Legislature(2003 - 2004)

02/25/2003 03:22 PM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                       February 25, 2003                                                                                        
                           3:22 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Vic Kohring, Chair                                                                                               
Representative Mike Chenault, Vice Chair                                                                                        
Representative Hugh Fate                                                                                                        
Representative Lesil McGuire                                                                                                    
Representative Norman Rokeberg                                                                                                  
Representative Harry Crawford                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Beth Kerttula                                                                                                    
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 16                                                                                                               
"An  Act   amending  the  standards  applicable   to  determining                                                               
whether,  for purposes  of the  Alaska  Stranded Gas  Development                                                               
Act, a  proposed new investment constitutes  a qualified project,                                                               
and  repealing  the deadline  for  applications  relating to  the                                                               
development of  contracts for payments  in lieu of taxes  and for                                                               
royalty  adjustments  that  may be  submitted  for  consideration                                                               
under that Act; and providing for an effective date."                                                                           
                                                                                                                                
     - MOVED CSHB 16(O&G) OUT OF COMMITTEE                                                                                      
                                                                                                                                
HOUSE BILL NO. 57                                                                                                               
"An Act amending  the manner of determining  the royalty received                                                               
by the state  on gas production as it relates  to the manufacture                                                               
of certain value-added products."                                                                                               
                                                                                                                                
     - MOVED CSHB 57(O&G) OUT OF COMMITTEE                                                                                      
                                                                                                                                
PREVIOUS ACTION                                                                                                               
                                                                                                                                
BILL: HB 16                                                                                                                   
SHORT TITLE:STRANDED GAS DEVELOPMENT ACT AMENDMENTS                                                                             
SPONSOR(S): REPRESENTATIVE(S)FATE                                                                                               
                                                                                                                                
Jrn-Date   Jrn-Page                     Action                                                                                  
01/21/03     0035       (H)        PREFILE RELEASED (1/10/03)                                                                   
01/21/03     0035       (H)        READ THE FIRST TIME -                                                                        
                                   REFERRALS                                                                                    
01/21/03     0035       (H)        O&G, RES, FIN                                                                                
01/21/03     0035       (H)        REFERRED TO OIL & GAS                                                                        
02/06/03                (H)        O&G AT 3:15 PM CAPITOL 124                                                                   
02/06/03                (H)        Heard & Held                                                                                 
                                   MINUTE(O&G)                                                                                  
02/07/03     0153       (H)        COSPONSOR(S): CHENAULT                                                                       
02/07/03                (H)        RES AT 1:00 PM CAPITOL 124                                                                   
02/07/03                (H)        Scheduled But Not Heard                                                                      
02/10/03     0172       (H)        COSPONSOR(S): HOLM                                                                           
02/14/03                (H)        RES AT 1:00 PM CAPITOL 124                                                                   
02/14/03                (H)        <Pending Referral> -- Meeting                                                                
                                   Canceled --                                                                                  
02/21/03                (H)        RES AT 1:00 PM CAPITOL 124                                                                   
02/21/03                (H)        <Bill Hearing Canceled>                                                                      
02/25/03                (H)        O&G AT 3:15 PM CAPITOL 124                                                                   
                                                                                                                                
BILL: HB 57                                                                                                                   
SHORT TITLE:ROYALTY GAS CONTRACTS                                                                                               
SPONSOR(S): REPRESENTATIVE(S)CHENAULT                                                                                           
                                                                                                                                
Jrn-Date   Jrn-Page                     Action                                                                                  
01/21/03     0047       (H)        PREFILE RELEASED (1/17/03)                                                                   
01/21/03     0047       (H)        READ THE FIRST TIME -                                                                        
                                   REFERRALS                                                                                    
01/21/03     0047       (H)        O&G, RES                                                                                     
01/31/03     0107       (H)        COSPONSOR(S): WHITAKER                                                                       
02/04/03                (H)        O&G AT 3:15 PM CAPITOL 124                                                                   
02/04/03                (H)        Heard & Held                                                                                 
02/04/03                (H)        MINUTE(O&G)                                                                                  
02/25/03                (H)        O&G AT 3:15 PM CAPITOL 124                                                                   
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MARK MYERS, Director                                                                                                            
Division of Oil & Gas                                                                                                           
Department of Natural Resources                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions on HB 16, Version H;                                                                    
answered questions on HB 57, Version I, and the division's newer                                                                
fiscal note, dated 2/11/03, for the original bill version.                                                                      
                                                                                                                                
JIM POUND, Staff                                                                                                                
to Representative Hugh Fate                                                                                                     
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered questions  on Amendment 5 to HB 16,                                                               
Version H.                                                                                                                      
                                                                                                                                
WENDY KING                                                                                                                      
ConocoPhillips                                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During hearing  on HB 16, Version H, offered                                                               
the company's position on the first amendment to Amendment 5.                                                                   
                                                                                                                                
VIRGINIA RAGLE, Assistant Attorney General                                                                                      
Oil, Gas & Mining Section                                                                                                       
Civil Division (Juneau)                                                                                                         
Department of Law                                                                                                               
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered questions  about the new definition                                                               
in HB 57, Version I.                                                                                                            
                                                                                                                                
MIKE NUGENT, General Manager                                                                                                    
Agrium Kenai Nitrogen Operations                                                                                                
Kenai, Alaska                                                                                                                   
POSITION STATEMENT:   Answered  questions relating  to HB  57 and                                                               
his company's operations and contract with Unocal.                                                                              
                                                                                                                                
JIM CALVIN, Economist and Partner                                                                                               
McDowell Group                                                                                                                  
Anchorage/Juneau, Alaska                                                                                                        
POSITION  STATEMENT:   During  hearing on  HB  57, explained  the                                                               
study that the McDowell Group had done on behalf of Agrium.                                                                     
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 03-9, SIDE A                                                                                                             
Number 0001                                                                                                                     
                                                                                                                                
CHAIR VIC KOHRING  called the House Special Committee  on Oil and                                                             
Gas  meeting to  order  at 3:22  p.m.   Representatives  Kohring,                                                               
Fate,  and   Crawford  were  present   at  the  call   to  order;                                                               
Representative    Rokeberg   arrived    immediately   thereafter.                                                               
Representatives Chenault  and McGuire arrived as  the meeting was                                                               
in progress.                                                                                                                    
                                                                                                                                
HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS                                                                                 
                                                                                                                                
Number 0094                                                                                                                     
                                                                                                                                
CHAIR KOHRING  announced that the  first order of  business would                                                               
be HOUSE BILL  NO. 16, "An Act amending  the standards applicable                                                               
to determining whether,  for purposes of the  Alaska Stranded Gas                                                               
Development  Act,   a  proposed  new  investment   constitutes  a                                                               
qualified project,  and repealing  the deadline  for applications                                                               
relating to the development of  contracts for payments in lieu of                                                               
taxes  and for  royalty  adjustments that  may  be submitted  for                                                               
consideration  under that  Act;  and providing  for an  effective                                                               
date."   [Before the  committee, adopted  at the  2/6/03 meeting,                                                               
was Version H, 23-LS0101\H, Chenoweth, 2/6/03.]                                                                                 
                                                                                                                                
CHAIR  KOHRING reminded  members  that there  had  been a  public                                                               
hearing on the bill, and that the public hearing was closed.                                                                    
                                                                                                                                
[There was a  motion to adopt Version  H as a work  draft, but it                                                               
was already before the committee.]                                                                                              
                                                                                                                                
Number 0213                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE,  sponsor, requested adoption of  Amendment 1                                                               
[the first of  ten amendments on a two-page  handout], which read                                                               
[original punctuation provided]:                                                                                                
                                                                                                                                
     Page 2 Line 6                                                                                                              
                                                                                                                                
       of natural gas within or from the state to one or                                                                    
     more....                                                                                                                   
                                                                                                                                
REPRESENTATIVE FATE  explained that  this makes  it clear  that a                                                               
gas  or gas  product  can be  used within  the  state or  shipped                                                               
outside the state.                                                                                                              
                                                                                                                                
The committee took an at-ease from 3:25 p.m. to 3:27 p.m.                                                                       
                                                                                                                                
Number 0356                                                                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD  objected to  Amendment 1  for discussion                                                               
purposes.   He  noted  that  the original  stranded  gas Act  was                                                               
intended  to  get Prudhoe  Bay  natural  gas  to market.    This,                                                               
however, applies to  virtually any project in  the state, whether                                                               
it exports  gas out  of state  or uses  it in  Alaska.   He asked                                                               
whether  the  legislature  wants  to  give  this  authority  away                                                               
indefinitely for any project of almost  any size.  He pointed out                                                               
that  500 million  cubic feet  isn't  a very  large gas  project.                                                               
This could be for any natural  gas project over 500 million cubic                                                               
feet,  including one  at Prudhoe  Bay,  at Minto  Flats, or  Cook                                                               
Inlet, for example.                                                                                                             
                                                                                                                                
REPRESENTATIVE  FATE indicated  this is  based on  the "qualified                                                               
project"  under  the  stranded  gas   Act  [AS  43.82],  and  the                                                               
commissioner [of  the Department of Natural  Resources (DNR)] has                                                               
the authority to determine [whether a project qualifies].                                                                       
                                                                                                                                
The committee took an at-ease from 3:30 p.m. to 3:31 p.m.                                                                       
                                                                                                                                
Number 0609                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE said any large  enough project "that's on the                                                               
line of this route" would  be qualified, under the commissioner's                                                               
parameters of qualifying the project.                                                                                           
                                                                                                                                
REPRESENTATIVE CRAWFORD asked where [the  bill or Act] shows that                                                               
it is limited to that route.                                                                                                    
                                                                                                                                
REPRESENTATIVE  FATE replied  that it  says the  commissioner may                                                               
qualify the project.                                                                                                            
                                                                                                                                
REPRESENTATIVE CRAWFORD  asked whether  gas discovered  in Norton                                                               
Sound could qualify if the commissioner so decided.                                                                             
                                                                                                                                
REPRESENTATIVE FATE affirmed that.                                                                                              
                                                                                                                                
REPRESENTATIVE  CRAWFORD  asked whether  it  doesn't  have to  be                                                               
parallel to any route, then.                                                                                                    
                                                                                                                                
