Legislature(2007 - 2008)CAPITOL 106

03/26/2007 08:30 AM OIL & GAS

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08:34:39 AM Start
08:34:51 AM HB177
10:17:08 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                         March 26, 2007                                                                                         
                           8:34 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Vic Kohring, Chair                                                                                               
Representative Nancy Dahlstrom                                                                                                  
Representative Jay Ramras                                                                                                       
Representative Ralph Samuels                                                                                                    
Representative Mike Doogan                                                                                                      
Representative Scott Kawasaki                                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Kurt Olson, Vice Chair                                                                                           
OTHER LEGISLATORS PRESENT                                                                                                     
Representative David Guttenberg                                                                                                 
Representative Craig Johnson                                                                                                    
Representative Carl Gatto                                                                                                       
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                                                                       
03/13/07       (H)       Heard & Held                                                                                           
03/13/07       (H)       MINUTE(O&G)                                                                                            
03/15/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/15/07       (H)       Heard & Held                                                                                           
03/15/07       (H)       MINUTE(O&G)                                                                                            
03/19/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/19/07       (H)       Heard & Held                                                                                           
03/19/07       (H)       MINUTE(O&G)                                                                                            
03/20/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/20/07       (H)       Heard & Held                                                                                           
03/20/07       (H)       MINUTE(O&G)                                                                                            
03/21/07       (H)       O&G AT 5:30 PM SENATE FINANCE 532                                                                      
03/21/07       (H)       Heard & Held                                                                                           
03/21/07       (H)       MINUTE(O&G)                                                                                            
03/22/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/22/07       (H)       Heard & Held                                                                                           
03/22/07       (H)       MINUTE(O&G)                                                                                            
03/23/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/23/07       (H)       Heard & Held                                                                                           
03/23/07       (H)       MINUTE(O&G)                                                                                            
03/24/07       (H)       O&G AT 1:00 PM SENATE FINANCE 532                                                                      
03/24/07       (H)       -- Public Testimony --                                                                                 
03/26/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
WITNESS REGISTER                                                                                                              
DAVE VAN TUYL, Manager                                                                                                          
Gas Commercialization                                                                                                           
BP Exploration (Alaska) Inc.                                                                                                    
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified during the hearing on HB 177.                                                                    
ACTION NARRATIVE                                                                                                              
CHAIR VIC KOHRING  called the House Special Committee  on Oil and                                                             
Gas meeting  to order  at 8:34:39  AM.   Representatives Samuels,                                                             
Ramras, Doogan,  Kawasaki, and Kohring  were present at  the call                                                               
to order.   Representative Dahlstrom  arrived as the  meeting was                                                               
in  progress.   Representatives  Guttenberg,  Johnson, and  Gatto                                                               
were also in attendance.                                                                                                        
HB 177-NATURAL GAS PIPELINE PROJECT                                                                                           
8:34:51 AM                                                                                                                    
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."                                                                                               
8:36:50 AM                                                                                                                    
DAVE  VAN TUYL,  Manager, Gas  Commercialization, BP  Exploration                                                               
(Alaska) Inc., informed  the committee that BP wants  and needs a                                                               
gas  pipeline, built  for a  low capital  cost and  operated cost                                                               
efficiently.  He  said that BP believes low costs  will allow the                                                               
pipeline to  be built and to  be successful.  Low  costs are good                                                               
for  the state  and  BP,  as they  ensure  lower tariffs,  higher                                                               
netbacks  and  more  revenue  and   will  provide  incentives  to                                                               
exploration.  Alaska's  gas pipeline, which will  also extend the                                                               
economic life of  oil production, is an important  project to BP,                                                               
the state  and the nation.   BP, he emphasized, is  ready to work                                                               
with  the Palin  Administration and  the legislature  to reach  a                                                               
fiscal framework  that will be  successful for all parties.   The                                                               
future of BP in Alaska is  directly linked to the construction of                                                               
a  gas pipeline.   Therefore,  it  is important  to complete  the                                                               
project.  BP, he said,  regards the Alaska Gasline Inducement Act                                                               
