Legislature(1997 - 1998)
02/19/1998 11:25 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 19, 1998
11:25 a.m.
MEMBERS PRESENT
Representative Mark Hodgins, Chairman
Representative Scott Ogan
Representative Joe Ryan
Representative Tom Brice
Representative J. Allen Kemplen
MEMBERS ABSENT
Representative Norman Rokeberg
Representative Con Bunde
COMMITTEE CALENDAR
* HOUSE BILL NO. 393
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 393
SHORT TITLE: DEVELOP STRANDED GAS RESOURCES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S)
02/11/98 2281 (H) OIL & GAS, FINANCE
02/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV)
02/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER
02/19/98 (H) O&G AT 11:00 AM CAPITOL 124
WITNESS REGISTER
DAVID COBB, Mayor of Valdez
P.O. Box 307
Valdez, Alaska 99686
Telephone: (907) 835-4313
POSITION STATEMENT: Presented resolution 98-18.
WILSON CONDON, Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
Telephone: (907) 465-2300
POSITION STATEMENT: Testified on HB 393.
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, Alaska 99801
Telephone: (907) 465-2400
POSITION STATEMENT: Testified on HB 393.
ACTION NARRATIVE
TAPE 98-11, SIDE A
Number 0001
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and
Gas meeting to order at 11:25 a.m. Members present at the call to
order were Representatives Hodgins and Ryan. Representatives
Brice and Kemplen arrived at 11:45 a.m. and Representative Ogan
arrived at 12:11 p.m. Representatives Rokeberg and Bunde were
absent.
CHAIRMAN HODGINS stated that the meeting is getting a late start
due to the joint session. He stated that the first order of
business is a presentation by the Mayor Cobb of Valdez.
Number 0060
DAVID COBB, Mayor of Valdez, stated that he would like to submit a
resolution that was passed by the Valdez city council.
Number 0097
CHAIRMAN HODGINS stated that it is resolution 98-18, "A resolution
of the city council of the city of Valdez, Alaska, supporting the
five year tax exemption proposed by the mayors of the Fairbanks
North Star Borough, North Slope Borough, cities of Fairbanks, North
Pole and Valdez for the construction of the Trans-Alaska Gas
Pipeline."
Number 0146
HB 393 - DEVELOP STRANDED GAS RESOURCES
CHAIRMAN HODGINS stated that the committee would now hear HB 393,
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date." He asked
Commissioner Condon to give his presentation.
Number 0167
WILSON CONDON, Commissioner, Department of Revenue, stated that he
was the chairman of the gas commercialization team, created by HB
250. He stated that HB 393 was introduced by the Governor and if
enacted, would be called the Alaska Stranded Gas Development Act.
He stated that he wanted to talk about the objective of the bill,
the development of stranded gas in Alaska. He stated that
Commissioner Shively and himself would testify about some
provisions in the bill and then he would address the following
seven policy issues: Alaska hire, gas supplies for local
communities, municipal sharing in project revenue, confidentiality
of information, Legislative approval, the question of whether one
legislature can bind future legislatures with respect to the
project's fiscal system and the delegation of tax and power.
Number 0295
COMMISSIONER CONDON stated that a lot of gas has been discovered on
the North Slope. He stated that in the Prudhoe Bay Reservoir, one-
quarter of the recoverable energy that is available is in the form
of gas. There has also been a big gas discovery on the North
Slope, he asserted that the question that needs to be asked is why
can't these resources be developed like oil and why do they appear
to be stranded today. He explained that the reason is because it
takes a lot more plumbing and more expense to haul an equivalent
unit of energy in the form of gas to market then it does for a unit
of energy in the form of oil.
Number 0366
COMMISSIONER CONDON referred to the proposed project to take North
Slope gas as liquefied natural gas (LNG) to Asia. The facilities
for that project would include a conditioning plant, a pipeline, a
liquefaction plant and ships. This project will cost about the
same in nominal dollars as the oil pipeline in hauling the North
Slope oil to market. Yet the proposed North Slope Gas Project will
carry an energy equivalent of about 400,000 barrels of oil a day to
market. He pointed out that it is one-third or less in energy
equivalents of the oil stream that is going to market. Therefore,
the situation is that there is the same dollar cost spread over
one-third the amount of energy.
Number 0436
COMMISSIONER CONDON stated that currently there are two
possibilities for commercializing the North Slope Gas Resource: the
above-mentioned LNG project, pipelining gas to tide water,
liquefying it there and then transporting the LNG to Asian markets,
or a gas-to-liquids (GTL) project. This project would convert
North Slope Gas to liquids that could be transported through taps.