REPRESENTATIVE FATE said this is the  stranded gas Act.  It isn't                                                               
for new discoveries.  He read  [from AS 43.82.010], which says in                                                               
part,  "The purpose  of  this  chapter is  to  (1) encourage  new                                                               
investment  to  develop the  state's  stranded  gas resources  by                                                               
authorizing  establishment of  fiscal terms  related to  that new                                                               
investment  without   significantly  altering  tax   and  royalty                                                               
methodologies and  rates on existing  oil and  gas infrastructure                                                               
and production".                                                                                                                
                                                                                                                                
[The  definition of  "stranded gas"  under AS  43.82.900 read  as                                                               
follows:   "(13)  'stranded  gas'  means gas  that  is not  being                                                               
marketed  due   to  prevailing  costs  or   price  conditions  as                                                               
determined  by an  economic analysis  by the  commissioner for  a                                                               
particular project."]                                                                                                           
                                                                                                                                
REPRESENTATIVE  FATE, offering  that  he doesn't  think there  is                                                               
stranded  gas  in Norton  Sound,  said  that "wherever  there  is                                                               
stranded gas that we know of", this Act [would apply].                                                                          
                                                                                                                                
Number 0775                                                                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD  asked whether  it couldn't apply  to new                                                               
discoveries in Minto Flats, for example.                                                                                        
                                                                                                                                
REPRESENTATIVE FATE replied  no, that it would  apply to stranded                                                               
gas.   He  added, "Stranded  gas is  where you  have an  existing                                                               
wellhead that has gas that has not been able to get to market."                                                                 
                                                                                                                                
REPRESENTATIVE  CRAWFORD  asked   whether  Representative  Fate's                                                               
intent,  then,   is  that   [gas]  won't   be  covered   by  this                                                               
[legislation] if it hasn't been discovered yet.                                                                                 
                                                                                                                                
REPRESENTATIVE  FATE replied  that it  isn't stranded  gas if  it                                                               
hasn't been discovered yet.   In response to a question regarding                                                               
whether it ever  would become stranded after  discovery, he said,                                                               
"It  becomes  stranded only  when  that  gas  is brought  to  the                                                               
surface  and lifted,  and  there's no  market for  it.   At  that                                                               
point,  it becomes  stranded."   In response  to a  suggestion by                                                               
Representative Crawford  that that  could happen in  Minto Flats,                                                               
he said:                                                                                                                        
                                                                                                                                
     This  bill doesn't  refer to  those  because it  hasn't                                                                    
     happened.  It  could, in other areas, of  course; if it                                                                    
     does, well,  then, I'm sure  there will  be legislation                                                                    
     appropriate  to that  particular situation.   But  this                                                                    
     only applies to  the present stranded gas  that we have                                                                    
     in the state.                                                                                                              
                                                                                                                                
REPRESENTATIVE CRAWFORD said he was glad that was on the record.                                                                
                                                                                                                                
Number 0811                                                                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD withdrew his objection.                                                                                 
                                                                                                                                
CHAIR  KOHRING asked  whether there  was  any further  objection.                                                               
Hearing none, he announced that Amendment 1 was adopted.                                                                        
                                                                                                                                
Number 0839                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE brought attention  to Amendment 2, which read                                                               
[original punctuation provided]:                                                                                                
                                                                                                                                
     Add new Section 2                                                                                                          
                                                                                                                                
     *Sec 2 AS 43.82.110(D) is amended to read                                                                                  
                                                                                                                                
     Sec. 43.82.110. Qualified sponsor or qualified sponsor                                                                     
     group.                                                                                                                     
                                                                                                                                
     (D) has a net worth equal to at least [33] 15 percent                                                                  
       of the estimated cost of constructing a qualified                                                                        
     project;                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FATE  explained  the   reasoning  behind  the  15                                                               
percent,  noting that  the figure  has been  shown to  the people                                                               
involved,  including "the  governor's oil  and gas  people."   He                                                               
said  it  was chosen  to  try  to  allow sponsors  who  otherwise                                                               
couldn't  meet a  [33]  percent net  worth  standard to  qualify.                                                               
With  a  $9-billion project,  for  example,  few corporations  in                                                               
Alaska or  elsewhere could  participate if  the net  worth, under                                                               
the old scenario, must be 33  percent of that project cost.  This                                                               
is a  way to  get others  into the  pipeline, and  yet is  a high                                                               
enough  hurdle that  it doesn't  dissipate the  profitability for                                                               
major companies that will carry the majority of the financing.                                                                  
                                                                                                                                
REPRESENTATIVE FATE called  it a good attempt to try  to get more                                                               
involvement in construction  of the qualified project  or the gas                                                               
pipeline, to spread out risk  among those deemed qualified by the                                                               
commissioner, and  to help induce exploration  and development of                                                               
the maturing  fields on the  North Slope by companies  other than                                                               
the  three   major  ones   of  today.     He   acknowledged  that                                                               
negotiations over access still will be required.                                                                                
                                                                                                                                
Number 1075                                                                                                                     
                                                                                                                                
CHAIR KOHRING sought confirmation that  lowering it to 15 percent                                                               
wouldn't put  a prospective  owner of the  line in  a financially                                                               
weak position to where that  company wouldn't be strong enough to                                                               
be an owner.                                                                                                                    
                                                                                                                                
REPRESENTATIVE FATE said it shouldn't affect that at all.                                                                       
                                                                                                                                
CHAIR KOHRING  offered his understanding that  this doesn't force                                                               
negotiations between  existing and prospective owners  of any gas                                                               
line.                                                                                                                           
                                                                                                                                
REPRESENTATIVE responded  no, this  spells out  in law  what that                                                               
bar would be.                                                                                                                   
                                                                                                                                
Number 1131                                                                                                                     
                                                                                                                                
REPRESENTATIVE  KOHRING asked  whether  there  were questions  or                                                               
comments with regard to Amendment  2.  Hearing none, he announced                                                               
that Amendment 2 was adopted.                                                                                                   
                                                                                                                                
Number 1155                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE brought attention  to Amendment 3, which read                                                               
[original punctuation provided]:                                                                                                
                                                                                                                                
     Page 2 Line 12                                                                                                             
                                                                                                                                
     Delete (2) Add (3)                                                                                                         
                                                                                                                                
Number 1160                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG objected.                                                                                               
                                                                                                                                
AN UNIDENTIFIED SPEAKER said it is to renumber [paragraph] (2).                                                                 
                                                                                                                                
REPRESENTATIVE  ROKEBERG informed  the committee  that he  had an                                                               
amendment  that deletes  Section 2  [of Version  H] and  subsumes                                                               
Amendments   3-7   [on   the   two-page   handout   provided   by                                                               
Representative Fate].   He  recommended addressing  his amendment                                                               
first  and then  [including  the  renumbering] in  Representative                                                               
Fate's next amendment.                                                                                                          
                                                                                                                                
The committee took an at-ease from 3:39 p.m. to 3:40 p.m.                                                                       
                                                                                                                                
Number 1271                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE withdrew Amendment 3.                                                                                       
                                                                                                                                
Number 1279                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG moved  to adopt  new Amendment  3, which                                                               
read [original punctuation provided]:                                                                                           
                                                                                                                                
       Pg. 2, line 12 through Pg. 3, line 6:  DELETE ALL                                                                        
     MATERIAL                                                                                                                   
                                                                                                                                
REPRESENTATIVE CRAWFORD objected, requesting  an explanation.  He                                                               
referred  to [paragraph]  (5), which  Amendment  3 would  delete.                                                               
[Section 2  of Version  H amended  AS 43.82.200  by adding  a new                                                               
paragraph (5)  as an item  that may  be included in  the contract                                                               
that the commissioner may develop.]  Paragraph (5) read:                                                                        
                                                                                                                                
     (5) terms  regarding an  equity or  other participating                                                                
     interest  in  a project  by  one  or more  Alaska-based                                                                
     corporations or  businesses; the terms  developed under                                                                
     this paragraph  may authorize the holding  of equity or                                                                
     other participating interests not  to exceed 10 percent                                                                
     of  the  estimated  cost of  constructing  a  qualified                                                                
     project;                                                                                                               
                                                                                                                                
REPRESENTATIVE  CRAWFORD  said  removing  [paragraph  (5)]  would                                                               
remove his  support for  the legislation  because he  believed it                                                               
was probably  the best part  of the bill, allowing  small players                                                               
into the project.                                                                                                               
                                                                                                                                
REPRESENTATIVE  ROKEBERG, noting  that it  had been  discussed at                                                               
the previous  bill hearing, explained that  [limiting] the amount                                                               
of equity  interest to 10  percent narrows the  opportunities for                                                               
Alaskan  businesses  to  participate.     He  said  there  is  no                                                               
commercial  interest in  [having  that cap],  and  asked why  the                                                               
state should dictate  who the parties to  the commercial contract                                                               
could be.   He pointed out that the [Act]  being reauthorized has                                                               
no prohibition  about the size of  the entity.  He  suggested the                                                               
language    in   [proposed    paragraph   (5)]    works   against                                                               
Representative Crawford's  desire to allow Alaskan  businesses to                                                               
participate  and have  an equity  interest in  the pipeline,  and                                                               
hence  he should  support the  amendment because  it deletes  the                                                               
cap.  He said anybody who brings  value to table can be an equity                                                               
partner  in the  contract with  the  state, and  that there's  no                                                               
limitation on it [if Amendment 3 is adopted].                                                                                   
                                                                                                                                
Number 1474                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CRAWFORD  offered  his   belief  that  the  three                                                               
"majors" could  take the  project over and  not allow  others in,                                                               
even if those others brought 10  percent to the project.  He said                                                               
he thought  it was  a good  idea to  have a  cap so  that smaller                                                               
[companies] could get in.                                                                                                       
                                                                                                                                
REPRESENTATIVE  FATE put  forth reasons  for the  15 percent  [in                                                               
Amendment 2]  at the same  time this  [cap] is being  deleted [by                                                               
Amendment 3]:   it  lowers the  bar to allow  more people  in the                                                               
game,  although it's  up  to the  commissioner  to qualify  those                                                               
sponsor groups.  He explained:                                                                                                  
                                                                                                                                
     We thought it was just better  to get rid of it; that's                                                                    
     one reason.   And, also,  ... there was  shipped around                                                                    
     here  some discussion  of 10  percent, which  we didn't                                                                    
     feel was in  the best interest of the  State of Alaska,                                                                    
     to  try to  come  up with  some kind  of  a ...  strict                                                                    
     percentage  that we'd  heard  in the  halls here,  very                                                                    
     frankly.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FATE said,  therefore,  that a  better route  was                                                               
chosen, lowering the bar from 33 percent.  He explained:                                                                        
                                                                                                                                