(AGIA) as a  step to an open and transparent  path to development                                                               
of  the pipeline.    BP  has developed  an  outline of  concerns,                                                               
however, about the proposed legislation.                                                                                        
8:40:02 AM                                                                                                                    
MR. VAN  TUYL opined that  AIGA creates  unintended consequences.                                                               
The first  areas of  concern are AS  43.90.440 and  AS 43.90.340,                                                               
which direct the  state to select an exclusive  winner, and award                                                               
state  funds,  based on  promises.    In addition,  AS  43.90.140                                                               
requires  that  the  exclusive winner  comply  with  16  specific                                                               
requirements.  BP,  he said, believes that  rather than providing                                                               
selection criteria, the state should  establish a clear framework                                                               
for  investors,  and  allow  the  market  to  identify  the  most                                                               
successful  project.   Mr.  Van  Tuyl continued  to  say that  BP                                                               
supports  competition in  the marketplace,  and does  not support                                                               
advance exclusivity before the competition  begins.  In fact, the                                                               
Federal  Energy  Regulatory  Commission  (FERC)  will  require  a                                                               
successful open  season before issuing its  certification for the                                                               
project.  Mr. Van Tuyl continued  to say that BP is supportive of                                                               
the state's  objectives for the  gas pipeline project,  which are                                                               
jobs and  natural gas for  Alaskans, and future expansion  of the                                                               
MR. VAN  TUYL stated that  BP's second  concern is that  AGIA can                                                               
result  in  one  party  subsidizing another.    The  language  of                                                               
section 140  requires that initial shippers  will bear additional                                                               
risk and  cost by  the possibility of  increases in  the shipping                                                               
tariff of  15 percent or  more.  It is  good business to  have an                                                               
expandable  pipeline;  however,   increased  rates  to  subsidize                                                               
expansion shippers  put an  additional risk  and cost  on initial                                                               
shippers.  He suggested that  instead, the state can write policy                                                               
to subsidize expansion  shippers if it desires.   He reminded the                                                               
committee  that Congress  makes  clear by  the  enactment of  the                                                               
Alaska Natural Gas  Pipeline Act of 2004 (ANGPA),  that rates for                                                               
initial shippers  should not  increase after  mandatory expansion                                                               
of the pipeline.                                                                                                                
8:44:52 AM                                                                                                                    
REPRESENTATIVE  RAMRAS  asked  for  clarification  regarding  the                                                               
expansion shipper subsidy.                                                                                                      
8:45:35 AM                                                                                                                    
MR. VAN TUYL  explained that AGIA, as drafted,  would require all                                                               
of  the  initial  shippers, including  the  state,  to  subsidize                                                               
expansion shippers.   He reiterated that the  state may subsidize                                                               
expansion shippers as a separate policy decision.                                                                               
8:46:12 AM                                                                                                                    
REPRESENTATIVE RAMRAS  asked whether  Mr. Van Tuyl  was referring                                                               
to  a subsidy  paid  by  rolled-in rates  (RIR)  or  by the  $500                                                               
million grant.                                                                                                                  
MR. VAN TUYL answered that the RIR subsidy is his concern.                                                                      
8:46:58 AM                                                                                                                    
REPRESENTATIVE RAMRAS  observed that  even if BP  participates in                                                               
the project  as an initial  shipper, it subsequently will  be the                                                               
beneficiary  of  RIRs  after  more   gas  is  discovered  and  it                                                               
participates in expansion.                                                                                                      
8:48:07 AM                                                                                                                    
MR.  VAN TUYL  responded that  the  concern is  with the  initial                                                               
commitment required at  open season.  The  initial investors will                                                               
be presented  with a  base toll  that is  included in  the tariff                                                               
agreement.  The  state's policy may result in an  increase to the                                                               
tariff  even before  the operation  of the  pipeline begins.   BP                                                               
does  anticipate participating  in  pipeline expansion;  however,                                                               
undue risk for the initial  shippers can prevent the construction                                                               
of the pipeline altogether.                                                                                                     
8:49:15 AM                                                                                                                    
REPRESENTATIVE  RAMRAS recalled  that BP  was supportive  of last                                                               
year's  gas pipeline  legislation.    BP's testimony  anticipated                                                               
increasing  the throughput  on the  Trans-Alaska Pipeline  System                                                               
(TAPS)  as  well  as  participating  in  expansions  of  the  gas                                                               
pipeline.   Representative  Ramras asked  BP to  provide for  the                                                               
committee the estimate of the amount  of gas it planned for the 4                                                               
