Legislature(2005 - 2006)CAPITOL 124
03/31/2005 05:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB224 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 234 | TELECONFERENCED | |
| *+ | HB 224 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 31, 2005
5:05 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Ralph Samuels
Representative Berta Gardner
Representative Norman Rokeberg
Representative Nancy Dahlstrom
Representative Lesil McGuire
MEMBERS ABSENT
Representative Beth Kerttula
OTHER LEGISLATORS PRESENT
Representative Jay Ramras
COMMITTEE CALENDAR
HOUSE BILL NO. 224
"An Act relating to the sale or securitization of certain of the
state's oil taken as royalty."
- MOVED HB 224 OUT OF COMMITTEE
HOUSE BILL NO. 234
"An Act relating to the due date for the payment of oil and gas
royalty and net profit shares and amending the rate of interest
payable on royalties or net profit shares."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 224
SHORT TITLE: SALE/SECURITIZATION OF STATE ROYALTY OIL
SPONSOR(s): REPRESENTATIVE(s) BERKOWITZ
03/18/05 (H) READ THE FIRST TIME - REFERRALS
03/18/05 (H) O&G, RES, FIN
03/31/05 (H) O&G AT 5:00 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE ETHAN BERKOWITZ
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 224 as sponsor.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding HB 224 as
cosponsor.
MARK MYERS, Director
Division of Oil and Gas
Alaska Department of Natural Resources
POSITION STATEMENT: Answered questions regarding HB 224.
KURT GIBSON, Petroleum Investments Manager
Division of Oil and Gas
Alaska Department of Natural Resources
POSITION STATEMENT: Answered questions regarding HB 224.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 5:05:26 PM. Representatives Kohring,
Samuels, and Gardner were present at the call to order.
Representatives Rokeberg, McGuire, and Dahlstrom arrived as the
meeting was in progress.
HB 224-SALE/SECURITIZATION OF STATE ROYALTY OIL
5:06:09 PM
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 224, "An Act relating to the sale or
securitization of certain of the state's oil taken as royalty."
REPRESENTATIVE ETHAN BERKOWITZ, Alaska State Legislature,
presented HB 224 as sponsor. He explained that the bill
addresses the idea of the securitization of oil as well as gas,
or "anything that the state sells or gets royalties off of." He
noted that a few years ago the state chose to securitize money
that it received from a tobacco settlement. He clarified that
to securitize is to take future payments up front in a lump sum.
He continued:
Some would argue there's a discounting that occurs
because you haven't actually received the product, but
yet there's others who might suggest that [it] could
be a premium price because in the instance of oil, the
price is so high today. ... It could bring an element
of stability to the industry that everyone seeks.
REPRESENTATIVE BERKOWITZ explained that any time there is a sale
of an asset, the buyer is essentially buying all of the
reserves.
5:09:32 PM
CHAIR KOHRING asked if this has happened in other states.
REPRESENTATIVE BERKOWITZ replied that he hasn't heard of any
other states that have securitized oil. However, he noted,
"Alaska's in a unique position where it is our oil."
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, commented
that the bill is a product of discussions among legislators over
how the state might approach ways to stabilize oil and gas
revenues and potentially lock in higher prices. He noted, "The
bill was crafted to be a permissive bill, not a mandatory bill,
in that it really is simply putting into statute here an
authority for us to investigate this further, fully, and with
the appropriate academic resources."
5:10:50 PM
REPRESENTATIVE ROKEBERG asked, "Is this kind of the GARVEE
[Grant Anticipation Revenue Vehicles] bond of oil, ... where
we're trying to create a financial instrument that ... generates
near term cash with the risk elements of a long term
instrument?"
REPRESENTATIVE BERKOWITZ replied:
It could be viewed that way. ... When people initially
conceptualize securitization with Alaska's oil, they
tend to go to the big picture and imagine we're going
to securitize all our royalty. And it doesn't
necessarily have to be viewed in that context; you
could deal field by field, for example. And I think
in some of the more marginal fields, securitization
might prove to be an interesting way of bringing
stability for the producers and also getting the state
out of the day-to-day management.
5:11:56 PM
REPRESENTATIVE HAWKER clarified that a GARVEE bond is a grant
anticipation revenue vehicle in which [a state] will receive a
federal grant in a fixed dollar amount in the future for a
certain project. There are two big differences between a GARVEE
grant anticipation vehicle and securitization, he said. One
difference is that there is no assurance that the GARVEE bond
would be met by those grants, while securitization is a
commodities transaction more than a revenue anticipation
transaction. Another difference is that the amount for a GARVEE
bond is fixed, whereas with securitization there potentially is
a way to hedge prices and lock in on high oil prices.