It is the state's belief that the proposed LNG project has the best
chance of commercial success. He pointed out that it would be
helpful to review the alphabet soup of LNG, natural gas liquids
(NGL) and GTL's. He stated that the liquids in each of them are
quite different. He held up a model of a methane molecule which
has one carbon molecule and four hydrogen molecules at the center.
In order to make LNG, it is a physical process and this is what
makes up the gas, it makes up 90 percent of the "good stuff". This
"stuff" would be pipelined from the North Slope to Valdez or Prince
William Sound to a liquefaction plant and then it would be cooled
to minus 260 degrees Fahrenheit, and in doing so it becomes a
liquid. The liquid is then hauled to Asia where it would be re-
gasified and distributed through a pipeline system to a power plant
and a town gas delivery system.
Number 0639
COMMISSION CONDON stated that he wanted to talk about NGL'S, a
substance which is present in natural gas but can be liquefied and
sold as propane, butane and others. Currently, these gases are
recovered out of the gas stream on the North Slope. Propane is
made up of three carbon molecules and eight hydrogen molecules. He
explained that it is one of the substances that comes out of the
gas stream of Prudhoe Bay and used as miscible injectant to
increase the recovery of oil in the reservoir. He stated that
butane consists of four carbon and four hydrogen molecules. It is
also recovered in the central gas facility of Prudhoe Bay and is
blended with the crude oil and sent to market. He stated that
substances which were generally thought of as gas are marketed from
the North Slope as part of the crude oil springs.
Number 0802
COMMISSIONER CONDON stated that he would talk about the chemical
conversion of the substance methane into another chemical
substance. This molecule is taken apart to achieve the conversion,
the molecules are then put into another chemical process and
constructed into another substance. He stated that the desired
result is the molecule decane, which consists of 10 carbon
molecules and 22 hydrogen molecules. He explained that what often
happens is a molecule that had 20 carbon molecules and 42 hydrogens
molecules which is wax. This cannot be prevented, therefore, there
needs to be a facility in the project that will take that apart
again to result in the two decane molecules.
Number 0965
COMMISSIONER CONDON explained that a year and a half ago the
department retained a Dr. Pedro van Meurs, a consultant that talks
to governments around the world that are trying to structure their
fiscal systems to develop resources. Dr. van Meurs was retained to
see if there was something that the state could do to improve the
economic viability of a North Slope Gas Project. His
recommendations were that in order to be able to compete against
other political entities, restructuring of the state and local
fiscal regime should be considered to make it competitive with the
fiscal terms that are being offered in respect to other grass roots
projects around the Pacific Basin. Specifically, modify the front
-end loaded fiscal system to one which is a back-end loaded and
modify it in a way that it would be more progressive. This could
be risking some of revenue that may be received in the event of low
energy prices in exchange for receiving a higher share, if energy
prices turn out to be high. He recommended increasing the fiscal
certainty of the arrangements that are put in place, by embodying
them in a contract. He also recommended that federal decision
makers be engaged and that there is a succinct modification of
federal fiscal terms so that they would also facilitate the
project.
Number 1118
COMMISSION CONDON stated that both state and local fiscal systems
are just part of what is needed to come together before a North
Slope gas project is going to be viable. There needs to be
significant reductions in the cost and there needs to be favorable
market conditions in order to have a successful resource to market.
House Bill 393 would provide for payment, in lieu of taxes, for
sponsors of a stranded gas project. He explained that existing
taxes including production, property and corporate income taxes
could be replaced by a single periodic payment that is more closely
related to the projects profitability. And gives state and local
governments more of a share of the projects economic grant later on
in the life of the project. He stated that the provisions in the
bill that lays out the above mentioned proposition is in AS
43.82.020 and AS 43.82.210(a)
Number 1205
COMMISSIONER CONDON explained that stranded gas is gas that the
commissioner determines to be uneconomic or uncompetitive to
develop under prevailing economic or competitive conditions. He
stated that the definitions are listed in AS 43.82.900(10). He
stated that if the fiscal regime is embodied by a contract that is
negotiated by the state, it will enhance the viability of a project
for two reasons: First, it increases certainty regarding the
return investors can expect because it decreases the possibility
that the government's portion will rise unexpectably in the future.
Secondly, it will increase certainty regarding the return investors
can expect and therefore reduce the financial risks taken by the
investors. He stated that it means that they will require a lower
rate of return to compensate them for investing in a project. He
stated that the department believes that is a sound justification
for tailoring a fiscal system for a stranded gas project on a
project by project basis to a fiscal contract.
