02/13/2001 10:03 AM House O&G
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= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 13, 2001
10:03 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 38
"An Act amending the application deadline, and the standards
applicable to determining whether a proposed new investment
constitutes a qualified project, for purposes of the Alaska
Stranded Gas Development Act; and providing for an effective
date."
- HEARD AND HELD
HOUSE BILL NO. 9
"An Act amending the standards applicable to determining whether
a proposed new investment constitutes a qualified project for
purposes of the Alaska Stranded Gas Development Act; and
providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 38
SHORT TITLE:ALASKA STRANDED GAS DEVELOPMENT
SPONSOR(S): RLS BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
01/08/01 0034 (H) READ THE FIRST TIME -
REFERRALS
01/08/01 0034 (H) O&G, RES, FIN
01/08/01 0034 (H) FN1: ZERO(DNR)
01/08/01 0034 (H) REFERRED TO O&G
02/13/01 (H) O&G AT 10:00 AM CAPITOL 124
BILL: HB 9
SHORT TITLE:STRANDED GAS DEVELOPMENT PROJECT
SPONSOR(S): REPRESENTATIVE(S)GREEN
Jrn-Date Jrn-Page Action
01/08/01 0026 (H) PREFILE RELEASED 12/29/00
01/08/01 0026 (H) READ THE FIRST TIME -
REFERRALS
01/08/01 0026 (H) O&G, RES
01/08/01 0026 (H) REFERRED TO O&G
01/30/01 (H) O&G AT 10:00 AM CAPITOL 124
01/30/01 (H) Heard & Held
01/30/01 (H) MINUTE(O&G)
01/30/01 (H) MINUTE(O&G)
02/01/01 (H) O&G AT 10:00 AM CAPITOL 124
02/01/01 (H) Scheduled But Not Heard
02/13/01 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
WILSON CONDON, Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
POSITION STATEMENT: Presented HB 38 on behalf of the
administration; answered questions pertaining to HB 38 and HB 9.
RICHARD PETERSON, President
Alaska Natural Gas to Liquids Company
310 F Street, Suite 200
Anchorage, Alaska 99501
POSITION STATEMENT: During hearing on HB 38, suggested that HB
393 (from 1998) may have sent unintended message; proposed that
any changes not specify types of projects; answered questions
relating to HB 38 and HB 9.
REPRESENTATIVE JOE GREEN
Alaska State Legislature
Capitol Building, Room 403
Juneau, Alaska 99801
POSITION STATEMENT: Sponsor of HB 9.
ACTION NARRATIVE
TAPE 01-14, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting to order at 10:03 a.m. Members present at the call
to order were Representatives Ogan, Kohring, Guess, and Joule.
Representatives Dyson, Chenault, and Fate arrived as the meeting
was in progress.
HB 38 - ALASKA STRANDED GAS DEVELOPMENT
[Contains testimony relating to HB 9]
CHAIR OGAN announced that the first order of business would be
HOUSE BILL NO. 38, "An Act amending the application deadline,
and the standards applicable to determining whether a proposed
new investment constitutes a qualified project, for purposes of
the Alaska Stranded Gas Development Act; and providing for an
effective date." [Committee packets included a copy of SCS CSHB
393(FIN), the version of HB 393 that in 1998 became the Alaska
Stranded Gas Development Act.]
Number 0127
WILSON CONDON, Commissioner, Department of Revenue, explained
that HB 38, introduced on behalf of the governor, would amend
the Alaska Stranded Gas Development Act, passed by the
legislature in 1998 and codified in AS 43.82. First, HB 38
would expand the applicability of that Act beyond the current
LNG [liquefied natural gas] option, to include any option that
would commercialize stranded gas in Alaska, including a long-
distance transmission proposal or a gas-to-liquids (GTL) option.
Second, HB 38 would extend by six months the current June 30,
2001, deadline for people to make applications for consideration
under the Alaska Stranded Gas Development Act.
COMMISSIONER CONDON reviewed the history of the 1998 Act. Its
fairly detailed procedures were put in place by the legislature
for consideration of modifications to the fiscal system that
might be appropriate to a gas development project. At the time,
there was much discussion that [HB 393], as introduced, would
apply to any project that would have commercialized stranded gas
in Alaska. After much deliberation, the legislature chose to
limit the applicability of the Act to an LNG project only.
