committee on Oil and Gas.
ADJOURNMENT
Number 0196
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 9:55
a.m.
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