     It  just   makes  a  better  condition   for  not  only                                                                    
     acceptance of  this by the present  producers and those                                                                    
     people  that  are  already exploring,  but  for  future                                                                    
     people that  would like  to get in,  into that  play of                                                                    
     exploration,  ...  wherever  the  gas  is,  as  you  so                                                                    
     adequately  put when  we started,  whether it's  on the                                                                    
     North Slope  or somewhere else  where ... there   could                                                                    
     eventually be stranded gas.   So we've really tried the                                                                    
     best  way we  could to  lower  that bar,  to get  these                                                                    
     people into this game.   And this [limit of 10 percent]                                                                    
     doesn't do the job.                                                                                                        
                                                                                                                                
Number 1630                                                                                                                     
                                                                                                                                
CHAIR  KOHRING, noting  that he  and Representative  Crawford had                                                               
talked about this,  said he appreciated where he  was coming from                                                               
and also would  like to see as much  diversification of ownership                                                               
as possible.   However, he disagreed  philosophically, explaining                                                               
one concern:   if this  provision is  in the bill,  government is                                                               
more or less  forcing ownership, rather than  letting people work                                                               
out financial arrangements among themselves.                                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD  proposed   deleting  the  "10  percent"                                                               
language but leaving what he  believes is the operative language:                                                               
"terms regarding an  equity or other participating  interest in a                                                           
project by one or more  Alaska-based corporations or businesses".                                                           
He  suggested  that  would  make  it  possible  for  Alaska-based                                                               
businesses to get into this game.                                                                                               
                                                                                                                                
REPRESENTATIVE ROKEBERG  said he appreciated  what Representative                                                               
Crawford  was  saying  and   agreed  philosophically  that  there                                                               
shouldn't be a bar to Alaskan  participation.  With regard to the                                                               
[10  percent]  restriction,  he inquired  about  an  Alaska-based                                                               
company  that  wants 100  percent  ownership,  for example.    He                                                               
suggested  that leaving  the wording  proposed by  Representative                                                               
Crawford would be merely "jawboning" or "cheerleading."                                                                         
                                                                                                                                
REPRESENTATIVE  ROKEBERG  therefore  proposed  perhaps  having  a                                                               
letter of  intent that  says the intent  is to  encourage Alaska-                                                               
based companies to  take an equity position in the  pipeline.  He                                                               
also suggested  that Representative  Fate's Amendment 2  was what                                                               
was operative, opening the net-worth  requirement by more than 50                                                               
percent and thereby opening the door to Alaskan businesses.                                                                     
                                                                                                                                
Number 1794                                                                                                                     
                                                                                                                                
CHAIR KOHRING  asked whether there  was any further  objection to                                                               
new Amendment 3.                                                                                                                
                                                                                                                                
REPRESENTATIVE   CRAWFORD  indicated   he  was   withdrawing  his                                                               
objection.                                                                                                                      
                                                                                                                                
CHAIR KOHRING announced that new Amendment 3 was adopted.                                                                       
                                                                                                                                
[Written Amendments 4-7 were made  unnecessary by the adoption of                                                               
new Amendment 3.]                                                                                                               
                                                                                                                                
Number 1852                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE  offered Amendment 4 [labeled  Amendment 8 on                                                               
the handout], which read [original punctuation provided]:                                                                       
                                                                                                                                
     Page 3 Line 7                                                                                                              
                                                                                                                                
     Delete [*Sec. 3. AS 43.82.170 is repealed.]                                                                              
                                                                                                                                
        *Sec. 4  AS 43.82.170.  Application Deadlines is                                                                    
     amended to read:                                                                                                       
                                                                                                                                
     The  commissioner of  revenue  or  the commissioner  of                                                                
     natural resources may  not act on an  application for a                                                                
     contract  submitted  under   AS  43.82.120  unless  the                                                                
     application is  received by  the Department  of Revenue                                                                
     no later than June 30, 2004.                                                                                           
                                                                                                                                
The committee took an at-ease from 3:50 p.m. to 3:53 p.m.                                                                       
                                                                                                                                
Number 1902                                                                                                                     
                                                                                                                                
REPRESENTATIVE  FATE, noting  that  it would  now  be Section  3,                                                               
explained that this extends the [application deadline].                                                                         
                                                                                                                                
REPRESENTATIVE  McGUIRE  observed  that  Version  H,  Section  3,                                                               
repeals  [AS  43.82.]170, which  is  identical  to [Amendment  4]                                                               
except that it  has a date of  June 30, 2001.  She  asked why the                                                               
decision  was made  to put  it back  in the  bill but  change the                                                               
date,  since the  policy will  be the  same as  for the  existing                                                               
statute.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  FATE  replied  that  in  conversations  with  the                                                               
Division of Oil & Gas, it  was determined that a definite date is                                                               
better in order  to spur activity.  Without that,  or if there is                                                               
an extensive amount  of time, he said, "people might  use that to                                                               
their  advantage   and  not  really   come  up  to   the  plate."                                                               
Suggesting  it is  in the  state's best  interest to  have people                                                               
apply  as quickly  as they  can, he  added, "This  can always  be                                                               
renewed at a later date in subsequent legislative sessions."                                                                    
                                                                                                                                
Number 1998                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  expressed concern  about the  2004 date,                                                               
which may force the committee to  take the bill up 12 months from                                                               
now.  He asked whether that is the sponsor's intention.                                                                         
                                                                                                                                
REPRESENTATIVE  FATE, again  citing advice  from the  Division of                                                               
Oil & Gas  as the impetus, said  this is a prod to  get people to                                                               
file  an application  if they  want  to get  into the  game.   In                                                               
further  response, he  affirmed  that he'd  considered [that  the                                                               
committee might have  to address the provision again  in a year].                                                               
He explained:                                                                                                                   
                                                                                                                                
     If  the filing  of applications  isn't what  we expect,                                                                    
     then we  can extend  that date, and  ... really  have a                                                                    
     responsibility to  assess that  and extend that  date a                                                                    
     longer time  ... at the next  go-round.  It would  be a                                                                    
     very simple  fix; it's  a simple  amendment to  the ...                                                                    
     stranded gas  Act.  And if  that's what we have  to do,                                                                    
     ...  then we'll  do it.   But  it does  also send  some                                                                    
     signals  that we  really want  to get  cracking on  the                                                                    
     project, and I  really think it's in  the best interest                                                                    
     to  shorten   the  time,  rather  than   extend  it  ad                                                                    
     infinitum.                                                                                                                 
                                                                                                                                
Number 2133                                                                                                                     
                                                                                                                                
REPRESENTATIVE  McGUIRE inquired  about the  reason for  the June                                                               
30, 2004 [deadline], which is after the legislature [adjourns].                                                                 
                                                                                                                                
REPRESENTATIVE  FATE said  he  thought  it had  to  do with  "the                                                               
expenditures  and the  turnover expenditures,  and fiscal  years'                                                               
timing, so  that some of the  expenses incurred - which  you will                                                               
see  a cap  on later,  that are  reimbursable -  fall under  that                                                               
accounting timeline."                                                                                                           
                                                                                                                                
Number 2184                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  offered that ongoing  negotiations might                                                               
not come to  fruition before the end of  the legislative session,                                                               
and that  the legislature wouldn't  want to return for  a special                                                               
session in  an election year  to reauthorize an Act.   Expressing                                                               
doubt that an executive order  could extend the Act, for example,                                                               
he   voiced  concern   about  the   timing   and  asked   whether                                                               
Representative Fate had considered these points.                                                                                
                                                                                                                                
REPRESENTATIVE  FATE  replied  that  the  process  of  filing  an                                                               
application,  to his  understanding, won't  require that  type of                                                               
negotiation,  for one  thing,  although  a person  "theoretically                                                               
could get caught."                                                                                                              
                                                                                                                                
Number 2252                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  whether  Representative Fate  had                                                               
considered  an expiration  date of  April 1  of 2004  or, in  the                                                               
alternative, February 1 or May 1 of 2005.                                                                                       
                                                                                                                                
REPRESENTATIVE  FATE indicated  he hadn't  thought about  it with                                                               
regard  to  the application  process,  or  thought it  necessary.                                                               
However,  this  day's  discussion  had  raised  a  "fairly  valid                                                               
point."    He asked  Representative  Rokeberg  to state  it  more                                                               
clearly if he had an amendment in mind.                                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG  again expressed concern about  the short                                                               
time, particularly  since federal action  on any energy  bill may                                                               
affect deliberations  regarding the  sponsor group and  push this                                                               
into next  winter, not  allowing time  for due  deliberation, and                                                               
because [the  Act] would expire  when the legislature  [wasn't in                                                               
session].                                                                                                                       
                                                                                                                                
REPRESENTATIVE FATE deferred to Mr. Myers.                                                                                      
                                                                                                                                
Number 2356                                                                                                                     
                                                                                                                                
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural  Resources, specified  that [June  30] 2004  refers to  a                                                               
date  by which  the  commissioner of  the  Department of  Revenue                                                               
would  have to  receive the  application.   It doesn't  limit the                                                               
time of  the negotiations.   Rather, the applicant would  have to                                                               
file by that date in order to start the process.                                                                                
                                                                                                                                
REPRESENTATIVE ROKEBERG  agreed that's  what the  amendment says,                                                               
but nonetheless said it doesn't  give him much comfort because of                                                               
the federal  energy bill  and the  timeframe in  which to  put an                                                               
application  together.     Observing  that  [what   later  became                                                               
Amendment  5] allows  for outside  contractors to  be paid  up to                                                               
$1.5  million "to  read this  application," he  surmised that  it                                                               
isn't a two-page application and might take time to complete.                                                                   
                                                                                                                                
Number 2426                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  Representative Fate  whether  he                                                               
would be  open to [a  deadline] of February  or March 1  of 2005,                                                               
for example.                                                                                                                    
                                                                                                                                
REPRESENTATIVE FATE  said he'd have  to consider it,  noting that                                                               
"a  large  part   of  this  came  through  the   desires  of  the                                                               
administration to  move forward on  some of these projects."   He                                                               
recalled that there was no date  in the first version of the bill                                                               
[which never  was considered by  the committee] "because  we just                                                               
wanted to allow people to come in as they needed to."                                                                           
                                                                                                                                
REPRESENTATIVE ROKEBERG  said he appreciated that,  but added, "I                                                               
just  want  to  make  sure  the  administration  knows  that  the                                                               
legislature is here."                                                                                                           
                                                                                                                                