Number 0507
COMMISSIONER CONDON explained the procedures established by the
1998 Act. The Act envisions an application made by a project
sponsor; review by the commissioners of [the Departments of]
Revenue and Natural Resources to determine whether the project
qualifies; negotiations between the state executive branch and
the project sponsors over proposed fiscal arrangements, which
would be structured in the form of a contract, with contractual
payments in lieu of taxes; public review; an opportunity for
modification; and submittal of the proposal to the legislature,
which would decide to either grant or deny the executive branch
the authority to enter into the contract.
COMMISSIONER CONDON noted that also important in the Act is a
provision for the participation of both revenue-affected
municipalities and economically affected municipalities. In the
former, arrangements would change the applicability of local
property tax; in the latter, costs related to activities
surrounding the project would cause a potential financial
burden. These communities would be given a role in developing
the fiscal contract.
Number 0845
CHAIR OGAN recalled that the genesis of [HB 393] was the Van
Meurs report, which said one key to unlocking the economics of
the LNG line to Valdez was to defer taxes and compensate
affected communities.
COMMISSIONER CONDON said that was a fair characterization. The
state had employed, under contract, Dr. Pedro van Meurs, a
consultant with offices in Calgary [Alberta, Canada] who
specializes in advising governments about fiscal arrangements in
terms of their participation in the oil and gas business.
Speaking of Dr. van Meurs, Commissioner Condon said:
As he looked at Alaska's fiscal system, he advised us,
as you know, in a lengthy report focused principally
on LNG; but in helping us with the legislation, he
believed that it was important that the legislation
apply to any potential project that would
commercialize gas in Alaska.
And he advised us that the fiscal system that we have
in place, which works ... relatively well for the oil
production that we have, ... was not ideally suited to
the public interest in terms of ... the gas business.
... In terms of the public's share in the resource, he
thought that we would be better served by a fiscal
system that was less front-end-loaded, which means ...
a system ... where the state gets ... much of its
share even before a potential project begins to earn
money, ... and, as well, less regressive, which means
that when prices are high, we take a much smaller
share of the economic rent than when prices are low.
And in terms of tailoring a fiscal system that would
best serve the public interest for gas
commercialization, he advised us that we should come
up with a set of procedures that would tailor our
fiscal system to the particulars of the gas
development project, and that we ought to try to
achieve one that was less front-end-loaded and more
progressive.
CHAIR OGAN invited Representative Green to join members at the
committee table.
Number 1172
REPRESENTATIVE DYSON referred to HB 38, page 2, line 4, which
read, "reasonably foreseeable demand in this state for gas". He
asked whether "in this state" means the provisions of HB 38
"would only be available to a scenario that would supply gas to
consumers and wholesalers in the Interior and ... along the
length of the pipe."
COMMISSIONER CONDON replied no, then suggested going to the
underlying question. If the question is whether somebody who
was going to try to build the "over the top" project could
apply, for example, he said the answer is yes. The Act
certainly envisions that the state would insist on making gas
available within the economic proximity of the project, and that
means anything close.
Number 1336
REPRESENTATIVE DYSON requested clarification. He referred to
[HB 38, page 2, lines 3-5], which read, "making gas available to
meet the reasonably foreseeable demand in this state for gas
within the economic proximity of the project." He asked what
"in this state" means besides for people in this state.
COMMISSIONER CONDON emphasized the phrase "within the economic
proximity of the project." He said if a project goes by
Fairbanks and Delta [Junction] and across the border, it was not
envisioned that this Act would require the delivery of gas to
Ketchikan, for example. This provision of the Act deals with
who can apply and what a qualified project is, not what can be
imposed on the project; the latter is in a different provision.
There is no question that envisioned under this Act would be a
requirement that gas be delivered to Fairbanks if the pipeline
went by Fairbanks.
Number 1409
REPRESENTATIVE DYSON asked whether deleting that entire phrase
wouldn't make any difference, then, because "making gas
available for folks within the state and along the pipeline
route is covered in other portions."
COMMISSIONER CONDON said this has to do with whether the
application will be considered in the first place. He stated,
"I think you ought to leave this in there, as well as the
provision in the Act that deals specifically with what you're
[going to] make them do."
