Legislature(2007 - 2008)HOUSE FINANCE 519

03/13/2007 03:30 PM OIL & GAS

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03:37:47 PM Start
03:38:54 PM HB177
05:27:19 PM Adjourn
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Heard & Held
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                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                         March 13, 2007                                                                                         
                           3:37 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Vic Kohring, Chair                                                                                               
Representative Kurt Olson, Vice Chair                                                                                           
Representative Nancy Dahlstrom                                                                                                  
Representative Jay Ramras                                                                                                       
Representative Ralph Samuels                                                                                                    
Representative Mike Doogan                                                                                                      
Representative Scott Kawasaki                                                                                                   
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Carl Gatto                                                                                                       
Representative Bob Buch                                                                                                         
Representative David Guttenberg                                                                                                 
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO.  177                                                                                                             
"An  Act   relating  to  the   Alaska  Gasline   Inducement  Act;                                                               
establishing   the  Alaska   Gasline   Inducement  Act   matching                                                               
contribution  fund; providing  for an  Alaska Gasline  Inducement                                                               
Act coordinator; making conforming  amendments; and providing for                                                               
an effective date."                                                                                                             
     - HEARD AND HELD                                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 177                                                                                                                  
SHORT TITLE: NATURAL GAS PIPELINE PROJECT                                                                                       
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
03/05/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/05/07       (H)       O&G, RES, FIN                                                                                          
03/06/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/06/07       (H)       -- MEETING CANCELED --                                                                                 
03/08/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/08/07       (H)       -- MEETING CANCELED --                                                                                 
03/13/07       (H)       O&G AT 3:30 PM HOUSE FINANCE 519                                                                       
WITNESS REGISTER                                                                                                              
PAT GALVIN, Commissioner                                                                                                        
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  On behalf of the governor, presented HB                                                                    
KURTIS GIBSON, Acting Deputy Director                                                                                           
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Assisted in the presentation of HB 177.                                                                    
ANTONY SCOTT, Section Chief                                                                                                     
Commercial Section                                                                                                              
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Assisted in the presentation of HB 177.                                                                    
KEVIN BANKS, Acting Director                                                                                                    
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Assisted in the presentation of HB 177.                                                                    
ACTION NARRATIVE                                                                                                              
CHAIR  VIC KOHRING  called the  meeting to  order at  3:37:47 PM.                                                           
Representatives  Olson,   Dahlstrom,  Samuels,   Ramras,  Doogan,                                                               
Kawasaki,  and  Kohring  were  present  at  the  call  to  order.                                                               
Representatives  Guttenberg,   Buch,  and  Gatto  were   also  in                                                               
HB 177-NATURAL GAS PIPELINE PROJECT                                                                                           
3:38:54 PM                                                                                                                    
CHAIR KOHRING announced that the  only order of business would be                                                               
HOUSE  BILL NO.  177,  "An  Act relating  to  the Alaska  Gasline                                                               
Inducement Act;  establishing the  Alaska Gasline  Inducement Act                                                               
matching  contribution  fund;  providing for  an  Alaska  Gasline                                                               
Inducement  Act coordinator;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
3:40:11 PM                                                                                                                    
PAT GALVIN, Commissioner, Department  of Revenue (DOR), presented                                                               
HB  177 on  behalf of  the  governor.   Mr. Galvin  said that  an                                                               
overview  of  HB  177,  which  is known  as  the  Alaska  Gasline                                                               
Inducement   Act  (AGIA),   will   be  presented   today.     The                                                               
presentation is  divided into two  parts:  the principles  of the                                                               
approach to AGIA, and background  information on the state's $500                                                               
million contribution to the project.                                                                                            
3:44:12 PM                                                                                                                    
MR. GALVIN  informed the committee  that DOR recognizes  the need                                                               
to begin  the gas pipeline  project as  soon as possible.   Every                                                               
delay,  he said,  will  cost  the state  significant  value.   In                                                               
addition, the  state will  soon need  the projected  revenue from                                                               
the 35  trillion cubic feet  (Tcf) of  known gas reserves  in the                                                               
North Slope  basin.   The state,  he said, is  also aware  of the                                                               
need for  an open  and competitive project.   The  Alaska Gasline                                                               
Inducement   Act  will   provide   the   incentives  needed   for                                                               
construction of the gas pipeline  and will determine which of the                                                               
