Legislature(1997 - 1998)

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

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
       HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                  
                   March 24, 1998                                              
                     10:10 a.m.                                                
                                                                               
                                                                               
MEMBERS PRESENT                                                                
                                                                               
Representative Scott Ogan                                                      
Representative Norman Rokeberg                                                 
Representative Joe Ryan                                                        
Representative Con Bunde                                                       
Representative J. Allen Kemplen                                                
                                                                               
MEMBERS ABSENT                                                                 
                                                                               
Representative Mark Hodgins, Chairman                                          
Representative Tom Brice                                                       
                                                                               
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                                          
 2/11/98      2280     (H)  READ THE FIRST TIME - REFERRAL(S)                  
 2/11/98      2281     (H)  OIL & GAS, FINANCE                                 
 2/11/98      2281     (H)  2 FISCAL NOTES (DNR, REV)                          
 2/11/98      2281     (H)  GOVERNOR'S TRANSMITTAL LETTER                      
 2/19/98               (H)  O&G AT 11:00 AM CAPITOL 124                        
 2/19/98               (H)  MINUTE(O&G)                                        
 2/24/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 2/24/98               (H)  MINUTE(O&G)                                        
 2/26/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 2/26/98               (H)  MINUTE(O&G)                                        
 3/03/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 3/03/98               (H)  MINUTE(O&G)                                        
 3/05/98               (H)  MINUTE(O&G)                                        
 3/09/98      2578     (H)  RES REFERRAL ADDED                                 
 3/10/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 3/10/98               (H)  MINUTE(O&G)                                        
 3/12/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 3/12/98               (H)  MINUTE(O&G)                                        
 3/19/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 3/19/98               (H)  MINUTE(O&G)                                        
 3/24/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
                                                                               
WITNESS REGISTER                                                               
                                                                               
JOHN SHIVELY, Commissioner, Department of Natural Resources                    
400 Willoughby Avenue, 5th Floor                                               
Juneau, Alaska 99801                                                           
Telephone:  (907) 4532400                                                      
POSITION STATEMENT:  Testified on CSHB 393(O&G).                               
                                                                               
ACTION NARRATIVE                                                               
                                                                               
TAPE 98-26, SIDE A                                                             
Number 0001                                                                    
                                                                               
VICE-CHAIR CON BUNDE called the House Special Committee on Oil and             
Gas meeting to order at 10:10 a.m.  Members present at the call to             
order were Representatives Rokeberg, Ryan, Bunde and Kemplen.                  
Representative Ogan arrived at 10:11 a.m.                                      
                                                                               
HB 393 - DEVELOP STRANDED GAS RESOURCES                                        
                                                                               
Number 0068                                                                    
                                                                               
VICE-CHAIR BUNDE 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 had previously adopted CSHB 393(O&G),                
version B and Amendment 1.  He stated that there is also                       
Representative  Rokeberg's Amendment 2 before the committee.                   
                                                                               
Number 0135                                                                    
                                                                               
VICE-CHAIR BUNDE stated that he had a technical amendment to                   
Amendment 2.  He stated that on page 24, line 16, note the phrase:             
"pay a portion of the periodic payments."  He stated that in                   
Amendment 2 on page 1, line 8, in order for the verbiage to                    
conform, that phase would need to be added.                                    
                                                                               
Number 0158                                                                    
                                                                               
REPRESENTATIVE NORMAN ROKEBERG stated that he would accept it as a             
technical amendment to Amendment 2.                                            
                                                                               
VICE-CHAIR BUNDE asked if there was an objection to the amendment              
to Amendment 2.  Hearing none, it was so ordered.                              
                                                                               
Number 0340                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that on page 24, line 17 of CSHB
393(O&G), he would insert a new section entitled "Sec. 43.82.505.              
Payments to economically affected municipalities."  He stated that             
the concept is to create, by definition, two forms of                          
municipalities; those that tax bases are affected and those that               
have other economic impacts as a result of the construction of the             
pipeline.  He stated that areas such as the Mat-su borough and the             
municipality of Anchorage, which clearly has impacts from the                  
development of the pipeline, have a right to be at the table when              
impact monies are under consideration.  He stated that he would                
assume that the advisory group would develop a matrix to give                  
greater weight to those communities that are revenue and                       
economically affected.  He asked for the support of the committee              
on Amendment  2.                                                               
                                                                               