Number 1325
COMMISSIONER CONDON stated that under the proposed bill the
potential project sponsors come to the commissioner with a proposal
for development. The proposed AS 43.82.110 would require that a
qualified sponsor or a sponsor group must intend to own an equity
interest in the project or commit gas to the project. In addition,
they must either own 10 percent of the gas that the project
proposes to market, hold the necessary permits to construct the
project or have a sufficient network or borrowing capacity to get
the project moving.
Number 1370
COMMISSIONER CONDON stated that a qualified project must be a
proposal to develop 500 billion cubic feet or more of uncompetitive
gas within 20 years from the project's commencement and it must be
capable of satisfying local and state demand within the proximity
of the project. These requirements are listed in AS 43.82.100.
He explained that a qualified sponsor must also come in with a
qualified plan and present that plan in the application, this is
found in the bill under AS 43.82.120(b). A qualified client must
have a proposal which reflects anticipated diligent development, it
can not conflict with pertinent oil and gas lease terms and it has
to be satisfactory for making gas available for instate demand
within the proximity of the project. He stated that if there is a
qualified project, qualified plan and qualified sponsor, the bill
provides a review process to determine whether it is possible to go
on and negotiate a contract. He stated that in respect to whether
the applicant and the project are qualified, it is a determination
made by the commissioner of revenue. Whether a project plan is
satisfactory it would be made jointly by the commissioners of
revenue and natural resources. This is stated in AS 43.82.120-150.
Number 1518
COMMISSIONER CONDON stated that if the prospective sponsor was
qualified in all respects then the application would be initially
approved and the negotiation process would begin. He stated that
the contract negotiations process is covered by AS 43.82, Sections
200 to 270, pages 10-17. The important point being that the
fiscal terms are to be tailored to the particular economic
conditions faced by the project. They are to be developed by the
commissioner of revenue after reviewing the pertinent technical and
market data. The commissioner of revenue may employ an independent
consultant with the cost to be reimbursed by the applicant. The
commissioner of natural resources may negotiate terms to be
included in the contract that deal with certain aspects of the
royalty. He stated that once a proposed contract is in place there
is a period for public comment and legislative review. He stated
that the provisions that deal with that aspect of the bill are AS
43.82.400-420 pages 19-21.
Number 1611
COMMISSIONER CONDON stated that once a tentative contract has been
negotiated, the commissioner of revenue is required to present the
contract along with preliminary findings and a determination that
the contract is in the long term fiscal interests of the state. He
stated that the bill provides for legislative review but not
legislative approval. After the opportunity for the general public
and the legislature to review what the commissioner proposes to do,
the commissioner may then enter into the contract and can change
the terms of the contract provided that the long term fiscal
interest of the state remains protected.
Number 1654
COMMISSIONER CONDON stated that there are eight basis principles of
contract development that are set forth in the proposed bill under
AS 43.82.210(b), pages 10-11. He explained that in negotiating the
contract the commissioner of revenue would be obligated to (1)
improve the competitiveness of the proposed gas project, (2)
develop a contract that was fair to both the state and to the
projects sponsors under a wide range of economic circumstances, (3)
provide fiscal terms that were progressive; state and local
governments could take more if the economics turned out to be rich,
(4) back-end loaded fiscal terms, (5) fiscal terms which recognize
the sponsors need for a share of the up-side potential, (6) state
and local governments should take a significant share of the
proposed project economic grant, (7) clear and unambiguous terms
and (8) the use of cost formulas for administrative certainty and
efficiency were appropriate. He deferred to Commissioner Shively
for some comments on the royalty provisions on the bill.
Number 1755
JOHN SHIVELY, Commissioner, Department of Natural Resources, stated
that AS 43.82.220 contains the royalty provisions. He explained
that the department has not suggested a change in royalty rate, it
would stay the same. The issue that could be negotiated on, is the
timing of how they take in-kind versus in-value gas. Currently,
they are operating under the royalty oil contracts and can change
the amount of royalty oil or gas that is taken on a monthly basis,
as long as six months notice is given. This causes potential
problems for any project sponsor that is involved in long-term
contracts. He pointed out that is an area that may require some
negotiation during the review of the project proposal. He stated
that the second thing to look at is how the royalty is determined.
He stated that in the past there has been a number of disagreements
regarding the evaluation methodology with the industry.