Number 2457                                                                                                                     
                                                                                                                                
CHAIR KOHRING  asked Mr. Myers  whether he had any  opinion about                                                               
perhaps modifying this to March 2005.                                                                                           
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     I can't  really speak for the  administration because I                                                                    
     don't think I've been party  to those discussions.  But                                                                    
     just  from the  division's perspective,  I don't  think                                                                    
     we'd  have a  problem with  that.   Again, I  think ...                                                                    
     Representative Fate's discussed the  reason you want to                                                                    
     have a  finite date.   The specifics  of the  timing of                                                                    
     that date probably [aren't] as  important as having ...                                                                    
     a reasonable period  of time ... to  start the process,                                                                    
     but not  too long, [so]  that you don't  accelerate the                                                                    
     ... project itself.                                                                                                        
                                                                                                                                
Number 2498                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  said he could either  offer an amendment                                                               
or defer to  the chair of the House  Resources Standing Committee                                                               
[Representative Fate,  co-chair] to take  this issue up  [in that                                                               
committee].                                                                                                                     
                                                                                                                                
REPRESENTATIVE  FATE responded  that  he'd prefer  to discuss  it                                                               
with some  people he'd been  dealing with in  the administration.                                                               
He said  he had no real  objection [to an amendment],  except for                                                               
wanting to speed up the process  as much as possible.  Suggesting                                                               
it  would  be  up  to  Chair  Kohring  whether  to  entertain  an                                                               
amendment, Representative Fate  said he'd be willing to  do so in                                                               
the  House  Resources  Standing Committee,  "depending  upon  our                                                               
discussions with the administration."                                                                                           
                                                                                                                                
REPRESENTATIVE ROKEBERG  responded, given that, that  he wouldn't                                                               
offer an  amendment to [Amendment  4] or object to  the amendment                                                               
itself.                                                                                                                         
                                                                                                                                
CHAIR KOHRING clarified, as chair  of the House Special Committee                                                               
on  Oil and  Gas, that  he won't  control whether  amendments are                                                               
submitted.   Instead,  he  announced that  anyone  is welcome  to                                                               
attempt to modify any legislation.                                                                                              
                                                                                                                                
Number 2521                                                                                                                     
                                                                                                                                
CHAIR  KOHRING   asked  whether   there  was  any   objection  to                                                               
Amendment 4.  There being no objection, Amendment 4 was adopted.                                                                
                                                                                                                                
Number 2590                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE  offered Amendment 5 [labeled  Amendment 9 on                                                               
the  handout],  which  read [original  punctuation  provided  but                                                               
formatting changed]:                                                                                                            
                                                                                                                                
     New Section 5                                                                                                              
                                                                                                                                
     *Sec. 5  AS 43.82.240 is amended to read                                                                               
                                                                                                                                
     Sec. 43.82.240.  Use of an independent contractor.                                                                         
                                                                                                                                
          (a) The commissioner may use [an] independent                                                                       
     [contractor]  contractors to  assist in  the evaluation                                                                
     of  an application  or in  the development  of contract                                                                    
     terms   under  AS   43.82.200.  The   commissioner  may                                                                    
     condition  the  development  of  a  contract  under  AS                                                                    
     43.82.020  on   an  agreement   by  the   applicant  to                                                                    
     reimburse   the  state   for  the   expenses  of   [an]                                                                  
     independent  [contractor]  contractors, not  to  exceed                                                              
     $1.5 million per application under this section.                                                                       
                                                                                                                                
Number 2642                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CHENAULT objected  for discussion  purposes.   He                                                               
requested confirmation that  the new section would  be Section 4,                                                               
not Section 5.                                                                                                                  
                                                                                                                                
CHAIR KOHRING and REPRESENTATIVE FATE affirmed that.                                                                            
                                                                                                                                
Number 2660                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  requested   the  rationale  behind  the                                                               
language "not to exceed $1.5 million".                                                                                      
                                                                                                                                
REPRESENTATIVE  FATE  explained  that   it  caps  the  amount  of                                                               
reimbursable expenses.   He said  there are  "differing scenarios                                                               
of that amount," but that  it's the amount the administration and                                                               
the Division of Oil & Gas thought was fair.                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  whether  Representative Fate  had                                                               
checked to see whether the private  sector thought it was fair as                                                               
well.                                                                                                                           
                                                                                                                                
REPRESENTATIVE FATE said he hadn't, although Jim [Pound] had.                                                                   
                                                                                                                                
Number 2704                                                                                                                     
                                                                                                                                
JIM  POUND,  Staff  to Representative  Hugh  Fate,  Alaska  State                                                               
Legislature, offered  his understanding that the  industry wanted                                                               
some  type of  cap on  it,  "especially when  we're dealing  with                                                               
multiple contractors."  He said  this "seemed to be an acceptable                                                               
amount to them as far as a cap for a project of this size."                                                                     
                                                                                                                                
Number 2721                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  how  many  individual  companies                                                               
Mr. Pound had talked to.                                                                                                        
                                                                                                                                
MR. POUND said  he hadn't talked to them.   "This was through the                                                               
administration, through discussions they  had with the industry,"                                                               
he explained.                                                                                                                   
                                                                                                                                
Number 2731                                                                                                                     
                                                                                                                                
REPRESENTATIVE   ROKEBERG  said   he  wouldn't   object  to   the                                                               
amendment, but expressed hope that  Representative Fate, as chair                                                               
of  the  House  Resources  Standing  Committee,  would  get  some                                                               
feedback on it.                                                                                                                 
                                                                                                                                
Number 2740                                                                                                                     
                                                                                                                                
CHAIR KOHRING  asked if this  [$1.5-million cap] is  for expenses                                                               
the  industry  would  occur  in the  course  of  the  negotiation                                                               
process that the state would reimburse.                                                                                         
                                                                                                                                
MR. POUND  replied no.  He  said this deals with  the contractors                                                               
that the  state would hire  in order  to negotiate.   The statute                                                               
says [the commissioner] may condition  the contract in such a way                                                               
that  the  industry  actually  reimburses  the  state  for  those                                                               
contractors, he added.                                                                                                          
                                                                                                                                
The committee took an at-ease from 4:11 p.m. to 4:13 p.m.                                                                       
                                                                                                                                
Number 2774                                                                                                                     
                                                                                                                                
CHAIR KOHRING  began discussion  of what  would become  the first                                                               
amendment to Amendment 5.   He proposed inserting "reasonable and                                                               
nonredundant"   before  "expenses"   and   asked   Ms.  King   of                                                               
ConocoPhillips, who was on teleconference,  whether it is prudent                                                               
to  do so.   He  also informed  members that  Roger Marks  of the                                                               
Department of Revenue was on line to answer questions.                                                                          
                                                                                                                                
Number 2820                                                                                                                     
                                                                                                                                
WENDY   KING,  ConocoPhillips,   said  ConocoPhillips   would  be                                                               
supportive  of using  that kind  of language  in here,  but asked                                                               
where it would be inserted.                                                                                                     
                                                                                                                                
CHAIR  KOHRING, surmising  that Ms.  King didn't  have a  written                                                               
copy,  read   Amendment  5,   inserting  the   words  "reasonable                                                               
nonredundant" [no punctuation specified] before "expenses".                                                                     
                                                                                                                                
MS.  KING  responded  that   ConocoPhillips  would  support  that                                                               
language.  She explained:                                                                                                       
                                                                                                                                
     The key  thing here  would be  that we  would encourage                                                                    
     the state  to work  as ... one  entity and  ensure that                                                                    
     multiple  contractors are  not being  hired to  provide                                                                    
     resource  to the  same particular  issue  so we're  not                                                                    
     incurring ... redundant  work.  And also  we would just                                                                    
     encourage  that the  costs quoted  be reasonable.   For                                                                    
     example, ...  we would support  the idea of  the limit;                                                                    
     we do  support that limit,  but we want to  ensure that                                                                    
       the amount quoted is seen as a maximum, and not an                                                                       
     endorsement of that actual amount.                                                                                         
                                                                                                                                
Number 2938                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked whether  it should read "reasonable                                                               
or nonredundant".                                                                                                               
                                                                                                                                
CHAIR KOHRING  said he thought that  would be prudent.   He asked                                                               
Ms.  King  what   she  thought  about  it,   rather  than  having                                                               
"reasonable, redundant" [comma specified].                                                                                      
                                                                                                                                
MS.   KING   responded   that   it   would   be   acceptable   to                                                               
ConocoPhillips.                                                                                                                 
                                                                                                                                
TAPE 03-9, SIDE B                                                                                                             
Number 2966                                                                                                                     
                                                                                                                                
MR. MYERS agreed with "the  concept of reasonable" with regard to                                                               
reimbursable expenses.   With regard to  "nonredundant", however,                                                               
he said  it is harder to  quantify and becomes a  more subjective                                                               
standard:  some areas clearly  would be redundant, whereas others                                                               
might  have some  overlap.   He suggested  there might  be issues                                                               
over  whether something  is or  isn't  a legitimate  reimbursable                                                               
expense  with that  language.   From the  division's perspective,                                                               
rather than that  of the administration, Mr. Myers  said he would                                                               
be a  little concerned  about the ability  to determine  what the                                                               
reasonable costs are if the word "nonredundant" is added.                                                                       
                                                                                                                                
Number 2935                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked Mr.  Myers if changing "contractor"                                                               
to "contractors" [in Amendment 5 itself] was his recommendation.                                                                
                                                                                                                                
MR.  MYERS  offered his  understanding,  from  talking with  Mike                                                               
Tibbles  [legislative liaison  with the  Office of  the Governor]                                                               
that  it  was the  administration's  recommendation.   Mr.  Myers                                                               
added, "That's mainly because there  aren't really any firms that                                                               
have the breadth  of specialized technical expertise  in the wide                                                               
number of issues that could be negotiated under a gas contract."                                                                
                                                                                                                                
REPRESENTATIVE ROKEBERG agreed with that policy, but said:                                                                      
                                                                                                                                
     When  they're going  to  add  the multiple  contractors                                                                    
     here,  there  is a  redundancy  and  overlap; then  the                                                                    
     burden should be on the  state to draft their contracts                                                                    
     and the  scope of  work so ...  there shouldn't  be the                                                                    
     burden it  has to be  reimbursed by the applicant.   So                                                                    
     while I agree with the  concept and the procedure here,                                                                    
     ...  they  should  be wary  of  nonredundant  scope  of                                                                    
     activity, and  if there is  certain overlap,  then they                                                                    
     shouldn't penalize the applicant for it.                                                                                   
                                                                                                                                