Number 0511                                                                    
                                                                               
REPRESENTATIVE SCOTT OGAN stated that he conceptually supports the             
amendment, as his district would be affected largely but positively            
from the pipeline, although there are problems that come from                  
economic growth such as demands for services.  He stated that his              
concern is that Amendment 2 is too broad and that a non-affected               
community could make a claim.  He asked if there was a protection              
for this in the amendment.                                                     
                                                                               
Number 0648                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that the commissioner of revenue                
would have to make the findings and determinations based on the                
application made by the municipality.  He stated that he would not             
be adverse to tightening the language up if someone offered it.                
                                                                               
VICE-CHAIR BUNDE asked if he anticipated that the communities that             
would be excluded from the table would file suit to have access to             
the table.                                                                     
                                                                               
Number 0734                                                                    
                                                                               
REPRESENTATIVE ROKEBERG replied that he assumed they would file an             
application first and then if denied...                                        
                                                                               
VICE-CHAIR BUNDE asked if there were too many sideboards would that            
cause increased litigation.                                                    
                                                                               
REPRESENTATIVE ROKEBERG replied that he is not sure that if there              
are greater obstacles, if it would dissuade people from filing a               
cause of action or generate one.  He stated that he would not                  
exhibit the right of any municipality to file a cause of action for            
a pay day gain.  (INDISCERNIBLE -- static on tape)                             
                                                                               
Number 0815                                                                    
                                                                               
REPRESENTATIVE ALAN KEMPLEN stated that he would like to understand            
the difference between revenue affected municipality and                       
economically affected municipality.  A revenue affected                        
municipality would be the public entities that would have make                 
adjustments in their property taxes.                                           
                                                                               
Number 0861                                                                    
                                                                               
REPRESENTATIVE ROKEBERG replied that is correct.                               
                                                                               
Number 0871                                                                    
                                                                               
REPRESENTATIVE KEMPLEN stated that with the revenue affected                   
municipalities, he might want to think about the notion of linking             
it with an employment variable.  The number of people from an area             
employed on the pipeline could be reflected back to the affected               
municipality.                                                                  
                                                                               
Number 0917                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that is a meritorious suggestion,               
however, he does not see anything here that would restrict the                 
commissioner from developing a matrix.  He stated that at this                 
point, he did not want to complicate the issue.                                
                                                                               
Number 0958                                                                    
                                                                               
JOHN SHIVELY, Commissioner, Department of Natural Resources, stated            
that the Amendment 2, as drafted, could be workable. Whenever money            
is allocated it would have to be appropriated by the legislature.              
                                                                               
Number 0996                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that he has submitted to the                    
committee along with the amendment, a memorandum from Legal                    
Services regarding "periodic payments in lieu of taxes" dated March            
16, 1998.  The memorandum indicates that there is no necessity to              
change any of the information in the bill in order for the payments            
to occur at the time of the impact.                                            
                                                                               
Number 1050                                                                    
                                                                               
VICE-CHAIR BUNDE (INDISC. -- static on tape).                                  
                                                                               
Number 1082                                                                    
                                                                               
VICE-CHAIR BUNDE asked if there is an objection on Amendment 2.                
                                                                               
REPRESENTATIVE OGAN asked if there was an objection when it was                
moved.                                                                         
                                                                               
VICE-CHAIR BUNDE stated that he assumed there was for discussion               
purposes.  Hearing no objection, Amendment 2, as amended was                   
adopted.                                                                       
                                                                               
Number 1205                                                                    
                                                                               
REPRESENTATIVE RYAN referred the committee to his packet of                    
amendments.  He made a motion to adopt Amendment 3, 0-GH2006\B.8,              
which reads:                                                                   
                                                                               