projects  deserves the  state's  support.   Mr. Galvin  explained                                                               
that, for  the gas pipeline project  to be successful there  is a                                                               
need  for  low tariff  rates  for  the  gas flowing  through  the                                                               
pipeline.   The  state must  also get  gas from  the pipeline  to                                                               
Alaska  communities  and  must  ensure that  all  facets  of  the                                                               
pipeline  project  provide  jobs  for Alaskans.    Finally,  AGIA                                                               
recognizes that incentives are necessary  to obtain financing and                                                               
to ensure fiscal certainty for the producers.                                                                                   
MR. GALVIN noted that much  of the information presented today is                                                               
based on  a prototype project.   The  prototype project is  a gas                                                               
pipeline  into Canada  that transports  4.3  Bcf per  day.   This                                                               
model is built with  a 70 to 30 debt to  equity ratio as required                                                               
by  AGIA and  maintains  a  14 percent  return  on  equity.   The                                                               
prototype  computations   are  further   based  on   current  gas                                                               
production taxes legislated by the  production profits tax (PPT).                                                               
The  total estimated  project cost  of $20.5  billion is  derived                                                               
from  prorating the  current producer's  estimate of  $30 billion                                                               
for  construction of  a  gas  pipeline from  the  North Slope  to                                                               
Chicago.  The  destination for the prototype  is Alberta, Canada,                                                               
which reduces  the construction cost  estimate.  Mr.  Galvin told                                                               
the  committee  that the  numbers  provided  in the  presentation                                                               
today are based on the described prototype.                                                                                     
3:50:27 PM                                                                                                                    
MR. GALVIN said  that the structure of AGIA requires  that a $500                                                               
million  grant be  provided,  as an  incentive,  to the  pipeline                                                               
company that obtains  the AGIA gas pipeline project  license.  To                                                               
obtain  the  AGIA  license,  the  company  will  include  in  its                                                               
proposals  the  means to  fulfill  mandated  financial terms  and                                                               
state requirements.   The value  to the  state in return  for the                                                               
$500 million incentive is the fulfillment of the terms of AGIA.                                                                 
3:51:33 PM                                                                                                                    
KURT GIBSON, Acting Deputy Director,  Central Office, Division of                                                               
Oil &  Gas, Department of  Natural Resources (DNR),  informed the                                                               
committee  that the  list of  values the  state receives  for its                                                               
incentive  begins  with timely  completion  of  the gas  pipeline                                                               
project.   Acceleration of the  project will mean that  the state                                                               
will gain  lost revenue  due to  delay and  will recoup  the $500                                                               
million incentive.   Mr. Gibson explained that when  the price of                                                               
gas is at  the Chicago land and market price  of $5.50, the state                                                               
will  recoup  three  times  its  capital  contribution,  or  $1.8                                                               
billion,  by  accelerating the  project  by  one  year.   At  the                                                               
current price for  gas of $6.75 the state  recuperates five times                                                               
its capital  contribution in one  year.  These figures,  he said,                                                               
illustrate the  importance of beginning the  gas pipeline project                                                               
now.  Mr. Gibson noted that  all of the scenarios discussed today                                                               
are based on a gas pipeline with a projected life of 30 years.                                                                  
3:55:30 PM                                                                                                                    
MR. GALVIN  said that  the AGIA timeline  for the  project begins                                                               
when the  license is awarded.   The licensee  will have up  to 36                                                               
months  to  complete its  binding  open  season process,  and  24                                                               
months  after  that  to achieve  the  Federal  Energy  Regulatory                                                               
Commission    (FERC)    public    convenience    and    necessity                                                               
MR.  GALVIN clarified  that  the AGIA  model can  be  used as  an                                                               
example  of the  construction  of a  pipeline continuing  through                                                               
Canada, or an all-Alaska pipeline.                                                                                              
REPRESENTATIVE  DOOGAN  asked  why  there  is  a  36-month  delay                                                               
between issuance of the AGIA license and open season.                                                                           
MR. GIBSON explained that this is a reasonable timeframe.                                                                       
REPRESENTATIVE SAMUELS asked whether  shortening this time period                                                               
could shorten the entire project.                                                                                               
MR. GALVIN responded  that the open season deadline  of 36 months                                                               
allows  the project  to  be  closer to  qualifying  for the  FERC                                                               
certificate.   He  noted that  this time  period was  approved by                                                               
interested  parties.   However,  the licensee  has  the right  to                                                               
schedule this deadline  earlier.  He also noted that  a change in                                                               
the open  season deadline may or  may not change the  date of the                                                               
issuance of the FERC certificate.                                                                                               
3:59:15 PM                                                                                                                    
REPRESENTATIVE SAMUELS  asked if  the majority  of the  money [to                                                               
develop the gas pipeline] is spent after open season.                                                                           
MR. GIBSON said yes.                                                                                                            