billion  cubic  feet  (Bcf)  per   day  pipeline  and  subsequent                                                               
expansions.   Even  with  firm  transportation (FT)  commitments,                                                               
RIRs will  be beneficial to  subsequent gas  shipped by BP.   The                                                               
calculation requested,  he said,  is how  much additional  gas BP                                                               
anticipated  rolling  in under  last  year's  legislation.   This                                                               
information will measure  BP's exposure to the  initial RIR cost,                                                               
balanced by estimates of expansions over the next 10 years.                                                                     
8:52:53 AM                                                                                                                    
MR. VAN TUYL  responded that the gas nominations  into a pipeline                                                               
at  open season  are by  a sealed  bid.   BP can  not reveal  its                                                               
strategy at this point due to  the competitive aspect of the open                                                               
season.  Additionally,  future volumes to the  pipeline will only                                                               
happen  if companies  have  enough  of a  guarantee  of rates  to                                                               
participate in construction and bidding at open season.                                                                         
8:54:26 AM                                                                                                                    
REPRESENTATIVE RAMRAS  again requested  that BP generate  a graph                                                               
that provides different scenarios  with different rates, sizes of                                                               
pipe, and tariffs.  Also, he  asked, the graph should include the                                                               
effect of the anticipated benefits from RIRs.                                                                                   
8:55:55 AM                                                                                                                    
MR.  VAN TUYL  assured the  committee that  BP would  provide the                                                               
requested information.   He  suggested that  if the  initial toll                                                               
was  anticipated  to  be  $3   per  million  cubic  feet  (Mmcf),                                                               
delivering one  Bcf per day,  a RIR  increase of 15  percent will                                                               
result in a cost increase of $200  million per year.  Add to that                                                               
the potential  impact of  a previous 20  year FT  commitment, and                                                               
BP's exposure will be billions of dollars.                                                                                      
8:57:05 AM                                                                                                                    
REPRESENTATIVE RAMRAS observed  that it is known  that there will                                                               
be expansions, thereby those costs  can be anticipated, as can be                                                               
BP's benefit  from participation  in RIRs.   BP could  also build                                                               
many additional  plants as the  result of those expansions.   The                                                               
initial exposure and  benefits of RIRs can be  estimated over the                                                               
next 20 years.                                                                                                                  
8:58:51 AM                                                                                                                    
MR. VAN  TUYL indicated that  BP will provide the  estimates, but                                                               
restated his concern over the risk to initial shippers.                                                                         
8:59:19 AM                                                                                                                    
REPRESENTATIVE  RAMRAS   also  requested  that  BP   provide  its                                                               
previously submitted 50 year business plan graphic.                                                                             
9:00:53 AM                                                                                                                    
MR.  VAN  TUYL continued  his  testimony  by stating  that  ANGPA                                                               
specifies that rates for initial  shippers should not increase in                                                               
the case of a mandatory expansion.  He remarked:                                                                                
     This is from  section 105(b) of {ANGPA],  the FERC, the                                                                    
     commission it  says which means the  FERC, shall insure                                                                    
     that the rates do not  require existing shippers on the                                                                    
     Alaska natural gas  transportation project to subsidize                                                                    
     expansion shippers.   Also, in order 2005,  FERC put in                                                                    
     place a  rebuttable presumption of rolled-in  rates for                                                                    
     expansions, with  a proviso,  it says, provided  it did                                                                    
     not require  subsidization by initial shippers.  ... In                                                                    
     conclusion, to  provide guidance to  potential shippers                                                                    
     in  advance of  the  initial open  season  that is  the                                                                    
     subject  of  this  rule,   the  commission  intends  to                                                                    
     harmonize   both  objectives.     And   that  is   rate                                                                    
     predictability  for initial  shippers and  reduction of                                                                    
     barriers to  future oil  exploration and  production in                                                                    
     designing  rates for  future expansions  of any  Alaska                                                                    
     natural gas transportation projects.   It is consistent                                                                    
     with our guiding principal  that competition favors all                                                                    
     of   the  commission's   customers  as   well  as   the                                                                    
     objectives  of the  act, here's  the proviso,  to adopt                                                                    
     rolled-in  rate treatment  up to  the point  that would                                                                    
     cause there  to be a  subsidy of expansion  shippers by                                                                    
     initial shippers if  any subsidy were to  be found. ...                                                                    
     These two  excerpts, from federal law  and from federal                                                                    