Number 2882                                                                                                                     
                                                                                                                                
CHAIR KOHRING  asked Representative Rokeberg whether  he would be                                                               
amenable to inserting "reasonable" but not "nonredundant".                                                                      
                                                                                                                                
REPRESENTATIVE   ROKEBERG   said    he   liked   "reasonable   or                                                               
nonredundant".                                                                                                                  
                                                                                                                                
Number 2864                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE  concurred that "reasonable"  is appropriate,                                                               
but  said  "'nonredundant'  could   get  everybody  in  trouble,"                                                               
resulting in litigation.   He suggested that  "reasonable ... and                                                               
reasonable  negotiation"  would  probably cover  redundancy  that                                                               
might  result if  negotiations weren't  in the  best interest  of                                                               
both the state and the qualified sponsors.                                                                                      
                                                                                                                                
Number 2829                                                                                                                     
                                                                                                                                
CHAIR KOHRING moved to adopt  the first amendment to Amendment 5,                                                               
inserting  "reasonable or  nonredundant".    Citing the  previous                                                               
discussion, he explained that his  preference is "for the reasons                                                               
of clarity and strengthening the verbiage here."                                                                                
                                                                                                                                
REPRESENTATIVE FATE objected.                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG surmised  that the Division of  Oil & Gas                                                               
would be  "invoicing the  applicant for  ... the  contractor they                                                               
retained."  If  the applicant determined there  was a redundancy,                                                               
he suggested, "then they would be  able to make a complaint under                                                               
basic administrative procedures."                                                                                               
                                                                                                                                
CHAIR KOHRING asked Mr. Myers to address that.                                                                                  
                                                                                                                                
Number 2768                                                                                                                     
                                                                                                                                
MR. MYERS  responded that  one concern  is that  in negotiations,                                                               
one clearly  doesn't want to  telegraph all areas of  analysis or                                                               
the results of the analyses,  which a detailed invoice might give                                                               
key  indications  about.    With regard  to  the  redundancy,  he                                                               
offered his belief  that no one has intended  to have overlapping                                                               
experts who  duplicate.   However, in a  "line of  experts" there                                                               
might be an overlap of 5, 10, or  15 percent.  He asked:  When is                                                               
it arguable,  significant redundancy?   Furthermore,  some points                                                               
will  come   across  on  multiple   issues,  resulting   in  some                                                               
redundancy.  He suggested having  some language of intent that it                                                               
isn't  "our  ability  to  require  them to  pay  for  two  nearly                                                               
identical type of analyses."  He  added, "I think ... some of the                                                               
clarity here might  be somewhere in between.  But  ... my concern                                                               
would be, chiefly,  that you get into the issue  of ... there's a                                                               
5- or a 10-percent overlap,  which is inherent, again, in looking                                                               
at  different issues,  and it  may  be inherent  in those  firms'                                                               
expertise."                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG   surmised  that  the   committee  would                                                               
recognize that a  5- or 10-percent overlap  regarding some issues                                                               
might  be reasonable.   He  suggested  that Mr.  Myers makes  his                                                               
[Representative Rokeberg's]  case by saying one  wouldn't want to                                                               
reveal what  is in the  invoice.  How  would a firm  know whether                                                               
something was  redundant unless  a certain  amount of  detail was                                                               
provided  about what  the  firm  was paying  for?   He  suggested                                                               
perhaps invoicing "after the fact rather than before the fact."                                                                 
                                                                                                                                
Number 2656                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CRAWFORD  said  he  believes  "reasonable  costs"                                                               
takes care  of the language here.   He said he  believes, as does                                                               
Representative  Fate,  that  adding the  "nonredundant"  language                                                               
would muddy the waters.                                                                                                         
                                                                                                                                
Number 2626                                                                                                                     
                                                                                                                                
REPRESENTATIVE  McGUIRE  said she  believes  it  is important  to                                                               
clarify the costs to make  sure they're reasonable and that there                                                               
isn't  overbilling or  double  billing or  billing  for the  same                                                               
thing to  two different companies.   At the same time,  she said,                                                               
in shifting  the burden,  she doesn't want  to make  it difficult                                                               
for the state  to have to wade through a  series of documents and                                                               
proof, for example,  that will actually encumber  the process and                                                               
create more  workload for state  departments "that we want  to be                                                               
out there  issuing permits  and helping  these guys  get moving."                                                               
She asked to  hear more testimony from Mr. Myers  and Ms. King on                                                               
how they believe this will play out in practical terms.                                                                         
                                                                                                                                
Number 2552                                                                                                                     
                                                                                                                                
MR. MYERS offered  his view that "reasonable"  covers a multitude                                                               
of  issues,  since totally  duplicative  work  probably would  be                                                               
considered unreasonable.   However,  there may be  occasions when                                                               
the state wants  to confirm something as well, just  to look from                                                               
another   angle.     Overall,   he   said,   there  has   to   be                                                               
reasonableness,  so  a  strong reasonableness  standard,  to  his                                                               
belief, covers  "a multitude  of potential sins  and keeps  us on                                                               
the  straight  and  narrow"  and   would  [cover]  a  substantial                                                               
duplication of effort  as well.  He suggested it  may be somewhat                                                               
redundant to  specify that  it is  nonduplicative in  addition to                                                               
requiring reasonableness.                                                                                                       
                                                                                                                                
Number 2501                                                                                                                     
                                                                                                                                
MS. KING, in response to Chair Kohring, said:                                                                                   
                                                                                                                                
     First,  I'd  like   to  emphasize  that  ConocoPhillips                                                                    
     [supports] the  administration obtaining  those experts                                                                    
     that allow  them to be  fully informed going  into this                                                                    
     negotiation, and they  need to be prepared  to do that.                                                                    
     "Reasonable" is acceptable to ConocoPhillips.                                                                              
                                                                                                                                
REPRESENTATIVE  McGUIRE  asked  to  hear from  Chair  Kohring  or                                                               
Representative  Rokeberg why  they feel  the word  "redundant" is                                                               
necessary.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG replied  that  the  state has  requested                                                               
multiple contractors,  whereas the  bill now  refers to  only one                                                               
contractor.   When there  is more  than one  entity, there  is an                                                               
opportunity  for  redundancy  that   wasn't  there  before.    He                                                               
suggested it  is incumbent  on the  state to  make sure  that the                                                               
scope of work  in the contracts doesn't overlap any  more than it                                                               
has to  as a practical  matter.  Clearly,  he said, there  may be                                                               
some overlap,  which he suggested  everyone recognizes.   He said                                                               
he didn't think it was that big a deal.                                                                                         
                                                                                                                                
CHAIR  KOHRING said  he  wanted  to stay  with  "the language  as                                                               
original  proposed," including  "nonredundant",  for the  reasons                                                               
just stated by Representative Rokeberg.                                                                                         
                                                                                                                                
Number 2401                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CRAWFORD  said   it  seems  reasonableness  would                                                               
include  some  reasonable  redundancy.     But  adding  the  word                                                               
"nonredundant"  means  that   any  nonredundancy  would  preclude                                                               
paying the  charges to  the applicant.   He again  suggested that                                                               
"reasonable"  is  the  proper  term   to  use,  and  that  adding                                                               
"nonredundant" will muddy the waters.                                                                                           
                                                                                                                                
REPRESENTATIVE ROKEBERG suggested taking out  the "or", then.  He                                                               
said reasonableness  is a standard  of law that would  be applied                                                               
by the  courts anyway, so that's  highly redundant.  He  said the                                                               
idea  that there  is reasonable  nonredundancy seems  to indicate                                                               
there  would be  some level  of  redundancy allowed,  but not  an                                                               
unreasonable amount.                                                                                                            
                                                                                                                                
CHAIR  KOHRING  asked  Representative Crawford  whether  he'd  be                                                               
amenable to that.  [There was no audible reply.]                                                                                
                                                                                                                                
REPRESENTATIVE McGUIRE  responded, "That gets  at it."   She said                                                               
she wants  the state to  have a second  opinion if it  needs one,                                                               
for  example, if  one  opinion comes  in  that leaves  unanswered                                                               
questions that  are reasonable.   She  said she'd  been concerned                                                               
about having the  language be too narrow, and  likes the friendly                                                               
amendment [proposed by Representative Rokeberg].                                                                                
                                                                                                                                
CHAIR KOHRING asked whether he  was hearing that [Representatives                                                               
Rokeberg,  McGuire,  and Crawford]  preferred  to  return to  his                                                               
original  amendment   to  [Amendment   5],  which  he   said  was                                                               
"reasonable,  nonredundant" [comma  specified].    [There was  no                                                               
audible response.]                                                                                                              
                                                                                                                                
REPRESENTATIVE FATE  said he hadn't heard  the original amendment                                                               
to Amendment 5 that way, but thought it included the word "or".                                                                 
                                                                                                                                
CHAIR  KOHRING  read Amendment  5  with  his amendment  included,                                                               
specifying  that  it   would  insert  "reasonable,  nonredundant"                                                               
[comma specified].                                                                                                              
                                                                                                                                
Number 2245                                                                                                                     
                                                                                                                                
REPRESENTATIVE  FATE  indicated  that in  effect,  therefore,  it                                                               
would be "reasonable" and then "absolutely nonredundant".                                                                       
                                                                                                                                
REPRESENTATIVE ROKEBERG suggested removing the comma.                                                                           
                                                                                                                                
REPRESENTATIVE   FATE  responded   that   it   would,  then,   be                                                               
"reasonable  specific to  nonredundancy," but  not reasonable  in                                                               
any other category.   He suggested that if there  is a desire for                                                               
reasonableness in  any other category, it  should say "reasonable                                                               
and reasonable nonredundancy".                                                                                                  
                                                                                                                                
Number 2213                                                                                                                     
                                                                                                                                
CHAIR KOHRING,  in response to  a request, restated  Amendment 5,                                                               
adding  his  amendment,   "reasonable  nonredundant"  [comma  not                                                               
specified].  He  asked whether there was any  objection.  Hearing                                                               
no objection, he announced that  the amendment to Amendment 5 was                                                               
adopted.                                                                                                                        
                                                                                                                                
Number 2187                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG moved  to  adopt a  second amendment  to                                                               
Amendment  5, below  subsection (a)  of Amendment  5, to  add the                                                               
words "renumber accordingly".   There being no  objection, it was                                                               
so ordered.                                                                                                                     
                                                                                                                                