4:00:33 PM                                                                                                                    
MR.  GIBSON presented  information on  the decline  of state  oil                                                               
revenue to  the committee.   He said  a North Slope  gas pipeline                                                               
will  offset the  decline  in oil  production,  and will  provide                                                               
future  revenue  for Alaska.    Furthermore,  he noted  that  the                                                               
overall U.S. supply  of natural gas, without a  gas pipeline from                                                               
the  North  Slope, must  be  supplemented  by imported  liquefied                                                               
natural gas  (LNG).  In  addition, recent statements  from energy                                                               
experts encourage  new domestic  production of natural  gas, even                                                               
with increased production of energy  from nuclear, wind, and coal                                                               
sources.   Mr. Gibson  also stressed  that the  national security                                                               
need  to reduce  U. S.  dependence  on foreign  oil requires  the                                                               
timely construction of the Alaska gas pipeline.                                                                                 
MR. GIBSON called the committee's  attention to the importance of                                                               
lower  tariffs   for  the  transportation  of   gas  through  the                                                               
pipeline.    The  relationship between  market  price,  treatment                                                               
costs, and transportation  costs affect the netback  value to the                                                               
state  and  producers.    For the  state,  higher  netback  value                                                               
results in  greater royalty value  and higher  production profits                                                               
taxes  paid to  the state  by the  producers.   The $500  million                                                               
grant from  the state,  he said,  will result  in a  reduction of                                                               
4:06:09 PM                                                                                                                    
REPRESENTATIVE  RAMRAS  asked  the presenters  to  clarify  which                                                               
statistics are "imaginary."                                                                                                     
MR. GIBSON  reiterated that the  computations for the  purpose of                                                               
the presentation are stylized numbers based on the prototype.                                                                   
4:07:52 PM                                                                                                                    
MR. GIBSON continued  to say that the state's  $500 million grant                                                               
ultimately results in a reduction  of the pipeline transportation                                                               
tariff by four to six cents  for the next 30 years.  Furthermore,                                                               
a one cent  change in the tariff is worth  $45 million in royalty                                                               
and  production  taxes to  the  state.    In addition,  the  $500                                                               
million capital  contribution will lock-in the  debt equity ratio                                                               
percentages  and will  improve the  economics of  development for                                                               
all parties.                                                                                                                    
4:10:27 PM                                                                                                                    
REPRESENTATIVE  DOOGAN  asked if  the  $45  million increase  was                                                               
discounted, for  the lifetime of the  project, at a rate  of five                                                               
MR. GIBSON answered yes.  He  then further explained how the $500                                                               
million  grant  will  reduce  the  transportation  tariff.    The                                                               
Federal  Energy Regulatory  Commission  uses  many components  to                                                               
determine a rate  base for an interstate pipeline rate.   Some of                                                               
these components  are:  capital contribution,  debt equity ratio,                                                               
and allowance  for funds used  during construction (AFUDC).   The                                                               
$500 million  grant from the  state during the  5 to 10  years of                                                               
pipeline construction  will accrue  interest.  This  interest can                                                               
be rolled into the rate base  and ultimately will be paid back to                                                               
the  project  sponsor  by  the  shipper.    The  state's  capital                                                               
contribution, therefore, results in a  $900 million impact to the                                                               
rate base.                                                                                                                      
4:13:28 PM                                                                                                                    
REPRESENTATIVE SAMUELS  asked if  the state  can recoup  the $900                                                               
MR. GIBSON replied  no.  If the $500 million  grant is managed as                                                               
a loan, the advantage would not reach all shippers.                                                                             
4:14:17 PM                                                                                                                    
ANTONY SCOTT, Section Chief,  Commercial Section, Central Office,                                                               
Division  of Oil  & Gas,  Department of  Natural Resources  (DNR)                                                               
informed the  committee of the  importance of debt  equity ratio,                                                               
or capitalization, on  the overall cost of  transportation of the                                                               
gas  through the  pipeline.   The Alaska  Gasline Inducement  Act                                                               
requires a licensed project to have  a minimum of 70 percent debt                                                               
and   30   percent   equity  ratio.      Seventy   percent   debt                                                               
capitalization  will  ensure lower  tariffs  for  the state,  the                                                               
producers,  and future  explorers.   Mr. Scott  stated that  this                                                               
requirement  is  commercially  reasonable  and  is  an  important                                                               
protection  of the  state's  interests.   He  referred to  recent                                                               
examples of  pipeline projects for  data to support  the licensee                                                               
minimum requirements that are incorporated in AGIA.                                                                             
REPRESENTATIVE  SAMUELS  requested  specific information  on  the                                                               
sizes of the comparable projects.                                                                                               