     regulation,  suggest  that  section  140  of  AGIA  and                                                                    
     federal law  could be in conflict.  ... Resolving [this                                                                    
     conflict] would  add delay and uncertainty.  ... I just                                                                    
     wanted  to  ensure that  the  nature  of the  producers                                                                    
     challenge  to order  2005 (a)  was clear.   We're  only                                                                    
     challenging the issue of whether  or not FERC should be                                                                    
     able to  dictate a design  change after  the conclusion                                                                    
     of the open season....                                                                                                     
9:04:46 AM                                                                                                                    
REPRESENTATIVE DOOGAN said:                                                                                                     
     If there's  a rebuttable  presumption of RIRs  and RIRs                                                                    
     by their  very nature  mean that the  original shippers                                                                    
     are going  to pay more,  ... isn't any RIR,  under your                                                                    
     definition, a subsidy?                                                                                                     
9:05:36 AM                                                                                                                    
MR.  VAN  TUYL answered  not  necessarily.    The nature  of  the                                                               
service  of the  line would  affect the  rate.   He said  that he                                                               
believes  FERC's  intent   is  to  leave  the   language  of  its                                                               
regulations  open  so  that  FERC   can  look  at  subsidy  cases                                                               
9:06:34 AM                                                                                                                    
REPRESENTATIVE DOOGAN requested a definition of subsidy.                                                                        
MR. VAN TUYL said he did not believe the term was defined in the                                                                
federal law or FERC regulation.                                                                                                 
9:07:19 AM                                                                                                                    
REPRESENTATIVE SAMUELS remarked:                                                                                                
     The tariff is  at $4, Anadarko has  a find, compression                                                                    
     takes place your tariff goes  under $3.50, but they use                                                                    
     up all the compression so you  loop a little bit.  When                                                                    
     Exxon has a  find your tariff goes back to  $4.  So now                                                                    
     Anadarko  started at  $3.50,  there're  now paying  $4.                                                                    
     You started  at $4,  you're paying  the same  thing you                                                                    
     agreed to.  And now BG has  a find but you have to loop                                                                    
        some more and it goes to $5.  Now Exxon, BP, and                                                                        
     Anadarko are all paying more.  What's a subsidy?                                                                           
9:08:13 AM                                                                                                                    
MR. VAN TUYL  told the committee that in this  example, given the                                                               
magnitude of  the increase, the  difference could not be  made up                                                               
in fuel usage.   In addition, the difference could  depend on the                                                               
total  expected depreciable  life of  the line.   He  pointed out                                                               
that  FERC  wants  to  maintain  the  ability  to  look  at  rate                                                               
increases on a case by case basis.                                                                                              
9:10:06 AM                                                                                                                    
REPRESENTATIVE SAMUELS asked whether  the addition of an offshore                                                               
gas discovery would drive the rates down.                                                                                       
9:10:35 AM                                                                                                                    
MR. VAN  TUYL answered  yes.   In this case,  he said,  the state                                                               
would not be  participating in the additional gas  that is coming                                                               
from federal land.                                                                                                              
9:10:49 AM                                                                                                                    
CHAIR KOHRING referred to BP's  concern that AGIA would result in                                                               
an exclusive winner.   He asked if BP  could make recommendations                                                               
to improve the evaluation criteria.                                                                                             
MR.  VAN TUYL  suggested  allowing the  marketplace to  determine                                                               
which company  should be selected.   In addition, he  stated that                                                               
the  approval  process  used  by  FERC is  a  good  model  of  an                                                               
evaluation process.                                                                                                             
9:11:57 AM                                                                                                                    
REPRESENTATIVE   DOOGAN   questioned   how   selection   by   the                                                               
marketplace would begin.                                                                                                        
9:12:44 AM                                                                                                                    
MR.  VAN TUYL  explained that  for the  project to  advance there                                                               
must be a  successful initial open season, which  is dependent on                                                               
the following two  developments:  the shippers must  have a clear                                                               
framework  of the  resource  rules; the  shippers  know that  the                                                               
project can be built for a reasonable toll.                                                                                     
9:14:39 AM                                                                                                                    