Number 1839
COMMISSIONER CONDON stated that he would run throughout the seven
policy issues. He explained that on the issue of Alaska hire, both
the U.S. and Alaska Constitution limit the legislature's ability to
impose local hire obligations in terms of exercising the
legislature's police powers. He continued that the state does have
more flexibility to achieve local hire objectives when it enters
into contracts but it does run into problems, however, when the
legislature mandates that it must be put into contracts. He stated
that it is a difficult area and one which has to be approached with
some delicacy. He stated that the local hire provisions are all
found in the proposed AS 43.82.230, pages 13 to 15. He stated that
the department would like to recommend a change to the definition
of an Alaska resident. The definition in the bill is a person who
has received a permanent fund dividend or any two of the following,
a drivers license, a hunting fishing or trappers license, voter
registration or motor vehicle registration. He stated that the
drivers license and motor vehicle registration provision should be
deleted so that it would be a permanent fund dividend or a hunting,
fishing and trapping license and voter registration. In order to
make those changes on page 15, line 5, an "and" would need to be
added at the end of the line and strike the language on lines 8 and
9.
Number 1967
COMMISSIONER CONDON addressed the issue of gas to communities. He
stated that requiring project sponsors to subsidize local gas
consumption would increase the project costs and have a dependency
of pushing project economics in the wrong direction. He stated
that they are trying to increase the likelihood that the project is
going to come into being. He stated that they are going to be
requiring a reasonable provision of gas to communities and they
need to figure out ways to reduce the uncertainty regarding the
quantity of gas that the project is going to be required to deliver
to local users. This is so that requiring Alaska deliveries is not
a disincentive to the project.
Number 2016
COMMISSIONER CONDON stated that the third area is municipal revenue
sharing. Clearly, the single step that both state and local
governments can take to improve economics of this project is to
relieve the project of the tax burden of a local property tax
before the project goes into operation. He stated that the state
and local governments will feel the largest negative impact from
the project in terms of providing social services and the social
disruption that occurs with a large project. He pointed out that
the question is whether or not it is worth it. He stated that
there is the question of how municipalities should share in the
revenues generated by a fiscal contract. Whether municipal
governments should be at the table, is a question that the
legislature needs to address. He pointed out that the bill does
not provide for that now and it if it were made to include them,
negotiations would be more cumbersome.
Number 2107
COMMISSIONER CONDON addressed the area of confidentiality, trade
secrets would be held in confidence by the state. That information
would be shared among the pertinent executive branch agencies and
the legislature, but would be kept confidential as long as they
truly were trade secrets. The memorandum and documents generated
during the negotiation process would remain confidential during the
negotiation process but would be entirely open and available for
review once the review of the contract began. He stated that it is
stated in AS 43.82.310(f).
Number 2171
COMMISSIONER CONDON addressed the issue of legislative approval of
the contract. Formal legislative approval of any fiscal contract
involving the taxation of stranded gas is important for both policy
and legal reasons. The Governor strongly supports formal
legislative approval and has pledged to require it even if a
legislature enacts legislation without legislatively inserting that
requirement. He stated that the bill did not include this
requirement because he was advised against it due to technical
constitutional reasons.
Number 2276
COMMISSIONER CONDON stated that the final issue is, can one
legislature bind future legislatures with respect to the tax
liability of a project. He stated that the Department of Law has
concluded that it is not possible to bind future legislatures. He
stated that it could be done with a properly written fiscal
contract which raises the issue of if the legislature wants to test
that authority. The considerations are what the legislature
believes its power ought to be and what effect litigation would
have on this project. He stated that he thought it would be wiser
to avoid litigation and the exploration of the issue of what the
extent of legislative power is.
Number 2372
CHAIRMAN HODGINS stated that he would like to have a presentation
by the producers and that the majority of the work be done in this
committee.
Number 2417
REPRESENTATIVE JOE RYAN stated that the bill requires a deep leap
of faith on the part of the legislature. He stated that it is time
to get to the serious negotiations of what the resources are worth
to state of Alaska and how far Alaska is willing to go to sell the
project. He stated that there has not been any testimony as to the
potential of the project.
TAPE 98-11, SIDE B
Number 0033
REPRESENTATIVE RYAN stated that the commissioner of revenue through
the bill is given a lot of power and he questioned if that was
wise.
CHAIRMAN HODGINS stated that at a earlier meeting Dr. Pedro van
Meurs' testified that he thought there was approximately $150
billion worth of revenues. He stated that Dr. van Meurs would be
back at a later date to answer those questions.
Number 0064
REPRESENTATIVE KEMPLEN asked that on page 7, line 5 "proximity of
the project" if the definition could be nailed down better than as
stated. He questioned if it was just within 10 miles or does it
extend to a pipeline that goes out to Southcentral Alaska.
Number 0099
CHAIRMAN HODGINS stated that it is his hope that committee members
will pick the bill apart and make sure that there are no unanswered
questions. He stated that HB 393 will be held over for further
consideration.
ADJOURNMENT
Number 0190
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and
Gas meeting at 12:18 p.m.
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