MR.  SCOTT  confirmed  that   additional  information  about  the                                                               
comparable  projects   will  be   submitted  to   the  committee.                                                               
Furthermore,  he  said, he  believed  that  a successful  project                                                               
could be leveraged even higher  than AGIA's minimum requirements.                                                               
Mr. Scott indicated that a 70  percent debt and 30 percent equity                                                               
ratio  results in  returns  to the  state of  $2.5  billion at  a                                                               
discounted rate  of 5  percent over  30 years.   He  stressed the                                                               
importance to the state regarding  how the project is capitalized                                                               
and the rates of the resulting tariffs.                                                                                         
4:18:30 PM                                                                                                                    
REPRESENTATIVE RAMRAS again requested  that the presenters denote                                                               
that this is hypothetical data.  He then remarked:                                                                              
     The debt to  equity ratio, as I  understand it, applies                                                                    
     to the scope  of the project.  And if  the project goes                                                                    
     $10 billion  over budget, ...  then all $10  billion of                                                                    
     that  as, I  understand  it, would  then  also be  debt                                                                    
     financed  over  and above  the  70:30  ratio ....  What                                                                    
     [will that] do to increasing  the tariff over a 30-year                                                                    
     life, in  cents per tariff, if  we say that it's  a $10                                                                    
     billion  cost  overrun  beyond  whatever  the  eventual                                                                    
     licensee scopes the project at.                                                                                            
MR. SCOTT  confirmed that  the tariffs  that are  being discussed                                                               
are based on a hypothetical  project, with a construction cost of                                                               
$20.5  billion,  delivering  gas  through   a  4.3  Bcf  per  day                                                               
pipeline, from  the North Slope to  Alberta.  It is  fair to say,                                                               
he  acknowledged,  that  no  one knows  what  the  exact  project                                                               
construction costs will be.  Mr.  Scott pointed out that if there                                                               
are cost overruns beyond what  is anticipated in the application,                                                               
the expectation  is that the  increases will be capitalized  at a                                                               
minimum of 70 percent debt.                                                                                                     
4:22:58 PM                                                                                                                    
MR. GALVIN stated that AGIA  recognizes the risk of cost overruns                                                               
and  the  effect  overruns  would   have  on  the  tariff.    The                                                               
evaluation criteria  method will mitigate the  effect of overruns                                                               
that are passed along to the  shipper by higher tariffs.  He said                                                               
that  computations  indicating  the   effect  of  cost  overruns,                                                               
managed by  different debt to  equity ratios, can be  provided to                                                               
the committee.                                                                                                                  
REPRESENTATIVE  SAMUELS asked  if the  percentages given  for the                                                               
changes in debt equity ratios are also hypothetical.                                                                            
MR. GALVIN replied that the tariffs are based on the model.                                                                     
MR. SCOTT said:                                                                                                                 
     You  actually  cannot  simply  extrapolate  percentages                                                                    
     increase in  debt to differences in  the tariff without                                                                    
     also  specifying a  base  capital cost.    If the  base                                                                    
     capital  cost were  half  of what  we  are saying,  the                                                                    
     pennies difference on the tariff would change.                                                                             
4:25:52 PM                                                                                                                    
REPRESENTATIVE SAMUELS questioned whether  there is a penalty for                                                               
the licensee  that is  unable to obtain  financing at  the agreed                                                               
upon debt to equity ratio.                                                                                                      
MR. GALVIN  responded that the  debt to equity ratio  required by                                                               
AGIA  and  FERC  may  be  different than  what  is  required  for                                                               
obtaining financing.                                                                                                            
4:27:33 PM                                                                                                                    
REPRESENTATIVE   SAMUELS   observed    that   different   license                                                               
applicants may qualify for different financing interest rates.                                                                  
MR. SCOTT stated  that the expectation is that the  debt for this                                                               
project  will not  vary, and  will be  guaranteed by  the federal                                                               
REPRESENTATIVE  RAMRAS  tasked   the  presenters  with  providing                                                               
additional  information on  the  effect of  the  debt and  equity                                                               
structure  on tariffs.   He  requested the  amounts of  estimated                                                               
tariffs determined by a 100  percent debt capitalization on a $10                                                               
billion cost overrun over 30 years.                                                                                             
MR. GALVIN  offered to provide  the requested information  and he                                                               
indicated  that he  will include  a  range of  cost overruns  and                                                               
their effect on the potential ratios of debt to equity.                                                                         
4:30:42 PM                                                                                                                    
REPRESENTATIVE  SAMUELS requested  that 75  to 85  percent ratios                                                               
also be included.                                                                                                               
MR. SCOTT said:                                                                                                                 