     Page 2, lines 8-11:                                                       
                                                                               
          Delete all material.                                                 
                                                                               
     Renumber the following paragraphs accordingly.                            
                                                                               
     Page 2, lines 23-28:                                                      
                                                                               
          Delete all material.                                                 
                                                                               
          Insert "tankers;"                                                    
                                                                               
     Page 3, lines 7-15                                                        
          Delete all material.                                                 
                                                                               
          Renumber the following paragraphs accordingly.                       
                                                                               
                                                                               
Number 1126                                                                    
                                                                               
REPRESENTATIVE OGAN objected for discussion purposes.                          
                                                                               
Number 1205                                                                    
                                                                               
REPRESENTATIVE RYAN stated that since there is already the                     
infrastructure in Cook Inlet, they already have developed means of             
moving gas production and there is no stranded gas that we know of,            
that section is not germane to stranded gas.  He stated that he did            
not want it to relate to all the gas in the state.  (INDISC --                 
static on tape).  He stated that since the technology is not there,            
there is no need to include the gas-to-liquids(GTL) portion in the             
bill.  He stated that he did not see the relevancy of page 3, line             
7-15, other than for general information.  He stated that they                 
hired Dr. Pedro van Meurs to tell us what we hired him to tell us.             
                                                                               
Number 1327                                                                    
                                                                               
COMMISSIONER SHIVELY responded that they hired Dr. van Meurs to                
make an analysis of what he thought the situation was, as the                  
answer was unknown.                                                            
                                                                               
Number 1351                                                                    
                                                                               
VICE-CHAIR BUNDE referred to page 2, lines 23-28, and stated that              
his concern of GTLs is continuation (INDISC.) pipeline.  Once the              
amount of oil in the pipeline is no longer economically viable, the            
pipeline will have to be dismantled.  He stated that it might                  
extend the life of the pipeline if it was used to transfer GTLs.               
He asked if that was a possibility.                                            
                                                                               
Number 1390                                                                    
                                                                               
COMMISSIONER SHIVELY responded that any additional liquid put into             
the pipeline would increase its life and ability to operate.  He               
stated that a lot of the gas reserves have not been explored.                  
                                                                               
Number 1435                                                                    
                                                                               
REPRESENTATIVE ROKEBERG made a motion to divide Amendment 3 by                 
taking the following out of the amendment:                                     
                                                                               
     Page 3, lines 7-15                                                        
          Delete all material.                                                 
                                                                               
          Renumber the following paragraphs accordingly.                       
                                                                               
Number 1465                                                                    
                                                                               
VICE-CHAIR BUNDE stated that Amendment 4 would then read:                      
                                                                               
     Page 3, lines 7-15                                                        
          Delete all material.                                                 
                                                                               
          Renumber the following paragraphs accordingly.                       
                                                                               
REPRESENTATIVE OGAN removed his objection.                                     
                                                                               
Number 1586                                                                    
                                                                               
VICE-CHAIR BUNDE objected and asked for a roll call vote on                    
Amendment 3, as amended.  Representatives Kemplen, Ogan, Rokeberg              
and Ryan voted in favor of the motion.  Vice-Chair Bunde voted                 
against it.  Representatives Hodgins and Brice were absent.                    
Amendment 3, as amended was adopted.                                           
                                                                               
VICE-CHAIR BUNDE stated that would bring the committee to Amendment            
4.                                                                             
                                                                               
REPRESENTATIVE RYAN stated that he would withdraw Amendment 4.                 
                                                                               
REPRESENTATIVE RYAN made a motion to adopt Amendment 5,0-GH2006\B.9            
which reads:                                                                   
                                                                               
     Page 10, line 26, following "AS 43.82.210;"                               
                                                                               
          Insert "however, the terms concerning payments in lieu of            
          taxes must also include payment of interest at the rate              
          specified in AS 45.45.010(a) for suspended taxes;"                   
                                                                               
Number 1624                                                                    
                                                                               
VICE-CHAIR BUNDE objected for discussion purposes.                             
                                                                               