Number 1499
REPRESENTATIVE GUESS asked how projects unrelated to LNG would
move forward if [the legislature] doesn't make these changes.
COMMISSIONER CONDON replied that this [HB 38] provides an
opportunity for project sponsors with a project other than an
LNG project to come to the state with an application, before
December 31 of this year, and "engage with the state in an
exercise which hopefully would tailor the state's fiscal system
to the particulars of a project." If no one applied before the
December 31 deadline, that would be the end of it unless the
legislature later extended the deadline.
Number 1578
REPRESENTATIVE GUESS asked: If the legislature didn't pass
this, and projects came that were not LNG projects, how would
"you" approach that project?
COMMISSIONER CONDON posed a scenario in which the three
producers decide they want to build a pipeline to mid-North
America, or perhaps Foothills Pipe Lines Ltd. would file an
application with the FERC [Federal Energy Regulatory Commission]
and the Canadian National Energy Board to refresh the
arrangements made 20 years ago to carry gas to mid-North
America. Instead of deciding to apply under the Alaska Stranded
Gas Development Act, they may decide to talk to the legislature;
the ball would land in the legislature's court in terms of
making decisions about what the state's tax policy ought to be
with respect to whatever project is being proposed.
Commissioner Condon said this is simply one of many possible
vehicles to put before the legislature the issue of what the
state's fiscal system regarding a gas project ought to be.
Number 1704
CHAIR OGAN requested confirmation that the governor already has
the ability to negotiate an agreement like this and then present
his own bill before the legislature regarding payments in lieu
of taxes or deferments, for example. He stated his
understanding that [Governor Knowles] had done that with
Northstar.
COMMISSIONER CONDON clarified that the arrangements made with
respect to Northstar pertained to royalty, not tax. But yes, he
said, the governor could present to the legislature a set of
proposed statutory changes that would modify the tax system that
would be applicable to gas production in Alaska; then the
legislature would act upon that, as it deemed appropriate.
Number 1771
CHAIR OGAN said he interprets this as a concession and a
negotiating tool. He likened it to rewarding a horse with a
carrot before it even heads out, rather than using it as a
reward afterwards.
COMMISSIONER CONDON replied that he is reluctant to use the word
"concession" because it implies giving something away, which he
hopes the state won't do. Alaska's fiscal system that would
apply to a gas project is in place, he reminded members,
including royalties and a "suite of taxes." Noting that three
years ago this was worked on jointly by the legislature and the
executive branch, Commissioner Condon explained:
We thought it made sense to have ... a pretty definite
structure in place, which the executive branch was to
use to bring a proposal to the legislature for its
consideration ... in tailoring the fiscal system to
meet the precise needs of both the public and the
project.
And so, that's how we ... ended up with this [Alaska]
Stranded Gas Development Act that was put on the
books. And, of course, ... the Act itself doesn't
make any changes at all. It simply provides a
procedure for developing a set of proposed changes,
which would be presented to the legislature for its
consideration.
There are obviously lots of different ways that
proposals could be put together for the legislature.
But what was envisioned three years ago was to have
the executive branch go out and do a specified set of
assignments - homework, if you will - for developing a
proposal for dealing with a gas project, and then to
bring that before the legislature for the
legislature's consideration. ...
And clearly, ... the legislature establishes tax
policy. ... Of all the areas where ... the executive
branch proposes and the legislative branch disposes, I
think tax policy is about the most sensitive.
Number 1988
CHAIR OGAN responded that nothing prevents the governor, at this
point, from using this as a model for the pipeline route or GTL,
for example, and going ahead and negotiating these kinds of
terms and then presenting [the legislature] with a bill for
passage. He indicated that with the proposed system, the
legislature can only vote yes or no; if the administration
presents a bill, however, the legislature can modify it.
CHAIR OGAN said he sees this, essentially, as a delegation of
legislative powers to the governor. If the public is excited
about a project such as a pipeline, that "head of steam" might
cause the legislature to avoid trying to stop it, even if there
were some negotiated items that legislators didn't like.
CHAIR OGAN indicated he is more comfortable with the governor
negotiating, using this as a model, and then coming back to the
legislature; legislators could see what they did or didn't like
and then [send it back] for renegotiation. That would give the
legislature a little more power, which is "constitutionally
defined to the legislature" to manage resources.