REPRESENTATIVE RAMRAS  thanked Mr.  Van Tuyl  for the  clarity of                                                               
his testimony.                                                                                                                  
9:15:56 AM                                                                                                                    
MR.  VAN TUYL  continued  to  say that  BP's  motivation for  its                                                               
challenge to ANGPA, order 2005,  section 5(a), is that a mandated                                                               
re-design  of the  project  will add  cost and  delay.   He  then                                                               
returned to  BP's consideration of  AGIA, section  43.90.110, and                                                               
noted that  the $500 million  grant was  not requested by  BP and                                                               
may  attract underfinanced  applicants.   Rather than  specifying                                                               
inducements,  the  state  should  ask  the  project  sponsors  to                                                               
propose  inducements.     The  Palin  Administration,   he  said,                                                               
believes that  that the  development of  the project  carries the                                                               
greatest risk.   However, BP disagrees.  The  riskiest phase, for                                                               
the ultimate shippers, is the  construction period.  In fact, all                                                               
project risks  flow to the resource  owners who must make  the FT                                                               
agreements.   Mr. Van Tuyl said  that the fourth area  of concern                                                               
for BP is AS 43.90.310,  which relates to the resource framework.                                                               
The royalty inducement terms are  insufficient to encourage BP to                                                               
make  transportation  commitments.     As  drafted,  the  royalty                                                               
valuations  depend  on  future, non-specific,  regulations.    In                                                               
addition, AGIA  allows the  state to switch  from royalty  gas in                                                               
value (RIV)  to royalty gas in  kind (RIK), and BP  believes this                                                               
ability is detrimental to its interests.                                                                                        
9:20:57 AM                                                                                                                    
REPRESENTATIVE RAMRAS  asked for an  explanation of how  FTs work                                                               
for the buyer.                                                                                                                  
9:22:43 AM                                                                                                                    
MR. VAN  TUYL explained that the  traditional firm transportation                                                               
commitment (FT1)  is a  cash commitment  made by  a shipper  to a                                                               
pipeline company that  guarantees that a certain  payment will be                                                               
made whether the gas is ultimately shipped or not.                                                                              
REPRESENTATIVE RAMRAS remarked:                                                                                                 
     [For example],  so if I  built a shipping center  and I                                                                    
     had eight  bays and I'm  paying the bank a  mortgage on                                                                    
     all eight  of those  storefronts, whether all  eight of                                                                    
     them are rented, or six of them, or three of them.                                                                         
MR.  VAN TUYL  affirmed the  accuracy of  Representative Ramras's                                                               
example.   He added that the  FT1 commitment could be  for a term                                                               
of  20 to  30 years  and equals  a significant  amount of  money.                                                               
Furthermore, down the  line, the marketing arm  assumes risk when                                                               
marketing that gas, under the various terms and commitments.                                                                    
9:25:53 AM                                                                                                                    
REPRESENTATIVE RAMRAS remarked:                                                                                                 
     A  firm transportation  commitment could  very well  be                                                                    
     years and  years ...  and so the  exposure for  the oil                                                                    
     companies is  more significant when ...  the sale price                                                                    
     is fixed but  the shipping cost is  subject to movement                                                                    
     over that period of time because  it could be a 20 year                                                                    
     commitment on  the sale price  of that gas and  yet the                                                                    
     cost of  the tariff to  deliver it there could  move by                                                                    
     $.50, by $1, by $1.50.  ... And the transportation cost                                                                    
     for moving that gas from  the North Slope to Chicago is                                                                    
     an enormous  part of the ...  end cost of that  gas, it                                                                    
     could  be  40 percent.  ...  Forty,  fifty percent,  or                                                                    
     potentially more,  of the  cost of  moving that  gas is                                                                    
     absorbed  by  the tariff  and  if  it's a  third  party                                                                    
     person who  is using  the $500  million and  they're an                                                                    
     underfinanced  sponsor they  can  go  $10 billion  over                                                                    
     budget and increases the tariff....                                                                                        
9:30:20 AM                                                                                                                    
MR. VAN  TUYL expressed his  hope that transportation  costs will                                                               
represent 40 to 50 percent of the value of the product.                                                                         
9:31:03 AM                                                                                                                    
REPRESENTATIVE    SAMUELS    asked    whether,    under    normal                                                               
circumstances,  customers  and  users   take  the  shipping  risk                                                               
through the FTs.                                                                                                                
9:31:31 AM                                                                                                                    
