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