CHAIR   KOHRING   indicated    the   committee   would   consider                                                               
Amendment 5,  as amended.   [A  motion  to report  the bill  from                                                               
committee was made  before the chair asked whether  there was any                                                               
objection.  Amendment 5, as amended, was treated as adopted.]                                                                   
                                                                                                                                
Number 2103                                                                                                                     
                                                                                                                                
REPRESENTATIVE  McGUIRE  moved to  report  CSHB  16 [Version  23-                                                               
LS0101\H, Chenoweth,  2/6/03], as amended, out  of committee with                                                               
individual recommendations  and the accompanying  [fiscal notes].                                                               
There  being no  objection, CSHB  16(O&G) was  reported from  the                                                               
House Special Committee on Oil and Gas.                                                                                         
                                                                                                                                
HB 57-ROYALTY GAS CONTRACTS                                                                                                   
                                                                                                                                
CHAIR KOHRING  announced that the  final order of  business would                                                               
be HOUSE BILL NO. 57, "An  Act amending the manner of determining                                                               
the  royalty  received by  the  state  on  gas production  as  it                                                               
relates to the manufacture of certain value-added products."                                                                    
                                                                                                                                
Number 2003                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG moved  to adopt  the proposed  committee                                                               
substitute (CS),  Version 23-LS0303\I,  Chenoweth, 2/25/03,  as a                                                               
work draft.   There being no objection, Version I  was before the                                                               
committee.                                                                                                                      
                                                                                                                                
Number 1987                                                                                                                     
                                                                                                                                
REPRESENTATIVE CHENAULT, sponsor of  HB 57, reminded members that                                                               
questions had arisen  at the previous hearing;  those relating to                                                               
the  fiscal  note  prepared  by   the  Division  of  Oil  &  Gas,                                                               
Department  of Natural  Resources  (DNR),  required answers  from                                                               
Mark  Myers, who  was on  teleconference.   [The original  fiscal                                                               
note was  dated 2/4/03; a new  fiscal note with a  more extensive                                                               
analysis, dated  2/11/03, had been  provided by the  division for                                                               
the original  bill version, but  copies weren't yet  available to                                                               
members.]   Also available to  answer questions was  Mike Nugent,                                                               
the general  manager of Agrium  Kenai Nitrogen  Operations, which                                                               
would be [assisted] by this legislation.                                                                                        
                                                                                                                                
Number 1860                                                                                                                     
                                                                                                                                
REPRESENTATIVE   CHENAULT,  in   response  to   a  request   from                                                               
Representative   Rokeberg,  addressed   changes  in   Version  I.                                                               
Page 1,   line  10,   further  defines   "manufacturer"  to   say                                                           
"manufacturer of  agricultural chemicals".  The  word "increased"                                                           
on page 2, line  26 [of the original bill, line  27 of Version I]                                                               
is deleted.   Page  2, line  28, of the  original bill,  which is                                                               
line 29 of  Version I, adds [after "manufacturer",  the words "of                                                       
agricultural chemicals"]; page  3, line 3 [of  the original bill,                                                           
which is line 5 of Version I],  does the same.  And [page 3, line                                                               
8 of Version I]  defines "manufacturer of agricultural chemicals"                                                               
[whereas  the  original  bill,   beginning  at  line  6,  defined                                                               
"manufacturer"].                                                                                                                
                                                                                                                                
Number 1790                                                                                                                     
                                                                                                                                
REPRESENTATIVE   ROKEBERG   requested  corroboration   that   the                                                               
concerns  expressed by  him and  Representative  Kerttula at  the                                                               
previous meeting  were addressed  by the more  restrictive change                                                               
from "manufacturer" to "manufacturer of agricultural chemicals".                                                                
                                                                                                                                
Number 1682                                                                                                                     
                                                                                                                                
MARK  MYERS,  Director, Division  of  Oil  & Gas,  Department  of                                                               
Natural Resources  (DNR), offered his belief  that the definition                                                               
has  been  significantly  narrowed to  address  the  agricultural                                                               
chemical  issue.     He  said  the  concern   about  the  broader                                                               
definition of  ["manufacturer"] no  longer remains.   For further                                                               
clarification, he  deferred to Virginia  Ragle of  the Department                                                               
of Law, who he said had looked at this extensively as well.                                                                     
                                                                                                                                
Number 1639                                                                                                                     
                                                                                                                                
VIRGINIA  RAGLE, Assistant  Attorney General;  Oil, Gas  & Mining                                                               
Section; Civil  Division (Juneau); Department of  Law, noted that                                                               
she reviews issues  on behalf of DNR.  She  told members, "We did                                                               
look over the definitions proposed  by Agrium to narrow this, and                                                               
they  feel that  this ...  would be  one way  to narrow  down the                                                               
range  of applicants  ... DNR  would  be getting  to seek  relief                                                               
under this  bill."  [She  was given a copy  of Version I  at this                                                               
point.]                                                                                                                         
                                                                                                                                
REPRESENTATIVE ROKEBERG  referred to page  3, line 10,  and asked                                                               
whether   the  definition   of   "manufacturer  of   agricultural                                                               
chemicals",  which   mentions  "similar  chemicals",   is  narrow                                                               
enough.                                                                                                                         
                                                                                                                                
MS.  RAGLE replied  that it  differs somewhat  from the  language                                                               
proposed [by Agrium] for the  definition, which she'd reviewed on                                                               
behalf of DNR a  couple of weeks ago.  She  said it didn't appear                                                               
to  differ in  a "significant  legal way,"  but pointed  out that                                                               
she'd just looked at [Version I] briefly.                                                                                       
                                                                                                                                
Number 1373                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked,  "As   an  attorney,   are  you                                                               
comfortable  defending the  language or  pursuing somebody  who's                                                               
trying to breach it?"                                                                                                           
                                                                                                                                
MS.  RAGLE offered  the possibility  that it  was written  by the                                                               
legislative   drafters  to   conform  to   (indisc.--papers  over                                                               
microphone) requirements.                                                                                                       
                                                                                                                                
CHAIR KOHRING  suggested that  because Version  I has  a narrower                                                               
definition, there should be a change in the fiscal note.                                                                        
                                                                                                                                
The committee took an at-ease from 4:50 p.m. to 4:54 p.m.                                                                       
                                                                                                                                
Number 1298                                                                                                                     
                                                                                                                                
CHAIR  KOHRING,  indicating  copies  of  the  division's  2/11/03                                                               
fiscal note were being made, asked Mr. Myers to comment on it.                                                                  
                                                                                                                                
MR.  MYERS acknowledged  its complexity  and  apologized for  not                                                               
being present  to explain [the  previous version] at  the earlier                                                               
hearing.   He  then told  members it  basically is  about a  $33-                                                               
million  fiscal  note  over  about  a  seven-year  period.    The                                                               
contract price  - the contract value  - is based on  a negotiated                                                               
contract  between  Agrium  and   Unocal  [Union  Oil  Company  of                                                               
California]; Unocal actually owns the  gas, and so basically [the                                                               
state's] royalty  commitment is through  Unocal.  Mr.  Myers said                                                               
there is  a contract  value for  the gas, a  known volume  of gas                                                               
being  produced  from  the  leases under  that  contract,  and  a                                                               
differential  between the  actual market  value -  the prevailing                                                               
value - of that gas and the contract value under the contract.                                                                  
                                                                                                                                
Number 1209                                                                                                                     
                                                                                                                                
MR.  MYERS  advised members  that  the  negotiated contract  with                                                               
Unocal  has  provisions that  complicate  part  of the  analysis.                                                               
[Agrium]  essentially  negotiated  a   lower  contract  price  or                                                               
contract  value at  the  time  of sale  of  the plant,  basically                                                               
buying both the gas supply and the  plant for a single price.  He                                                               
offered  his understanding  that, as  part of  the contract,  any                                                               
lowering of  royalty below market  value is shared  50-50 between                                                               
Unocal and Agrium.  Expressing  confidence that the fiscal effect                                                               
to the  state of $33 million  is fairly accurate, he  pointed out                                                               
that approximately  50 percent - not  the entire amount -  of the                                                               
benefit would go to Agrium.                                                                                                     
                                                                                                                                
MR. MYERS  explained that the  [fiscal note]  analysis recognizes                                                               
that the  amount of  gas under that  contract is  decreasing over                                                               
time.   And there are  other scenarios wherein additional  gas is                                                               
bought off  other state lease  sales.  Therefore, the  final page                                                               
of the fiscal note addresses  sensitivity analyses.  For example,                                                               
if  the plant  is  only  producing gas  at  about  75 percent  of                                                               
capacity  and  the  amount  of  gas  under  the  Unocal  contract                                                               
declines rapidly, [Agrium] will pick  up more gas off other state                                                               
leases and  the differential could  be a little less,  around $23                                                               
million.                                                                                                                        
                                                                                                                                
Number 1098                                                                                                                     
                                                                                                                                
MR.  MYERS, mentioning  that  the  division had  run  a bunch  of                                                               
scenarios, pointed  out that  the fiscal  note strictly  looks at                                                               
Agrium and doesn't  refer to any other people  taking the benefit                                                               
of what  he called the  "double-A"  treatment [because  this bill                                                               
amends subsection (aa) of AS 38.05.180].  He explained:                                                                         
                                                                                                                                
     We put,  in the earlier  pages, a back-casting  of what                                                                    
     it  would  have  cost  in previous  years;  that's  not                                                                    
     actual costs of the bill, but  it just shows you a good                                                                    
     illustration  ...  that  the   numbers  are,  in  fact,                                                                    
     reasonable.   We went through the  fiscal analysis with                                                                    
     Agrium as well,  and, ... my understanding  is, we have                                                                    
     a pretty  good concurrence  ... on  the numbers  in the                                                                    
     fiscal  note with  Lisa  Parker ...  and  the folks  at                                                                    
     Agrium.  So,  again, we believe this is  a good, actual                                                                    
     calculation, ... with the  sensitivity analysis in here                                                                    
     for various scenarios.                                                                                                     
                                                                                                                                