Number 2100
COMMISSIONER CONDON responded that he doesn't fully agree with
that analysis. If, for example, the governor negotiates a
package and brings it before the legislature, asking that it be
voted up or down, the legislature could decide it didn't like
three provisions and pass bills which reflect its own judgment
regarding what is the best set of provisions. The legislature
would send that to the governor; although the governor could
veto it, clearly [the legislature] has full plenary authority
and hasn't delegated any of it. Commissioner Condon pointed out
that the only way the governor could, for example, hire a
consultant and ask the consultant to pay for part of the
negotiating would be to follow this procedure.
CHAIR OGAN remarked that for him, the issue is timing, which is
everything when negotiating a contract.
Number 2238
REPRESENTATIVE JOULE said he thinks the point is well made that
the [legislature], through the committee process, has the
opportunity to make changes that legislators deem necessary. He
said he didn't agree with the governor then, and is glad to see
something like this come out. He noted that [HB 9 and HB 38]
are almost identical except that one has a date changed from
June 30, 2001, to December [31], 2001, and the other doesn't.
He asked Commissioner Condon to speak to that.
COMMISSIONER CONDON noted that Representative Green's bill [HB
9] would expand coverage of the Act in exactly the same manner
as the governor's bill [HB 38]. He explained the other change
in the governor's bill, extending the deadline:
The governor believed that we ought to change ...
those dates, believing that ... given the likelihood
that any legislation might not pass until the end of
the legislative session, there simply wouldn't be
enough time for someone ... to gear up and make an
application if the bill passed in May and you had a
June 30 cutoff point for making applications under the
bill.
So, it was his thought we ought to extend the deadline
until the end of the year, but nevertheless that the
deadline should be ... an early deadline so that ...
if people are going to use this vehicle, ... they do
it soon and get moving.
Number 2380
REPRESENTATIVE JOULE referred to the change to open it up to
more than LNG. He asked whether this gives people additional
time "in looking at other things and making those other
potentials a part of their application process."
COMMISSIONER CONDON clarified that passage of either HB 38 or HB
9 would make it possible for someone who is proposing to build a
project to "pipeline" gas from the North Slope to mid-North
America, for example, to apply under this Act; the same is true
for someone proposing a GTL project. They could not apply now
because only a project that would take gas to market as LNG
would qualify for consideration.
Number 2486
CHAIR OGAN asked how the producers' working group is doing and
whether Commissioner Condon expects them to apply regarding LNG
before June 30.
COMMISSIONER CONDON specified that he doesn't expect them to
apply for consideration under the [Alaska] Stranded Gas
Development Act on June 30; however, he doesn't know that they
won't apply.
Number 2553
REPRESENTATIVE GUESS requested confirmation that under this
proposal, after the administration has negotiated the contract
and it has come back to the legislature, the legislature would
still have authority to change the contract.
COMMISSIONER CONDON affirmed that.
Number 2583
CHAIR OGAN asked: Has a report or study has been done to
justify this legislation? Who is asking for this? And what
basis is the governor using to bring this legislation forward?
He noted its mention as a "sidebar issue" with the Van Meurs
report, but pointed out that when HB 9 was heard [January 30,
2001], there was no testimony regarding the need for it. He
related that he'd had some off-the-record conversations with
producers, who had indicated they weren't ready to discuss this
because they don't really know whether they have a project yet.
COMMISSIONER CONDON answered:
The governor asked me what I thought we had to do, in
terms of legislative proposals relating to
commercializing North Slope gas. And I said to him,
"When we had this issue looked at three years ago by
... Dr. van Meurs, he recommended that we make this
legislation applicable to all the different
possibilities for commercializing North Slope gas, and
... I recommend that you put legislation in that
tracks the recommendation we got from Dr. van Meurs."
And so, the governor thought about it and accepted the
proposal that I made. ... I made the recommendation
because I thought we ought to return ... to the
proposal that we made three years ago.
Number 2688
CHAIR OGAN asked whether this is the legislation that Cambridge
[Energy Research Associates] was hired to work on.
COMMISSIONER CONDON answered:
As has proven to be the case, the question of
commercializing North Slope gas is something that you
and other members of the legislature are vitally
interested in. And we retained Cambridge to help in
gathering information and presenting information which
we thought would be pertinent to whatever legislative
deliberations, including this legislation, but just a
general question, policy making with respect to
commercializing North Slope gas. And so, the thought
was ... that Cambridge would be a good resource for
gathering and evaluating information relating to North
Slope gas commercialization.
