Legislature(1997 - 1998)

02/24/1998 10:03 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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              
"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                
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             
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             
"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              
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-            
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            
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                     
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              
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                
"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             
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                      
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                 
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.                                                
Number 1039                                                                    
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and              
Gas meeting at 11:55 a.m.                                                      

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