Number 1650                                                                    
                                                                               
REPRESENTATIVE RYAN stated that it was possible that the state                 
would have to adopt a back-end loaded system, which would mean that            
the state would receive its payments 10-15 years in the future.  He            
stated that the investors would receive (Indisc. -- static on the              
tape).  He stated that the statute sets the interest rate.  He                 
stated that it is only fair if the state gives this rate of                    
interest, the state should receive the same rate back.                         
                                                                               
Number 1748                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that he had some concerns about                 
that, he felt that the amendment would tie the hands of the                    
commissioner in bargaining the contract.                                       
                                                                               
Number 1797                                                                    
                                                                               
COMMISSIONER SHIVELY stated that he is opposed to Amendment 5.  He             
stated that Dr. van Meurs never said that the state would not get              
any money for 15 years.  He was suggesting a progressive tax policy            
where the state would get less amounts earlier on and greater                  
amounts at the end.  He stated that this amendment would put a                 
burden on the project and is counter productive.  He stated the                
rate should be left to the negotiations and not preset in the                  
legislation, so as to not pre-guess the deal.                                  
                                                                               
Number 1862                                                                    
                                                                               
VICE-CHAIR BUNDE stated that this bill would not preclude the                  
administration from negotiations (INDISC -- static on tape).                   
                                                                               
Number 1865                                                                    
                                                                               
COMMISSIONER SHIVELY responded that as part of the economic                    
observations one could look at what they gave up at the beginning              
and take that into account in terms of the payments at the end.                
                                                                               
Number 1875                                                                    
                                                                               
REPRESENTATIVE RYAN stated that there is no place in the world                 
where one can use someone's money without paying rent.  He asked               
why would the legislature want to give up the state of Alaska's                
just return.  He stated that the investors will recoup their money,            
so why shouldn't the state.  He stated that he saw this legislation            
as a wish list of industry asking for everything that they desire.             
He stated that if the legislature does not look out for the people             
that it represents, the store is going to be given away.                       
                                                                               
Number 1967                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that he agrees what Representative              
Ryan is saying regarding economic rent.  However, interest and                 
market rates vary and the time-frame is not specific.  He stated               
that to tie this to a 10.5 percent statutory rate is not applicable            
in this case.  He stated that it is something that should be done              
in the bargaining but should not be stipulated now.                            
                                                                               
Number 2020                                                                    
                                                                               
REPRESENTATIVE OGAN stated that he believed the administration                 
would have the latitude to take into consideration the value of                
deferred payments and will have the ability to negotiate a new                 
rate.                                                                          
                                                                               
Number 2040                                                                    
                                                                               
COMMISSIONER SHIVELY replied that is correct.                                  
                                                                               
REPRESENTATIVE OGAN asked if it would be subject to legislative                
approval.                                                                      
                                                                               
COMMISSIONER SHIVELY replied that it would, depending on how the               
bill was passed.                                                               
                                                                               
Number 2059                                                                    
                                                                               
REPRESENTATIVE OGAN stated that Representative Ryan's points are               
well taken and he believed the state should be duly compensated,               
but he does not expect that to happen.                                         
                                                                               
Number 2079                                                                    
                                                                               
REPRESENTATIVE RYAN stated that since the state has paid this, what            
is wrong for getting back what was paid.  (INDISC. -- static on the            
tape)                                                                          
                                                                               
Number 2104                                                                    
                                                                               
VICE-CHAIR BUNDE stated that he would be embarrassed if it was                 
limited to a 10 percent rate and the prime at the time, happened to            
be 20 percent.                                                                 
                                                                               
Number 2143                                                                    
                                                                               
VICE-CHAIR BUNDE asked for a roll call vote.  Representatives                  
Bunde, Ogan and Rokeberg voted against Amendment 5.  Representative            
Ryan voted in favor of it.  Amendment 5 failed.                                
                                                                               
Number 2164                                                                    
                                                                               
REPRESENTATIVE RYAN made a motion to adopt Amendment 6, 0-                     
GH2006\B.10 which reads:                                                       
                                                                               