MR.  VAN TUYL  replied that  Representative Samuels's  example is                                                               
not common; however, natural gas  markets are unstable and in the                                                               
recent   past  utilities   have  sought   relief  by   requesting                                                               
permission to extend commitments and move commitments upstream.                                                                 
9:33:04 AM                                                                                                                    
REPRESENTATIVE  SAMUELS  surmised that  FERC  would  not have  an                                                               
opinion  on who  takes an  FT commitment,  therefore, if  Chicago                                                               
Light  and Power  wants to  buy from  you at  the wellhead,  that                                                               
would be between Chicago Light and Power and BP.                                                                                
9:33:20 AM                                                                                                                    
MR.  VAN  TUYL  said  yes,  that was  his  understanding  of  the                                                               
9:33:39 AM                                                                                                                    
REPRESENTATIVE  SAMUELS  further  asked:    "Would  the  Illinois                                                               
[public  utilities  commission]  have  a say  in  that,  on  what                                                               
Chicago Light and Power may or may not do regarding risk?"                                                                      
9:33:48 AM                                                                                                                    
MR. VAN TUYL answered yes, by their regulation of utilities.                                                                    
9:34:09 AM                                                                                                                    
REPRESENTATIVE SAMUELS  assumed that  a willingness to  take some                                                               
of the  risk would result  in a commercial agreement  to discount                                                               
the wellhead price.                                                                                                             
9:34:18 AM                                                                                                                    
MR.  VAN TUYL  responded that  yes, there  would be  a commercial                                                               
agreement.   He then  returned to  his presentation  and restated                                                               
the  difficulties created  by RIV  and RIK  switching, and  noted                                                               
that  the solution  to the  unintended consequences  are left  to                                                               
future legislation.  He then  called the committee's attention to                                                               
section 320  of AGIA and said  that it relates to  gas production                                                               
taxes and defines that the  rates are not established until after                                                               
the conclusion of  the open season.  Mr. Van  Tuyl indicated that                                                               
the  shipper would  not know  the  production tax  rate prior  to                                                               
making   its  FT   commitment,  and   this  uncertainty   creates                                                               
additional  risk.   He  testified  that  AGIA  is silent  on  the                                                               
majority  of  other payments  that  will  be  due to  the  state.                                                               
Resource owners  will pay  all the  costs and  bear the  risks in                                                               
building the pipeline  whether or not they own  it.  Furthermore,                                                               
resource owners  will pay all  the costs, directly  or indirectly                                                               
through the tariff.   Therefore, they must know  the fiscal rules                                                               
that  will  govern  the project  before  making  commitments  and                                                               
successfully obtaining  financing.  Sections  310 and 320  do not                                                               
adequately  address  the details  needed  to  solve the  upstream                                                               
issues, he stressed.                                                                                                            
9:38:11 AM                                                                                                                    
MR.  VAN TUYL  pointed out  that, under  the terms  of AGIA,  the                                                               
resource owners  are the state  and the lessees.   Risks inherent                                                               
to the  resource are price and  production.  Risks to  the lessee                                                               
are  the possibility  of changes  in fiscal  terms and  the risks                                                               
associated  with construction  of  the pipeline.    Mr. Van  Tuyl                                                               
provided  a  chart  that  displayed  names,  capital  costs,  and                                                               
sponsors  of  the  ten  largest  oil  and  gas  pipeline  project                                                               
9:41:18 AM                                                                                                                    
REPRESENTATIVE  RAMRAS asked  about the  competitive risk  of not                                                               
building a pipeline and thereby  losing the future market for the                                                               
North Slope leases.                                                                                                             
9:43:19 AM                                                                                                                    
MR.  VAN  TUYL responded  that  it  is  very important  that  the                                                               
resource owners  begin preparations to demonstrate  to the future                                                               
markets that Alaska's gas will be available.                                                                                    
9:44:29 AM                                                                                                                    
REPRESENTATIVE SAMUELS  questioned why the  Trans-Alaska Pipeline                                                               
System (TAPS)  is not included  in the chart of  pipeline project                                                               
9:44:57 AM                                                                                                                    
MR. VAN TUYL answered that TAPS was owner financed.                                                                             
9:45:31 AM                                                                                                                    
REPRESENTATIVE SAMUELS asked:                                                                                                   
     Assuming that we can set a  tax rate now, and set aside                                                                    