     I  will   prepare  a  table   for  you   showing  70:30                                                                    
     capitalization for  the base  cost, and then  show what                                                                    
     happens at different cost escalations:   10 percent, 20                                                                    
     percent,  30  percent,  40  percent,  50  percent,  all                                                                    
     assuming that that those cost  overruns are 100 percent                                                                    
     financed with debt.                                                                                                        
REPRESENTATIVE   RAMRAS  requested   that   the  information   be                                                               
represented by billions of dollars, rather than by percentages.                                                                 
REPRESENTATIVE DOOGAN  asked for the  amount of the  maximum loan                                                               
that the federal  government will guarantee for  the gas pipeline                                                               
MR. SCOTT  replied that through  the Alaska Natural  Gas Pipeline                                                               
Act  of   2004  (ANGPA),  the  federal   government  offers  loan                                                               
guarantees of  up to 80  percent of the  cost of the  project, or                                                               
$18 billion, escalated for inflation.                                                                                           
4:32:36 PM                                                                                                                    
KEVIN BANKS, Acting  Director, Central Office, Division  of Oil &                                                               
Gas,  Department of  Natural  Resources,  informed the  committee                                                               
that  expansion commitments  for  the pipeline  are an  important                                                               
aspect  of  AGIA.    He  explained  that  without  the  expansion                                                               
provisions  to  allow  in-state  off   taking  of  gas  from  the                                                               
pipeline,  new explorations  for  natural gas  will be  hampered.                                                               
During the  time leading  up to  the open  season, there  will be                                                               
only a few producers capable of  committing their gas in the open                                                               
season.     However,  the  proposals  in  AGIA provide  that  the                                                               
pipeline licensee  will assess the  market demand  for additional                                                               
capacity every two  years.  Sufficient market  demand, he opined,                                                               
will determine expansion of the pipeline.                                                                                       
MR. BANKS  said that the  U.S. Geological Survey (USGS),  and the                                                               
U.S.   Mineral   Management   Service   (USMMS),   estimate   the                                                               
undiscovered  and technically  recoverable  gas  reserves on  the                                                               
North  Slope, the  [outer continental  shelf], Beaufort  Sea, and                                                               
Chukchi Sea  to be  about 200  trillion cubic  feet (Tcf).   This                                                               
total,   he  advised,   refers   to  gas   that  is   technically                                                               
recoverable,  but  may  not be  economically  recoverable.    The                                                               
expansion of one  Bcf per day, to an existing  pipeline, is equal                                                               
to about  eleven Tcf over the  life of the gas  pipeline project,                                                               
he opined.   Mr.  Banks stressed  that the  economically feasible                                                               
recovery of  gas reserves depends  on price, cost, access  to the                                                               
pipeline, access to  the discovery, and other factors.   Also not                                                               
included in  estimates is the  amount of hydrates  underlying the                                                               
oil and  gas fields.   Hydrate prospects  that have  been mapped,                                                               
but  have  never  been  tested,  are  classified  as  technically                                                               
recoverable at this time.                                                                                                       
MR. BANKS  called the committee's  attention to  FERC's mandatory                                                               
pipeline expansion process.  He  noted that expansions are common                                                               
and are supported by a vigorous  and wide-open market.  The ANGPA                                                               
recognizes  that there  will be  one pipeline  serving the  North                                                               
Slope;  therefore, it  requires  provisions for  expansion to  be                                                               
incorporated  in the  Alaska gas  pipeline.   These  requirements                                                               
mean  that   shippers  will  need  to   complete  studies  before                                                               
submitting  commitments of  their gas  at open  season, and  will                                                               
also  demonstrate  their  take-away capacity  from  the  pipeline                                                               
terminus.  Moreover, the expansion  must not adversely affect the                                                               
operation, or economics, of the pipeline.                                                                                       
4:38:44 PM                                                                                                                    
MR.  BANKS   assured  the  committee  that   AGIA  resolves  many                                                               
anticipated issues.   However, many  of the terms  and conditions                                                               
in  AGIA  have   not  been  subjected  to   judicial  review  and                                                               
litigation  will   occur,  he  advised.     In  fact,  litigation                                                               
regarding the rules  of the open season continues  today, and the                                                               
state may not be able to  rely on FERC regulations to assure that                                                               
expansion occurs.   Mr. Banks then outlined some of  the costs to                                                               
the explorer  under the  terms of  AGIA.   The parameters  of the                                                               
model prospect  created to illustrate  these costs,  assumes that                                                               
the seismic work has been  completed and exploration drilling has                                                               
been sanctioned.   In  addition, for  the model,  the exploration                                                               
wells cost $35  million each, the three  well delineation program                                                               
cost $45 million,  and six years pass from  the first delineation                                                               
drilling to gas sales.                                                                                                          
4:41:36 PM                                                                                                                    