     Page 10, line 28:                                                         
                                                                               
          Delete "(A)"                                                         
                                                                               
     Page 10, lines 29-30:                                                     
                                                                               
          Delete "or (B) royalty value"                                        
                                                                               
          Insert "however, the terms modifying the state's right to            
          royalty in value or in kind must include payment of                  
          interest at the rate specified in AS 45.45.010(a) for                
          delayed or suspended payments".                                      
                                                                               
REPRESENTATIVE RYAN explained the amendment (INDISC. -- tape                   
static).                                                                       
                                                                               
VICE-CHAIR BUNDE stated that this is basically a penalty clause.               
                                                                               
Number 2183                                                                    
                                                                               
COMMISSIONER SHIVELY stated that Amendment 6 does not make much                
sense to the administration.  He stated that what they are talking             
about is the right to take the royalty "in kind" as opposed to "in             
value".  He stated that they would always be getting something for             
royalty, it would just be how they would (INDISC.).  Either it                 
would be received as money or "in kind", there would not be a delay            
so there would not be anything to have interest on.                            
                                                                               
Number 2212                                                                    
                                                                               
REPRESENTATIVE RYAN stated that in the bill they talked a lot about            
delaying the payment until the investors armortized their                      
investment.  (INDISC.-- tape static) He stated that he thought if              
one was to use somebody's money they should pay them for the use of            
that money.                                                                    
                                                                               
Number 2240                                                                    
                                                                               
VICE-CHAIR BUNDE stated that this would just be a technical                    
amendment but the  word "or" on page 10, line 29, has been changed             
to "and".                                                                      
                                                                               
Number 2263                                                                    
                                                                               
COMMISSIONER SHIVELY stated that they are not talking about a                  
delayed payment for a royalty.  The section talks about when they              
could exercise the option to take the gas or money or take the gas             
and use it or market it ourselves.  He stated that the gas will be             
sold as it comes out, there would be no delay in the actual                    
royalty.  The amount that is taken can be changed on a monthly                 
basis.  If the industry builds the gas line and assumes that they              
would have a certain amount of gas to market but then the state,               
four years into the contract, takes 12 percent of the gas, that                
would violate the contract.  He stated that if "in kind" gas is                
used up-front then it would be taken into account upon the                     
contract's design.                                                             
                                                                               
Number 2328                                                                    
                                                                               
REPRESENTATIVE ROKEBERG stated that would be a possibility that the            
design of the pipeline would have a maximum capacity before                    
constructed, therefore a surplus capacity would be designed into it            
depending on the contract.  He stated that its conceivable that a              
royalty share would not have to be given up if it was taken in                 
kind.  He stated that this might be one area where the state might             
benefit because if there is excess capacity the cost of using the              
royalty gas and the ability to take it at full value may be there              
with minimal marginal costs to the projects sponsor.  He asked if              
that would be a possibility.                                                   
                                                                               
Number 2374                                                                    
                                                                               
COMMISSIONER SHIVELY stated that it is possible but unlikely.  He              
stated that the main disadvantage in the market place is the cost              
of the pipeline which other competing countries don't have.  He                
stated that there would be ways to increase capacity but it would              
have to be at a cost.  The challenge to the industry is to drive               
the cost down in order to have a competitive product.                          
                                                                               
Number 2407                                                                    
                                                                               
REPRESENTATIVE RYAN stated that he is looking at a long term                   
commitment on the state's portion of the gas as the markets change             
over time and we could be stuck in a contract that turns out to be             
unfavorable to the state's interest.  He stated that he would                  
withdraw Amendment 6 and come back with an index that would allow              
the state to commit its royalty and have a guaranteed index that if            
the price was over the index, a premium would be received.                     
                                                                               
Number 2452                                                                    
                                                                               
VICE-CHAIR BUNDE asked if there was an objection to withdrawing                
Amendment 6.  Hearing none, it was so ordered.  He recessed the                
meeting to the call of the chair.                                              
                                                                               

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