5:13:30 PM
REPRESENTATIVE SAMUELS asked for clarification.
REPRESENTATIVE HAWKER replied that securitization would actually
be time limited; the state could securitize the royalties for a
certain time frame for a certain reserve. He continued, "Now
[industry has] paid you for that up front; if they do not
develop it, don't produce it, don't get it downstream
themselves, it sits in the ground and reverts to the sovereign
at the expiration of the securitization term."
5:15:01 PM
REPRESENTATIVE ROKEBERG stated, "I'm rather astounded to think
that you're considering developing a financial instrument based
on nonproduced commodity."
REPRESENTATIVE HAWKER replied, "I would truly expect that the
people making the investment would expect to produce. But the
point is if they chose not to produce, the resource would still
remain and ultimately revert to the sovereign."
5:15:53 PM
REPRESENTATIVE ROKEBERG noted that the state would benefit but
he voiced concern about the investors.
REPRESENTATIVE BERKOWITZ stated, "If I wanted to get a
securitized interest in something, I would buy from a producing
field."
REPRESENTATIVE ROKEBERG asked if the sponsors had looked at the
history of the security called PBT, Prudhoe Bay Trust, which is
traded on the New York Stock Exchange against Prudhoe Bay oil.
REPRESENTATIVE HAWKER replied that he had not.
5:17:24 PM
REPRESENTATIVE ROKEBERG said, "Clearly when you're going to be
creating some kind of financial instrument, you make assumptions
about discounted rates at present values and managing risk." He
asked how the sponsors proposed to manage the risk in
[securitization].
REPRESENTATIVE BERKOWITZ responded that Representative Rokeberg
was making the issue more complex than necessary. He continued,
"If you put something on the market, and if you get a high
enough bid for it, then you make the transaction; if you don't
get a high enough bid, you don't make the transaction."
REPRESENTATIVE ROKEBERG stated that if [the state] can't
guarantee industry the amount of recognized realized return by
investor, there won't be any investors. He said, "To do that
you're going to have to discount the flow that would be derived
from the terms of the state arrangement with whoever the
producer is. You're discounting your future cash flow, and
you're giving something up that shifts the risk to the
investor."
5:18:36 PM
REPRESENTATIVE BERKOWITZ reminded the committee that the state
securitized a tobacco settlement.
REPRESENTATIVE ROKEBERG agreed and pointed out that he was a
leading proponent of that action. He commented that the
securitization of the tobacco settlement was primarily driven be
risk elements and the state was "very fortunate to get some of
the highest benefits by being early on." He continued:
Those types of ... instruments are no longer even
marketable on Wall Street. But that was a major
driving force behind that decision as a matter of
public policy, was to lower the risk to the State of
Alaska to that income stream, thereby securitizing it
and putting it on the market and shifting the risk to
Wall Street, and we did good. I'm not sure the same
scenario here comes into play, particularly if you get
into a situation with a commodity that may have an
upside potential for raising prices, you're going to
be giving it away and the investor will be betting
that you're wrong.
REPRESENTATIVE HAWKER reiterated that the bill is a permissive
bill that would allow the "best minds in the state" to
investigate the possibility or securitization, and if it has
merit, the state could propose a transaction.
5:23:02 PM
CHAIR KOHRING closed public testimony.
5:23:24 PM
MARK MYERS, Director, Division of Oil and Gas, Alaska Department
of Natural Resources, commented:
One of the concerns I would have is that ultimately
the state has to recognize it's not the producer; it
doesn't ultimately control the rate of production. We
have a say in it through our plan to development, but
on a day-to-day basis the operations belong to the
producers of that particular field. So if the state
were to sell, it doesn't really have the ability to
guarantee x amount of barrels on a given day, and that
might be a problem in terms of cash flow for someone
who has a limited option in time for a volume of oil.
Also, under our current requirements for royalty in
kind sales, and this would be a type of royalty in
kind sale, ... in the ground is a little bit different
than actually selling at Pump Station One, as we
normally do. But we have a requirement to achieve the
royalty in value as a benchmark. So it's going to be
very hard for us to benchmark when there'd be a net
benefit to the state because, again, we're not going
to be able to predict prices, [nor] are we really
going to know how much of a discount a person's going
to have to take in buying the commodity....