MR.  BANKS  continued  to  explain  that  the  model  project  is                                                               
economic  at  a 12  percent  return  [net present  value  (NPV)];                                                               
however, after a  one year delay the project operates  at a loss.                                                               
This illustrates, he  said, the looming risk to  an explorer when                                                               
expansion provisions are unsuccessful.                                                                                          
4:43:40 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  asked if  one  to  five year  delays  on                                                               
expansion  have the  same  effect  on producers  as  one to  five                                                               
delays have on completion of the entire project.                                                                                
MR. GALVIN said yes.  He added  that the risk for the explorer is                                                               
to undertake the expense of  drilling wells without the guarantee                                                               
that expansion will  occur in a timely manner.   If the explorers                                                               
conclude that the risk is too  great, the discoveries will not be                                                               
4:45:14 PM                                                                                                                    
MR.  BANKS   reminded  the  committee   of  the  fact   that  the                                                               
opportunity  to participate  in an  open season  every two  years                                                               
acts as a powerful incentive to the explorers.                                                                                  
MR. GALVIN pointed  out that the safeguards in  AGIA are provided                                                               
to assure explorers that expansion  will occur even if commercial                                                               
and market circumstances prevent the usual marketing procedures.                                                                
4:47:07 PM                                                                                                                    
REPRESENTATIVE SAMUELS questioned  whether an exploration company                                                               
might decide  to delay  exploration until  after the  pipeline is                                                               
completed  rather than  assume the  initial exploration  cost and                                                               
MR.  GALVIN  replied  that AGIA  requires  an  applicant  provide                                                               
certain  dates  for  the  open  season; this  also  will  be  the                                                               
deadline for the explorer's commitment to providing gas.                                                                        
MR.  SCOTT presented  information on  AGIA's terms  for rolled-in                                                               
rates  (RIR).   He explained  that AGIA  requires that  expansion                                                               
costs  receive  RIR  treatment as  opposed  to  incremental  rate                                                               
treatment.   However, rates, including  pipeline fuel  costs, can                                                               
not  exceed  15  percent  of   the  initial  in-service  tariffs.                                                               
Rolled-rate  treatment,  he  said, will  foster  exploration  and                                                               
MR. SCOTT continued  to explain that expansion  shippers will pay                                                               
lower rates  on expansions, thereby increasing  the likelihood of                                                               
exploration.   A lower  tariff will result  in a  higher economic                                                               
value.  Under RIR treatment all  shippers will pay the same rate,                                                               
whereas incremental  rate treatment results in  varying rates for                                                               
shippers.  Mr.  Scott gave the following example:  If the initial                                                               
cost of a  project is $100, and throughput is  100, then the base                                                               
initial toll will  equal $1 per unit of throughput.   In the case                                                               
of a subsequent expansion cost  of $30 and expected throughput of                                                               
$18,  a  RIR will  be  calculated  by  the entire  capital  costs                                                               
divided by  the entire  throughput, which  would equal  $1.10 per                                                               
unit.   In comparison, with  a subsequent expansion cost  of $30,                                                               
and an  expected throughput of $18,  calculated under incremental                                                               
rate treatment, only the expansion  costs would be divided by the                                                               
throughput and  the rate would  equal $1.67  per unit.   For this                                                               
reason,  initial shippers  would pay  $1 per  unit and  expansion                                                               
shippers would pay $1.67 for the same service.                                                                                  
REPRESENTATIVE  GATTO surmised  that  the  initial shippers  will                                                               
resist expansion of the gas pipeline.                                                                                           
MR. SCOTT clarified that, generally,  shippers who are interested                                                               
in  exploration  and who  do  not  own  the pipeline  prefer  RIR                                                               
treatment  for expansion  costs because  their prospects  will be                                                               
more  economic.    He  then introduced  to  the  committee  three                                                               
scenarios that  illustrate how RIRs  encourage exploration.   The                                                               
scenarios  take   into  account  varying   engineering  expansion                                                               
variables,  such  as  fuel   costs  associated  with  compression                                                               
stations, and FERC policy on expansion shipping rates.                                                                          
4:57:29 PM                                                                                                                    
MR.  GALVIN further  explained  that, based  on  scenario one,  a                                                               
shipper that is  projecting the value of  an exploration prospect                                                               
based upon the  rate of a RIR  tariff and with a one  Bcf per day                                                               
increase  from 4.5  to  5.5 Bcf  will value  the  prospect at  $6                                                               
million.  However, with compression,  and an increase from 4.5 to                                                               
5.5  Bcf  per  day  under the  incremental  rate  treatment,  the                                                               
shipper will value the prospect at $6.5 million.                                                                                
MR.  SCOTT pointed  out that  scenario one  and scenario  two are                                                               
both examples  of projects that  are profitable to drill.   Under                                                               
these circumstances the state would  expect pipeline expansion to                                                               