Number 2761
CHAIR OGAN asked Commissioner Condon whether anyone had
consulted with him regarding his testimony that day.
COMMISSIONER CONDON replied no; this procedural legislation,
which deals with the state fiscal system, is not in the realm of
expertise of Cambridge Energy Research Associates.
Number 2816
CHAIR OGAN expressed concern about Commissioner Condon's
statement that he doesn't see this as a concession. Chair Ogan
compared this to a balloon payment, which he believes to be a
concession. Without it, [project sponsors] would have to pay
taxes now instead of later, and it is perhaps a powerful
negotiating tool. He reiterated his concern about the timing of
giving what he perceives as a concession and just trusting the
governor to "do us right."
COMMISSIONER CONDON replied that this legislation doesn't do
anything other than set up a process. This Alaska Stranded Gas
Development Act just sets up a structure for dealing with the
issues; this would expand the applicability of that structure
[beyond LNG]. He stated:
It's a policy call that the executive branch and the
legislature worked closely together on when we went
through this exercise three years ago, and we're
certainly prepared to do that with you once again.
But, obviously, the objective here is to come up with
what we believe to be the most sensible way for
addressing these issues and bringing them before you
for your consideration.
Number 2973
CHAIR OGAN asked whether anyone is "kicking tires on GTL at this
point."
COMMISSIONER CONDON said that depends on what Chair Ogan means
by "kicking tires." He then stated:
You're going to hear from ... the folks that proposed
to link up with the Sasol folks for a GTL project. We
have the pilot plant that BP's constructing on the
Kenai Peninsula. The folks that have talked to us
often about GTLs - Exxon - sort of have not been by to
talk to us lately about GTLs ....
TAPE 01-14, SIDE B
Number 3001
CHAIR OGAN asked whether, if this legislation passes, someone is
"ripe to apply."
COMMISSIONER CONDON answered that he believes there won't be a
GTL application between now and December 31. That belief is
based on conversations with various people that he deals with;
nobody has mentioned it.
CHAIR OGAN commented that a couple of years ago, Exxon was
"seriously at the table on this." He thanked Commissioner
Condon and turned to public testimony.
Number 2946
RICHARD PETERSON, President, Alaska Natural Gas to Liquids
Company, came forward to testify, specifying that his company is
based on Anchorage. He told members:
When we look at legislation or projects that are going
to go on in Alaska, we generally like to say, "Well,
they're going to look at all projects and not single
out any one specific project." When we looked at
House Bill 393 with the limitation to LNG, it may have
sent an unintended message to the rest of the
potential gas development community that this was the
only type of project that would be considered.
So, we would say that in any future legislation or
change that ... maybe you shouldn't be specific.
Maybe we shouldn't even say "with respect to a gas
pipeline, GTL, or LNG," because ... maybe there is
somebody else out there who could say, "My goodness,
Alaska will consider anything that can be economic."
And maybe there's a different way than those three.
So, I would say that legislation that you put in place
would not be specific to any one particular project,
and it would just open the field for any viable
project.
Number 2860
REPRESENTATIVE DYSON asked Mr. Peterson whether HB 38 or HB 9
seemed to fit his criteria more.
MR. PETERSON answered that Representative Green's proposal [HB
9] is not specific as to the type of project; in that respect,
he thinks it would be more what the Alaska Natural Gas to
Liquids group would propose. In further response, Mr. Peterson
said he would be glad to discuss his organization with
Representative Dyson in the future.
Number 2788
CHAIR OGAN asked Mr. Peterson whether, if this legislation
passed - assuming that the date of the [deadline] is at the end
of this year - he would "have the resources to be ready to build
a project and apply for it, between now and then?"
MR. PETERSON answered that a lot of it has to do with whether
the Department of Natural Resources and "Commissioner Condon's
area" believe that the proposal that [his group] has presented
makes sense for the state. He added, "Until they tell us that
they're willing to continue on [working] with us in that area,
we're not going to do anything further. So, it's hard to say
whether or not we will apply this year ... for one on the North
Slope."