Generally these types of deals would have to be
significantly discounted, probably, over the expected
market value to make sure that your investment was
secure. So I do think there's a potential conflict
with our physical and economic way standard. Again,
if you have a contract and you're trying to deliver as
much oil as you can in a period, it may lead the state
... to a position where it's in conflict on the
physical and economic way standards in terms of the
rates of productions and the off-take rates of both
oil and gas.
5:26:00 PM
KURT GIBSON, Petroleum Investments Manager, Division of Oil and
Gas, Alaska Department of Natural Resources, asked if the
purpose of the bill was to use the securitization as a form of
price hedging, and if so, if there was another way to go about
establishing a price hedging mechanism without securitization
because, he noted, the two are not necessarily linked.
REPRESENTATIVE HAWKER replied, "The intent of this bill is
simply to grant the state the authority to investigate the
merits or the demerits of this sort of transaction in all of the
permutations that it might be constructed ... [that may provide]
any benefit to the State of Alaska."
5:27:18 PM
REPRESENTATIVE BERKOWITZ commented that price hedging wasn't his
original intent for the bill. He turned the committee's
attention to AS 38.06.010, which is the purpose section for the
Alaska Royalty Oil and Gas Development Advisory Board, which
says:
It is the purpose of this chapter to facilitate the
wise development of Alaska's oil and gas royalty
interests by providing means and procedures for sales,
exchanges, or other disposition of those interests in
ways calculated to promote private economic growth
consistent with applicable environmental standards and
public fiscal stability, and in accordance with AS
38.05.183.
REPRESENTATIVE BERKOWITZ commented that there are many ways to
point out problems with any kind of different way of looking at
disposing of a state asset. However, he said:
if we're going to be consistent with exploring the
wise development of Alaska's oil and gas royalty
interests, we ought to give the [Alaska Royalty Oil
and Gas Development Advisory Board] the widest
latitude possible, and let the people that are trained
... in this area make a choice and bring those choices
to the legislature. ... I can conceive of a situation
where we could dispose of a considerable amount of our
royalty interests for a large sum of money, which
would provide, for example, a pot ... [where] the
revenue off of that pot would be sufficient to help
bridge the state's fiscal gap.
5:29:24 PM
CHAIR KOHRING noted, "I can also foresee the state incurring
some major risk because you really don't know what's in the
ground unless you have some very competent people to get in
there and do some very thorough analyses to see what we really
have there."
REPRESENTATIVE BERKOWITZ agreed that there would be risk
involved, yet he pointed out that year after year there are more
transactions occurring in the oil fields. He continued:
There are lease transactions on a regular basis, so
clearly the industry has the means and the ability to
make these kinds of transactions, to make these
assessments, and the state had some understanding of
what goes on with those kind of transactions and ought
to have as wide a latitude as possible to dispose of
our interests or to protect our interests. ... We can
have a better idea of the value of our property if we
contemplate what securitization would bring to us.
5:30:27 PM
REPRESENTATIVE SAMUELS asked Mr. Gibson to clarify the
difference between hedging and securitization.
MR. GIBSON explained, "The primary difference is ... when you
contemplate securitization, you're exchanging a series of
payments for a single lump sum. But the prospect of hedging
price risk simply suggests that you agree on a forward price for
a commodity and then continue to receive a series of payments at
that price." In response to Representative Samuels, he
clarified:
The key distinction, I think, would be the discount
rate. ... In both cases you've got a series of
payments. When you securitize you exchange the series
of payments for a lump sum; in order to determine what
the present value of that series of payments is, you
have to establish a discount rate. In either case you
have to establish a forward price. In one case you're
continuing to receive a series of payments but you've
agreed upon a price; you're no longer floating with
the market. In the case of securitization, not only
are you agreeing on a forward price, you're agreeing
on how you're going to discount that price and take it
in a single lump sum payment today.
5:32:17 PM
REPRESENTATIVE ROKEBERG asked Mr. Gibson if he had ever seen
anything like this done. He remarked that he thought there
would be a high discount rate and the state would give up
substantial amounts of future income.
MR. GIBSON responded that there would have to be a substantial
discount rate to accommodate the price volatility. He noted
that he has never seen a sovereign sell its royalty on a
securitized arrangement. In response to Representative
Rokeberg, he stated that he is not aware of any other commodity
that has been securitized, noting that his familiarity is
primarily with oil, gas, and deregulated power.