4:58:57 PM                                                                                                                    
REPRESENTATIVE RAMRAS  noted that the scenarios  presented do not                                                               
include the possibility of developing  a gas pipeline terminating                                                               
at a liquefied natural gas (LNG) plant in Valdez.  He remarked:                                                                 
     It looks  like [the  Palin Administration] is  on point                                                                    
     toward a  4 Bcf, the larger  pipe ....  If  that is the                                                                    
     case and we  are looking at the "y" plan,  where then a                                                                    
     rolled-in rate in  expansion in a "y" plan,  could be a                                                                    
     part of  this, in which  case ... some  expansion could                                                                    
     lead to  a "y"  line going  down to  Valdez for  an LNG                                                                    
     plant somewhere down the line.                                                                                             
5:00:22 PM                                                                                                                    
MR. GALVIN responded that a 4.3  Bcf per day, through Canada, gas                                                               
pipeline is the model for AGIA.   However, the principles of AGIA                                                               
do allow for the licensing of either project.                                                                                   
MR. SCOTT agreed that AGIA's  provisions facilitate expansions to                                                               
serve a  "y" line for a  LNG project or to  increase the diameter                                                               
of  a  gas  pipeline  to  Alberta.    The  practical  reason,  he                                                               
explained, to  base the model on  a 4.3 Bcf per  day gas pipeline                                                               
to Alberta is that preliminary  studies have been completed.  Mr.                                                               
Scott  continued to  explain  that scenario  two,  which uses  an                                                               
addition of 1  Bcf per day, with compression from  5.5 to 6.5 Bcf                                                               
per day, results in a total  value to the shipper of $4.5 million                                                               
with RIR and  a negative value of -$5.4  million with incremental                                                               
rates.   This  scenario illustrates  that given  the higher  fuel                                                               
prices of  today, without  RIR treatment, the  state may  not get                                                               
full expansion of  the pipeline.  Scenario  three illustrates the                                                               
addition  of  700  million  cubic   feet  (Mmcf)  per  day,  with                                                               
"looping" from  6.8 to 7.5 Bcf  per day, and indicates  the total                                                               
value  to the  shipper of  $.9 million  with RIR  and a  negative                                                               
value of $25 million with incremental rates.                                                                                    
5:04:19 PM                                                                                                                    
MR.  SCOTT  then  called  the   committee's  attention  to  three                                                               
scenarios that illustrate both the  rate and fuel impacts of each                                                               
scenario, under  incremental and RIR treatment,  for existing and                                                               
expansion  shippers.   He indicated  that he  would discuss  this                                                               
information with members at their convenience.                                                                                  
MR.  GALVIN  added  that these  additional  details  support  the                                                               
previous scenarios presented to the committee.                                                                                  
MR. BANKS noted that AGIA  presumes that the initial expansion of                                                               
the gas pipeline  will lower tariffs for all  shippers.  However,                                                               
because of  fuel costs and shipping  costs, subsequent expansions                                                               
under  RIR  and  incremental  rates  will  be  higher.    Further                                                               
expansion  of the  model illustrated  in  the presentation  today                                                               
results in the  gas pipeline increasing delivery of  gas from 5.5                                                               
Bcf  per day  to 6.5  Bcf per  day.   Mr. Banks  pointed out  the                                                               
impact of the  tax and royalty offset.  This  offset, he said, is                                                               
the  result  of  the  increased tariff,  and  hence,  lowers  the                                                               
royalty revenue due the state.   The third scenario, illustrating                                                               
a 700 Mmcf  per day looping expansion,  reflects similar effects.                                                               
Mr. Banks  reminded the  committee that  the state  benefits from                                                               
expansion even though RIRs effect all production.                                                                               
5:08:24 PM                                                                                                                    
MR.  GALVIN concluded  the presentation  and asked  for questions                                                               
from committee members.                                                                                                         
5:08:49 PM                                                                                                                    
REPRESENTATIVE  SAMUELS asked  for clarification  of the  term in                                                               
AGIA,  page 6,  line 23,  that limits  the increase  of shipper's                                                               
rates to 15 percent over the initial rates.                                                                                     
MR.  GALVIN explained  that  the  15 percent  is  based upon  the                                                               
original tariff and that it is a fixed rate.                                                                                    
5:10:56 PM                                                                                                                    
MR.  BANKS  further  explained  that  tariffs  are  expressed  in                                                               
nominal dollars and usually do not increase with inflation.                                                                     
REPRESENTATIVE SAMUELS  asked for clarification of  what is meant                                                               
by the royalty offset.                                                                                                          
MR.  BANKS  noted  that  the  scenario of  a  700  Mmcf  per  day                                                               
expansion with looping indicates  that the production profits tax                                                               
increase to the state is $3 billion.                                                                                            
MR. SCOTT stated  that the model scenario  computations are based                                                               
on gas  of which one-half  is produced  from state land  and one-                                                               