     the constitutional  issue which will be  decided by the                                                                    
     supreme court  ... from BP's perspective,  is it better                                                                    
     to know your tax rate now, before the game starts?                                                                         
9:46:15 AM                                                                                                                    
MR.  VAN TUYL  advised the  committee that  the fiscal  framework                                                               
must be established before the open season.                                                                                     
9:46:55 AM                                                                                                                    
REPRESENTATIVE  SAMUELS  clarified  that   he  was  referring  to                                                               
establishing  the  tax  rate  at the  time  of  the  application,                                                               
instead of shortly before open season.                                                                                          
9:47:13 AM                                                                                                                    
MR. VAN  TUYL noted that AGIA  requires that the tax  rate on gas                                                               
would not be established until after open season.                                                                               
9:48:40 AM                                                                                                                    
REPRESENTATIVE SAMUELS  stressed that  the intent  of AGIA  is to                                                               
establish the tax rate before open season.                                                                                      
9:48:59 AM                                                                                                                    
MR. VAN TUYL referred to  Section 43.90.320(a), line 7 and stated                                                               
that  the  calculation of  the  tax  exemption  is based  on  the                                                               
production tax in  effect at the conclusion of  the first binding                                                               
open season.  BP, he  repeated, prefers tax rate certainty before                                                               
making its FT commitment.                                                                                                       
9:49:17 AM                                                                                                                    
REPRESENTATIVE  SAMUELS   questioned  whether  BP   would  prefer                                                               
knowing the tax rate before the application period begins.                                                                      
9:49:59 AM                                                                                                                    
MR.  VAN TUYL  expressed his  opinion that  the fiscal  framework                                                               
requested  by   BP  extends  beyond  the   establishment  of  the                                                               
production tax  rate and exemption.   Many other elements  of the                                                               
revenue to  the state  must also  be addressed.   In answer  to a                                                               
question, he added that, unlike  Alaska's tax structure, Canadian                                                               
property taxes  are a small  portion of the government  take from                                                               
this project.   Also unlike  Alaska, federal loan  guarantees and                                                               
incentives   are  known,   and  will   not  change,   during  the                                                               
development and construction of the project.                                                                                    
9:51:31 AM                                                                                                                    
CHAIR KOHRING asked whether  permitting and regulations regarding                                                               
the Canadian portion of the pipeline route will be an obstacle.                                                                 
9:52:23 AM                                                                                                                    
MR.  VAN  TUYL assured  the  committee  that BP  has  established                                                               
relationships with the Canadian  government and First Nations and                                                               
that   it  is   confident  that   future  negotiations   will  be                                                               
9:54:02 AM                                                                                                                    
REPRESENTATIVE RAMRAS  opined that  gas and  oil maintain  a cost                                                               
ratio of approximately a 9:1 ratio.                                                                                             
9:54:49 AM                                                                                                                    
MR. VAN  TUYL described  the actual  energy equivalency  ratio as                                                               
6:1  with the  price  increase attributed  to  the higher  market                                                               
value of gas.                                                                                                                   
9:55:18 AM                                                                                                                    
REPRESENTATIVE  RAMRAS   recalled  that   the  TAPS   tariff  was                                                               
increased recently.   He said  that he  felt it was  important to                                                               
discuss the cost  of the natural gas pipeline  tariff in relation                                                               
to the barrel of energy equivalent  for the TAPS line tariff.  He                                                               
suggested that a  comparison by DOR would  help committee members                                                               
appreciate the risk in moving  a barrel of energy equivalent from                                                               
the North  Slope during  the next  ten years,  as opposed  to the                                                               
cost of  transporting oil by  the TAPS which began  production 30                                                               
years ago.                                                                                                                      
9:58:45 AM                                                                                                                    
MR.  VAN  TUYL confirmed  that  historic  knowledge can  help  to                                                               
understand the  differences between  the transportation  costs of                                                               
oil and gas.  The proportion  of transportation cost to the value                                                               
of the commodity for gas  is significantly higher, therefore, gas                                                               
pipelines are marginal in profit,  and are regulated and financed                                                               
10:00:28 AM                                                                                                                   
REPRESENTATIVE RAMRAS  expressed his belief that  the state would                                                               