5:33:54 PM
REPRESENTATIVE BERKOWITZ commented that there is indication that
the Republic of Congo and Mexico both have done this.
CHAIR KOHRING asked if the sponsors have asked industry
representatives what they think about this bill.
REPRESENTATIVE BERKOWITZ replied that he has had preliminary
conversations with different members of industry and has heard
mixed responses, ranging from distrust of the state to interest
in the idea.
5:35:10 PM
REPRESENTATIVE ROKEBERG asked the sponsors why they chose
securitization over the hedging concept.
REPRESENTATIVE BERKOWITZ explained that he opted for
securitization because preliminary numbers indicated that this
was an option worth pursuing. He continued:
If someone wants to talk about hedging as another
alternative, I'm not adverse to that. I think the
state should have at its disposal every possible tool
when it comes time to getting the most value from our
resource. And there are different ways of assessing
whether we get the most value. And I would argue that
we have a constitutional requirement to get maximum
value, even if it requires us to make some hard
choices and go through some difficult protocols, which
is what I heard might be some of the concerns with the
securitization.
5:36:58 PM
REPRESENTATIVE ROKEBERG responded that he too believes that
[legislators] have a responsibility to generate a secure income
stream for the state. He asked if the sponsors would consider
adopting "some type of a studying task force or commission or
something to look into this as well hedging and these other
issues." He commented:
What we have in terms of the bill here is a suggestion
that we turn over the responsibility to the [Alaska
Royalty Oil and Gas Development Advisory Board] to
make a public policy. I'm not sure that's the right
thing we should do statutorily, when in fact this
decision should be made in the legislature. ... If
this concept has any merit, I think it does deserve
further study rather than just devolving our rights to
another agency.
5:38:36 PM
REPRESENTATIVE BERKOWITZ commented that the bill is written in a
permissive way. He reiterated that because [the legislators]
have a constitutional obligation to get maximum value from the
state's resources, "it seems almost incumbent upon the
commissioner of [the Alaska Department of Natural Resources
(DNR)] to pursue an investigation whether securitization does
bring maximum benefit to the state from out resources." He
continued, "I think if [DNR personnel] haven't taken a look at
securitization, they've been remiss in their responsibility."
He commented that the preliminary numbers [of projected income
from securitization] are very high.
REPRESENTATIVE HAWKER remarked that he would be happy to arrange
more informal discussions [with committee members]; however, he
said that he would be uncomfortable presenting the preliminary
numbers to the committee as a statement of fact.
5:40:46 PM
REPRESENTATIVE ROKEBERG commented that he is more interested in
hedging strategies than in securitization.
REPRESENTATIVE BERKOWITZ pointed out that one of the advantages
of securitization is that it could be applied on a field-by-
field basis. He said, "It's another option for investment in
the state, and it offers the state another way of providing
stability."
5:42:16 PM
REPRESENTATIVE HAWKER replied to Representative Rokeberg:
I don't believe that these financial strategies are
mutually exclusive; it is not one or the other. ... I
think we have an absolute obligation ... to pursue all
strategies that may benefit the state. And I would
personally be very happy to work with you on pursuing
a hedging strategy as well as this strategy. I think
the more ... investigations we put on the table the
farther we can take every one of these issues, [and]
the more comfortable we can get the public with the
state participating in some very sophisticated capital
markets.
5:42:59 PM
CHAIR KOHRING asked for the opinion of the committee regarding
the bill.
REPRESENTATIVE ROKEBERG replied, "I'm not at all comfortable
moving this bill right now because I'm not sure what it really
does. It may give the royalty board the license to gamble right
now; without a little more oversight and direction from the
legislature, I'm not at all comfortable moving it on."
CHAIR KOHRING suggested the concept of making any transaction
that the commissioner may engage in subject to legislative
approval.
5:43:57 PM
REPRESENTATIVE BERKOWITZ pointed out that any long-term sale of
more than a single year's worth of royalty currently requires
legislative approval.
CHAIR KOHRING clarified that on page 1, line 9 of HB 224 the
word "commissioner" refers to the DNR commissioner.
5:46:56 PM
REPRESENTATIVE DAHLSTROM moved to report HB 224 out of committee
with individual recommendations.
5:47:53 PM
REPRESENTATIVE ROKEBERG stated, "I won't object to moving the
bill but I'm going to be signing 'Do not pass,' for the record."
There being no objection, HB 224 was reported from the House
Special Committee on Oil and Gas.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:48:46 PM.
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