half is produced from onshore federal land.                                                                                     
MR. BANKS continued to say  that the model indicates shippers are                                                               
experiencing higher  tariffs due  to the  RIR.   Therefore, other                                                               
taxpayers are going  to be paying less tax because  their net tax                                                               
has been reduced.                                                                                                               
5:13:21 PM                                                                                                                    
REPRESENTATIVE SAMUELS asked how  offshore production will affect                                                               
the taxes, royalties, and tariffs of the scenarios presented.                                                                   
MR.  SCOTT assured  the  committee that  the  offshore affect  is                                                               
factored into the  models.  This is illustrated, he  said, by the                                                               
negative effect on production profits  tax values associated with                                                               
higher tariffs for the remainder of the state's gas.                                                                            
5:14:11 PM                                                                                                                    
REPRESENTATIVE RAMRAS asked the following  questions:  How do you                                                               
increment in the  $500 million dollar-for-dollar match?   [How do                                                               
"we"  answer]  Key  Coalition  of  Alaska,  and  other  deserving                                                               
constituents, who  request a portion  of the funds  designated to                                                               
the  construction of  the  gas  pipeline?   What  if  one of  the                                                               
proposals comes  in and declines  the state matching money?   How                                                               
will that affect your comparison of the proposals?                                                                              
MR. GALVIN  responded that AGIA  provides for the state  to match                                                               
costs  dollar-for-dollar  up to  the  open  season.   After  open                                                               
season,  the state  will allow  applicants  to propose  suggested                                                               
cost splits necessitated by the results  of the open season.  The                                                               
cost  splits would  be  a procedure  to  offset perceived  risks.                                                               
Moreover, the  disbursal will be  spread over a number  of years.                                                               
He said that  his answer to organizations  interested in reducing                                                               
the state's  inducement, is that  the earliest completion  of the                                                               
gas  pipeline project  will result  in  value to  the state,  and                                                               
thereby, more value  to each Alaskan.  Finally,  an applicant who                                                               
meets  the  licensee  qualifications  and does  not  require  the                                                               
state's participation  will be looked  upon favorably  during the                                                               
licensing process.                                                                                                              
5:20:26 PM                                                                                                                    
REPRESENTATIVE   SAMUELS  observed   that   testimony  from   the                                                               
producers,  pipeline  companies,  regulators,  and  explorers  is                                                               
expected.   He said he is  also interested in information  on how                                                               
questions of corporate behavior will  be addressed.  In addition,                                                               
he  requested  further  discussion by  Commissioners  Galvin  and                                                               
Irwin about  the weighing of  the criteria  that will be  used to                                                               
evaluate the applications.  He then remarked:                                                                                   
     Is there  enough gas at  Prudhoe and Kuparuk  right now                                                                    
     to  finance  a project,  absent  explorers?   How  does                                                                    
     Point  Thomson  play into  it?    The timeline  on  the                                                                    
     lawsuit; if  it gets in  federal court, if it  does not                                                                    
     get into federal  court, when can we take  action?  Can                                                                    
     you drop  it and make  a deal?   All those  things, how                                                                    
     does Point Thomson  play in to the  entire picture with                                                                    
     that  amount of  gas, or  can you  do it  without Point                                                                    
REPRESENTATION  GATTO  asked  if  the  basis  for  the  model  is                                                               
predicated on installation of 52 inch pipe.                                                                                     
MR. GALVIN confirmed  that the model presented  today assumes the                                                               
construction of a gas pipeline  transporting 4.3 Bcf per day, but                                                               
the pressure and design will determine the diameter.                                                                            
REPRESENTATIVE  GATTO  asked  if   a  scenario  for  two  smaller                                                               
parallel  pipes has  been considered.    He suggested  that if  a                                                               
smaller pipeline were built initially,  that pipeline could begin                                                               
operation and  then an  additional pipeline  could be  added when                                                               
5:25:16 PM                                                                                                                    
MR. GALVIN  explained that  during the  development of  AGIA, the                                                               
drafters decided to let the  applicants propose various projects.                                                               
The  DOR  has studied  many  different  projects to  ensure  that                                                               
AGIA's incentives are applicable  to the potential proposals, but                                                               
it has  not made  a determination  of their  value.   The state's                                                               
role, he  said, is to establish  the rules of the  competition so                                                               
that  the private  sector can  make  proposals for  the state  to                                                               
[HB 177 was held over.]                                                                                                         
5:27:19 PM                                                                                                                    
There being no further business before the committee, the House                                                                 
Special Committee on Oil and Gas meeting was adjourned at 5:27                                                                  

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