not like  to pay  transportation costs  for shipping  oil through                                                               
TAPS  that are  relatively equal  to the  proposed tariff  on the                                                               
shipment of gas.   He suggested that a comparison  of these costs                                                               
would be useful to the legislature.                                                                                             
10:01:48 AM                                                                                                                   
REPRESENTATIVE  DOOGAN  pointed  out  that  resource  owners  are                                                               
limited to the people of the  state of Alaska, and do not include                                                               
lease holders.   He asked  whether the producers need to know the                                                               
fiscal details of gas, or of both oil and gas.                                                                                  
10:03:08 AM                                                                                                                   
MR. VAN  TUYL reminded  the committee  that resource  owners also                                                               
include the owners of private and  federal lands.  In response to                                                               
the  question, he  said that  the scope  of the  fiscal framework                                                               
necessary  includes both  oil and  gas, and  also must  include a                                                               
risk reward balance that will work for all of the parties.                                                                      
10:04:12 AM                                                                                                                   
REPRESENTATIVE  DOOGAN  expressed   his  understanding  that  the                                                               
royalties are paid  to the state, as owners of  the resource, and                                                               
taxes  are  paid   to  the  state  as   the  sovereign  political                                                               
jurisdiction.  He said that  he was interested in knowing whether                                                               
the state can, through the  royalty, provide BP sufficient fiscal                                                               
certainty to  ensure its  participation in the  open season.   He                                                               
also asked  whether BP would  be willing to  sell its gas  to the                                                               
state for a fixed price.                                                                                                        
10:06:51 AM                                                                                                                   
MR. VAN TUYL stated that BP  will sell its gas under commercially                                                               
reasonable terms.  He then  continued his presentation by listing                                                               
the project  risks borne by  the pipeline company under  the AGIA                                                               
legislation.    However,  the pipeline  company  is  a  regulated                                                               
entity  and   is  granted   a  regulated   rate  of   return,  FT                                                               
commitments, and  is also able to  pass the risks, via  the toll,                                                               
back to the  resource owner.  BP  wants to ensure a  low cost and                                                               
successful  project;   in  fact,  those  bearing   the  risk  are                                                               
commercially motivated to manage the costs of construction.                                                                     
10:09:09 AM                                                                                                                   
MR. VAN TUYL  summarized by saying that BP wants  and needs a gas                                                               
pipeline for its future business in  Alaska.  BP also supports an                                                               
open and  transparent process that includes  participation by the                                                               
administration, the  legislature, and  the people of  Alaska, and                                                               
that  leads to  the successful  completion  of the  project.   In                                                               
addition, for  the project to  proceed, there must be  a mutually                                                               
agreeable upstream  framework.   Finally, midstream  details must                                                               
be   addressed   to  ensure   that   there   are  no   unintended                                                               
10:12:10 AM                                                                                                                   
REPRESENTATIVE SAMUELS asked whether BP  can ship gas without the                                                               
cooperation  of its  partners,  ConocoPhillips  Alaska, Inc.  and                                                               
ExxonMobil Corporation.                                                                                                         
MR. VAN TUYL  emphasized that he questioned whether  a project of                                                               
this scale  could be  successful without  the cooperation  of the                                                               
state,   BP,   ConocoPhillips   Alaska,  Inc.,   and   ExxonMobil                                                               
10:13:29 AM                                                                                                                   
REPRESENTATIVE SAMUELS re-stated his question and said,                                                                         
     "If three  of four agreed  ... that you had  enough gas                                                                    
     at  the   open  season,  according  to   the  operating                                                                    
     agreements, can  you sell gas  other than just  for the                                                                    
     field usage  ... could you  sell a  commercial quantity                                                                    
     of gas.                                                                                                                    
10:14:17 AM                                                                                                                   
MR.  VAN TUYL  opined  that the  operating  agreements would  not                                                               
prevent parties from selling gas independently.                                                                                 
10:14:54 AM                                                                                                                   
[HB 177 was held in committee]                                                                                                  
There being no  further business before the  committee, the House                                                               
Special Committee on  Oil and Gas meeting was  adjourned at 10:17                                                               
a. m.                                                                                                                           
10:17:08 AM                                                                                                                   

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