MR. MYERS pointed  out that also complicating the  fiscal note is                                                               
that the contract  price is arm's length - the  state isn't privy                                                               
to that data.   That is one of the  issues that makes calculating                                                               
additional  fiscal  effects  on   other  leases  more  difficult,                                                               
because the state  isn't a party to the contract  between the two                                                               
parties.   Other considerations often  come into that,  he added,                                                               
"which is one of  the reasons you always keep a  market value - a                                                               
prevailing  value -  option in  your  lease form."   He  informed                                                               
members  that Ms.  Ragle  is very  knowledgeable  about both  the                                                               
contract between the  companies and some of the  history with the                                                               
"double A" [subsection (aa)] and why it was done.                                                                               
                                                                                                                                
Number 0972                                                                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD  said he  understands the worth  and need                                                               
of doing this  for Agrium, but asked whether the  bill would open                                                               
up  the  possibility  of  big  breaks with  regard  to  taxes  or                                                               
royalties down the road.                                                                                                        
                                                                                                                                
MR. MYERS replied  that he believed it would, but  only for other                                                               
manufacturers of agricultural chemicals.   If there were a lot of                                                               
North Slope gas  available, for example, and  someone else wanted                                                               
to  do a  large-scale  agricultural project,  it would  certainly                                                               
qualify  for  it.    It  would  be  for  similar-type  industrial                                                               
activity,  limited,   to  his  belief,  by   that  definition  of                                                               
["manufacturer of agricultural chemicals"].   He also offered his                                                               
belief that another  company doing a similar  type of value-added                                                               
business  would suffer  the same  competitive issues  that Agrium                                                               
would, and thus it would be  reasonable that such a company would                                                               
receive similar  treatment.  He  suggested that if the  desire is                                                               
to limit potential revenue implications,  there could be a sunset                                                               
placed on  the bill;  he indicated  he wasn't  recommending that,                                                               
but just thinking of possibilities.                                                                                             
                                                                                                                                
REPRESENTATIVE CRAWFORD  thanked Mr. Myers  and said it  was what                                                               
he'd wanted to hear.                                                                                                            
                                                                                                                                
Number 0832                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked Mr.  Myers whether he'd  looked at                                                               
any model  of economic  alternatives weighing  foregone royalties                                                               
that would be lost to the state  if the company were to shut down                                                               
because of an inability to have affordable feedstock.                                                                           
                                                                                                                                
MR. MYERS clarified that the  division isn't taking a position on                                                               
the bill  on its merits.   He added, "We understand  the jobs and                                                               
the  importance of  the  Agrium plant,  and that  it  is a  truly                                                               
value-added industry."   He  said the fiscal  note just  looks at                                                               
the factual production  base over the next seven  years.  Calling                                                               
the "what ifs" a two-edged sword,  Mr. Myers pointed out that the                                                               
royalty gas  is less  than 7  percent of the  gas going  into the                                                               
plant  now.   Only about  half [Agrium's]  gas currently  is from                                                               
state royalty  leases; the other  half is from federal  and other                                                               
lessees.  He remarked:                                                                                                          
                                                                                                                                
     So, ...  we only  affect about 7  percent, and  if half                                                                    
     the  value's going  to  another  producer, you're  only                                                                    
     affecting, effectively, about 3.5  percent of their gas                                                                    
     or less in giving them a  lower break.  Now, that could                                                                    
     well  help  them stay  in  business,  but there  is  no                                                                    
     economic test  in the  bill, one way  or the  other, to                                                                    
     say whether  this is really  helping them or not.   And                                                                    
     I'm  not advocating  that ...  it  wouldn't help  them.                                                                    
     I'm  just saying,  you can't  really quantify,  on that                                                                    
     small quantity of  gas, how it's going  to affect their                                                                    
     long-term marketability in the [Cook] Inlet.                                                                               
                                                                                                                                
     I think  you can say,  in converse, though:   without a                                                                    
     reasonable  price   for  gas,  you  don't   get  future                                                                    
     exploration  ... and  development.   So  ... there's  a                                                                    
     needed  certain  level  of  pricing  in  the  inlet  to                                                                    
     establish  that additional  supply,  to  keep ...  them                                                                    
     healthy.  And I think  always, as ... the person paying                                                                    
     the lowest  value for gas,  they're always going  to be                                                                    
     the lower end of the  supply chain.  But that lower-end                                                                    
     price has  to be  enough to encourage  that exploration                                                                    
     [and] development.                                                                                                         
                                                                                                                                
Number 0621                                                                                                                     
                                                                                                                                
MR. MYERS suggested the market value and cost structure should                                                                  
[equilibrate] eventually.  He added:                                                                                            
                                                                                                                                
     I don't know,  again, if there's a whole lot  we can do                                                                    
     about  it,  since the  gas  we  supply in  the  royalty                                                                    
     share's a relatively small ...  portion of the gas.  So                                                                    
     you  ask  a  really complicated  question  and,  again,                                                                    
     there is no position [on  the bill].  We understand the                                                                    
     value that  Agrium brings, and I'm  not suggesting that                                                                    
     this  bill is  appropriate or  not appropriate.   We're                                                                    
     just  actually physically  analyzing the  percentage of                                                                    
     the royalty  gas -  what the  fiscal effect's  going to                                                                    
     be.                                                                                                                        
                                                                                                                                
Number 0575                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG referred  to one  of the  tables in  the                                                               
fiscal  note analysis,  specifying  that he  was  looking at  the                                                               
royalties paid  versus royalty  foregone; using  Agrium's figures                                                               
based on  the McDowell Group  document [signed by Jim  Calvin and                                                               
included in packets],  he said the company would  be paying $41.5                                                               
million and  that foregone  royalty would be  $24 million  or so.                                                               
He asked, if Agrium shut down,  whether the product would be lost                                                               
or would find its way into other markets.                                                                                       
                                                                                                                                
MR. MYERS  surmised that the sale  of the gas might  be deferred,                                                               
but that  ultimately the  gas would  go into  the LNG  or utility                                                               
market, in which case it would  get a higher price.  He mentioned                                                               
the question of the loss of the industry and the jobs.                                                                          
                                                                                                                                
Number 0467                                                                                                                     
                                                                                                                                
CHAIR KOHRING  said that's assuming  there would be  other takers                                                               
for the gas,  which isn't certain.  He offered  that if the plant                                                               
shuts down, ultimately  there will be less  in royalty [payments]                                                               
to  the state  because  there will  be  less need  for  gas.   He                                                               
specified that  he supports the  legislation, and  emphasized the                                                               
need  to weigh  the  economic  benefits as  well  as the  royalty                                                               
consequences to  the state.   He said this  is an effort  to keep                                                               
[Agrium] from closing.                                                                                                          
                                                                                                                                
Number 0362                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  Mr. Myers  what kind  of rate  is                                                               
being used for discounting the  value and the present value basis                                                               
on the fiscal note.                                                                                                             
                                                                                                                                
MR. MYERS answered, "We're using 8 percent."                                                                                    
                                                                                                                                
Number 0331                                                                                                                     
                                                                                                                                
REPRESENTATIVE  CRAWFORD  requested  to  hear  verification  from                                                               
Agrium that  50 percent [of the  benefit] would go to  Agrium and                                                               
50 percent would be to Unocal.                                                                                                  
                                                                                                                                
Number 0270                                                                                                                     
                                                                                                                                
MIKE NUGENT,  General Manager, Agrium Kenai  Nitrogen Operations,                                                               
responded,  "Under  the arrangement  we  have  made with  Unocal,                                                               
right  now we  would share  in  any additional  royalties to  the                                                               
State of Alaska.  However, they  are not our sole supplier of gas                                                               
right now."                                                                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD  said, "According  to your  figures, over                                                               
the next  seven years there'd be  about $24 or $25  million worth                                                               
of total  benefit.   Half of  that would go  towards Unocal.   Is                                                               
that approximately right?"                                                                                                      
                                                                                                                                
MR. NUGENT offered his understanding  that all the figures assume                                                               
that Agrium  is running at full  [capacity] and that all  the gas                                                               
is coming from Unocal.  If  that were the case, the figures would                                                               
be  correct,  but that  isn't  the  situation  today or  what  is                                                               
foreseen for the future.                                                                                                        
                                                                                                                                
REPRESENTATIVE CRAWFORD  responded that  the figures  provided by                                                               
Agrium  said $24  million,  whereas  the Division  of  Oil &  Gas                                                               
estimated approximately $33 million,  based on uncertain figures.                                                               
He said he wants to ensure  that Agrium exists for generations to                                                               
come.  He  asked whether a way  needs to be found  to direct that                                                               
total $24 million  to Agrium, instead of half to  Agrium and half                                                               
to Unocal.                                                                                                                      
                                                                                                                                
MR. NUGENT replied that splitting  it with Unocal is an agreement                                                               
his company made with Unocal on the gas it supplies.                                                                            
                                                                                                                                
Number 0030                                                                                                                     
                                                                                                                                
REPRESENTATIVE McGUIRE  asked what  percentage of its  gas Agrium                                                               
receives now from Unocal.                                                                                                       
                                                                                                                                
TAPE 03-10, SIDE A                                                                                                            
Number 0001                                                                                                                     
                                                                                                                                
MR.  NUGENT  said the  company  is  operating  at 75  percent  of                                                               
capacity,  and  approximately  two-thirds  of that  gas  is  from                                                               
Unocal.  For  the other one-third of the 75  percent, the company                                                               
has  made  arrangements  with other  suppliers  over  the  winter                                                               
months to supply that gas.                                                                                                      
                                                                                                                                
Number 0063                                                                                                                     
                                                                                                                                
REPRESENTATIVE  McGUIRE   offered  her  understanding   that  the                                                               
contracts  with Unocal  specify  that any  royalty adjustments  -                                                               
either  up or  down -  are shared  or apportioned  equally.   She                                                               
asked whether  the term  is for  a set  amount of  gas for  a set                                                               
period or  is adjustable.   She said  it has been  suggested that                                                               
Agrium might benefit  more if there were other  suppliers in Cook                                                               
Inlet so that  the supply would be spread out.   She acknowledged                                                               
that she might be requesting proprietary information.                                                                           
                                                                                                                                
MR. NUGENT answered:                                                                                                            
                                                                                                                                
     We had a  contract with Unocal to be  our sole supplier                                                                    
     of gas  through 2009.   And Unocal  has been  unable to                                                                    
     deliver that full quantity of  gas.  So, to answer your                                                                    
     question, we are  in the process, over  the short term,                                                                    
     to  try  to  develop  additional  supplies  from  other                                                                    
     producers, and  it's out intention, ...  going forward,                                                                    
     to  develop enough  relationships with  other producers                                                                    
     to get our facility back to capacity.                                                                                      
                                                                                                                                
Number 0197                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked whether the contract  provides for                                                               
a further  [price] break because  of Unocal's failure  to deliver                                                               
[the necessary amount  of] Agrium's feedstock and  because of the                                                               
necessity to seek other sources of supply.                                                                                      
                                                                                                                                
MR. NUGENT replied  that the contract is a  subject of litigation                                                               
at this  point.  There are  provisions in the contract  such that                                                               
if Unocal cannot  supply the full amounts, it is  liable for some                                                               
liquidated  damages, but  Mr. Nugent  said those  are "relatively                                                               
minor in the shortfall that we're presently experiencing."                                                                      
                                                                                                                                
Number 0287                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG referred  to Mr.  Myers' testimony  that                                                               
the  amount  of royalty  gas  is  a  relatively small  amount  of                                                               
Agrium's  needed gas.   He  requested clarification,  noting that                                                               
Mr. Nugent had  said Unocal is supplying about  two-thirds of the                                                               
current feedstock but that Mr.  Myers had mentioned [3.5] percent                                                               
for the royalty gas.  He asked whether he'd misunderstood.                                                                      
                                                                                                                                
MR.  NUGENT answered,  "This gets  fairly complicated  because it                                                               
depends on  where the gas  comes as to what  percentage ownership                                                               
the state may or may not have in a particular property."                                                                        
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  whether the  [3.5]  percent  Mr.                                                               
Myers  had mentioned  was in-kind  royalty.   He referred  to the                                                               
charts in the fiscal note that  talk about the amount of foregone                                                               
royalty because  of the  bill.  Referring  to the  McDowell Group                                                               
document in  packets, he observed  that it says part  of Agrium's                                                               
feedstock comes from federal leases,  "of which the state gets 90                                                               
percent."    He  asked  whether those  types  of  revenue-sharing                                                               
provisions come into  play under this bill or  would be insulated                                                               
from the legislation.                                                                                                           
                                                                                                                                
MR.  NUGENT  replied  that  this  bill  is  designed  to  address                                                               
[leases]  in which  the state  has an  ownership position  in the                                                               
gas.                                                                                                                            
                                                                                                                                
REPRESENTATIVE ROKEBERG  referred to the McDowell  Group document                                                               
and  noted  that  it  refers  to  approximately  25  million  Mcf                                                               
[thousand cubic feet]  and a royalty share of  $3.4 million, with                                                               
$3 million in royalty foregone.                                                                                                 
                                                                                                                                
MR. NUGENT noted that in the  table, the state leases assume that                                                               
Agrium is operating at capacity,  which isn't the case; that half                                                               
the gas  it receives comes  from state  leases; and that  of that                                                               
portion, one-eighth or  12.5 percent would be  state royalty gas.                                                               
He remarked  that because  the company isn't  able to  operate at                                                               
capacity, there  is an impact  on the royalty  paid.  There  is a                                                               
real revenue loss taking place right now, he added.                                                                             
                                                                                                                                
Number 0593                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG said  he was  trying to  figure out  the                                                               
other sources and  where this particular royalty  would come into                                                               
play,  since  the  bill  affects   only  a  portion  of  Agrium's                                                               
feedstock.                                                                                                                      
                                                                                                                                
MR. NUGENT reiterated that the bill  would have an impact on only                                                               
those leases in which the state has an ownership position.                                                                      
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked about  federal ones or  ones where                                                               
Native corporations have subsurface rights.                                                                                     
                                                                                                                                
MR. NUGENT said those would not [be affected by the bill].                                                                      
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked whether  that  is  part of  where                                                               
Agrium  gets its  feedstock now.   [No  answer was  discernible.]                                                               
Observing  that  the  figures  project  to  2009  and  that  many                                                               
assumptions are made  in the fiscal note about  where Agrium will                                                               
get its gas, he expressed concern about that.                                                                                   
                                                                                                                                
MR. NUGENT said these forecasts  were made on the assumption that                                                               
the distribution  would be the  same as  it was when  [the plant]                                                               
was at capacity,  which was last summer.   He said it  is hard to                                                               
predict where gas will be found in  the future.  In response to a                                                               
question  from  Representative  Rokeberg,  he  said  there  isn't                                                               
another consumer  standing there today  to purchase the  gas that                                                               
Agrium wouldn't  be consuming if it  shut down.  He  suggested it                                                               
would be  a direct revenue  hit to the  state, to Agrium,  and to                                                               
the local economies.                                                                                                            
                                                                                                                                
REPRESENTATIVE ROKEBERG requested  elucidation about the McDowell                                                               
Group study.                                                                                                                    
                                                                                                                                
Number 0862                                                                                                                     
                                                                                                                                
JIM CALVIN,  Economist and Partner,  McDowell Group,  noting that                                                               
the  McDowell  Group  is  a research  and  consulting  firm  with                                                               
offices  in  Anchorage  and  Juneau,   told  members  Agrium  had                                                               
requested  that his  firm look  at  the economic  impacts of  its                                                               
operations on  the economies  of Alaska  and the  Kenai Peninsula                                                               
Borough.  The  analysis found that the  facility directly employs                                                               
just  under 300  people,  with  an annual  payroll  of about  $25                                                               
million;  that averages  about  $83,000 per  job,  2.5 times  the                                                               
Kenai  Peninsula and  Alaska  annual average  wage.   "These  are                                                               
tremendous  jobs that  really  are  only found  in  this kind  of                                                               
value-added manufacturing activity," he remarked.                                                                               
                                                                                                                                
MR. CALVIN  further reported that the  Agrium operation purchases                                                               
gas  and a  variety of  goods and  services from  Kenai Peninsula                                                               
businesses,  Anchorage  businesses,  and  others;  that  spending                                                               
activity,  as well  as the  spending activity  of its  employees,                                                               
generates about 1,000 jobs in  the Kenai Peninsula area and about                                                               
$50  million in  total payroll  - about  5 percent  of the  Kenai                                                               
Peninsula employment base.  Thus  the company has a huge economic                                                               
presence in the  area, with about 250 businesses  that enjoy some                                                               
level  of spending  activity  from Agrium.    The borough  itself                                                               
receives more  than $2  million in property  tax from  the plant,                                                               
which is a big part of its property tax base.                                                                                   
                                                                                                                                
Number 1023                                                                                                                     
                                                                                                                                
MR. CALVIN,  describing "output"  as the total  value of  all the                                                               
goods  and  services  produced  as  a  result  of  the  company's                                                               
operation, said output  for Agrium is about $300  million a year.                                                               
He likened  the operation  to an  economic-development director's                                                               
dream:   it creates year-round,  high-paying jobs  for residents,                                                               
since he said there is  virtually no nonresident participation in                                                               
the workforce; it  creates a high level of spending  in the local                                                               
economy  in  support  of  the  operations,  resulting  in  "great                                                               
multiplier   effects";  and   it   requires  a   high  level   of                                                               
capitalization, which  means it  generates property  tax revenues                                                               
to help local government.   Noting that the state spends millions                                                               
of  dollars  on  economic  development  kind  of  activities,  he                                                               
described  this as  "the kind  of  economic activity  ... we  all                                                               
strive for," remarkable in the  breadth and depth of its economic                                                               
impact on the borough and state as well.                                                                                        
                                                                                                                                
CHAIR KOHRING indicated at some point he'd mentioned a billion-                                                                 
dollar effect  to the economy, and  said he stood corrected.   He                                                               
thanked Mr. Calvin for the information.                                                                                         
                                                                                                                                
Number 1123                                                                                                                     
                                                                                                                                
REPRESENTATIVE  ROKEBERG cited  a  figure in  the McDowell  Group                                                               
analysis about payroll  impacts of $383 million.   He requested a                                                               
definition of "payroll impacts."                                                                                                
                                                                                                                                
MR. CALVIN answered  that it is the total payroll  over the 2003-                                                               
2009 period addressed in the  various fiscal notes.  He explained                                                               
that the McDowell Group had tried to  total what is at stake.  He                                                               
added that it had been [adjusted for inflation] a little.                                                                       
                                                                                                                                
REPRESENTATIVE  ROKEBERG  referred  to   the  gross  figures  for                                                               
foregone  royalty  [to  the  state]  and  an  indication  in  the                                                               
company's  document  that  the  foregone  royalty,  in  terms  of                                                               
[Agrium's] costs,  had gone from  1 percent of the  plant's total                                                               
economic output,  or less  than 6  percent of  its $50-million-a-                                                               
year payroll.  He asked about that.                                                                                             
                                                                                                                                
MR. CALVIN  responded that rather  than focusing  specifically on                                                               
the  impacts  to the  state's  coffers,  the McDowell  Group  had                                                               
broadened it,  looking at  what is  at stake.   He  said although                                                               
there is  $3 million a year  or so of foregone  revenue, there is                                                               
$300 million worth  of economic activity that stems  in part from                                                               
that.  He  described it as a  "give a little, get  a lot" picture                                                               
that his company is trying to present.                                                                                          
                                                                                                                                
Number 1268                                                                                                                     
                                                                                                                                
REPRESENTATIVE ROKEBERG asked Mr.  Calvin whether he believes the                                                               
legislation would  be significant in helping  the economic health                                                               
of [Agrium] so it can continue to operate.                                                                                      
                                                                                                                                
MR.  CALVIN replied  that  he wasn't  familiar  with the  margins                                                               
under which Agrium operates, but that  there is no doubt the bill                                                               
would  significantly  improve  its  likelihood  of  remaining  in                                                               
business.                                                                                                                       
                                                                                                                                
Number 1308                                                                                                                     
                                                                                                                                
CHAIR KOHRING  acknowledged that  the fiscal note  is complicated                                                               
and difficult  to comprehend,  but said his  comfort about  it is                                                               
greater  than at  the previous  hearing.   He offered  his belief                                                               
that the economic benefits far outweigh the modest amount that                                                                  
the state would forego if this legislation went into effect.                                                                    
                                                                                                                                
Number 1370                                                                                                                     
                                                                                                                                
REPRESENTATIVE FATE moved to report [CSHB 57, Version 23-                                                                       
LS0303\I, Chenoweth,  2/25/03] out  of committee  with individual                                                               
recommendations and  the accompanying fiscal notes.   There being                                                               
no objection,  CSHB 57(O&G) was  reported from the  House Special                                                               
Committee on Oil and Gas.                                                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Special Committee on Oil and Gas meeting was adjourned at                                                                       
5:29 p.m.                                                                                                                       

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