Number 2760
CHAIR OGAN said in his mind, the record has been established
fairly clearly that the governor isn't precluded from using this
as a framework to negotiate and then propose legislation. He
said he doesn't see a project associated with at least the GTL
portion of the legislation. He asked, "Now, you don't own any
gas; is that correct?"
MR. PETERSON affirmed that.
CHAIR OGAN asked, "Whose gas do you anticipate turning into
GTLs?"
MR. PETERSON answered:
Initially, we proposed to do this with Exxon's gas,
BP's and, back in that timeframe, ARCO's gas. And at
that time, Exxon told us that they would not enter
into a project that used competing GTL technology,
although it was difficult to say that it was competing
because Exxon does not have a commercially proven
technology at this point, and neither did the other
two "majors" at that point. So, their general feeling
is, they would not like to participate in a project
that uses technology that is not their own.
So, the next option was the state royalty gas. And
once you go into the state royalty gas, it seriously
limits the size of a GTL project, and that can affect
the economics - and which it does. And that's what
has created additional issues that we've had to deal
with, because ... the volume that would be available
for a GTL project being so limited reduces the
economics and makes it a little more difficult to
happen.
Number 2661
CHAIR OGAN asked whether there were further questions. He
thanked Mr. Peterson, then asked whether anyone else wished to
testify. There being no response, Chair Ogan closed the hearing
on HB 38.
CHAIR OGAN called an at-ease at 10:57 a.m. He called the
meeting back to order at 11:04 a.m.
HB 9 - STRANDED GAS DEVELOPMENT PROJECT
[Contains discussion of HB 38]
CHAIR OGAN announced that the next order of business would be
HOUSE BILL NO. 9, "An Act amending the standards applicable to
determining whether a proposed new investment constitutes a
qualified project for purposes of the Alaska Stranded Gas
Development Act; and providing for an effective date."
Number 2625
REPRESENTATIVE JOE GREEN, Alaska State Legislature, sponsor of
HB 9, told members that Commissioner [Condon], who had just
presented HB 38 to the committee, had said perhaps 90 percent of
what he himself would refer to. He himself would offer comments
and ask questions relating to Commissioner Condon's remarks.
REPRESENTATIVE GREEN reminded members that the state has had
incentives in the past; some have been activated, and some
haven't. He offered examples: a "low-production royalty
reduction" instituted several years ago for the marginal wells
in Cook Inlet; the exploration credits instituted several years
ago to encourage exploration in unexplored regions of the state;
and modification of the Northstar royalty agreement that had
been struck some years before.
REPRESENTATIVE GREEN noted that there was extensive dialogue
surrounding [HB] 393 [in 1998]; a member of the body was very
vocal about wanting to limit this possible incentive to LNG, the
"hot" issue at the time. Representative Green pointed out that
gas prices have fluctuated wildly, and projecting gas prices and
development is difficult; furthermore, the huge resource at the
North Slope is extremely far from the market, including the
Pacific Rim. A company will be reluctant to spend billions of
dollars in such a situation, he indicated.
REPRESENTATIVE GREEN mentioned the current gas shortage in the
Midwest. Although there is a desire to get American gas to
American markets, he said, it is a long, long way. He asked
what can be done to help, if help is needed. Representative
Green pointed out that if [gas] can be sold at $16, a company
would build the line tomorrow. But can that be expected to
last? If gas goes to $6 or $4, for example, will there be a
return on the investment? He emphasized that any company -
whether producing gas, oil, or candy bars - aims to make a
profit.
Number 2296
REPRESENTATIVE GREEN pointed out that if the incentive is a
deferred tax, the tax would be paid anyway. Many "royalty
companies" will use their own money, but they also borrow
capital. There is a cost for that. The company would be paying
a tremendous amount of interest on that money until there is a
return; if taxes were added to that, it would be a burden.
REPRESENTATIVE GREEN differentiated between how companies and
governments look at "present worth" dollars. If a company could
defer current expenses for a few years - and then pay them back,
even with interest, after the product is coming in and there is
an inflow of money - it would be to the company's advantage;
that is called present worth. Governments, however, whether
state or local, doesn't work on a present-worth basis, other
than the discounted value of the money they may get; governments
aren't concerned about this year or next year, other than how it
affects their spending.
Number 2197
REPRESENTATIVE GREEN referred to discussion during the hearing
on HB 38 that day. He stated:
We heard that if we pass this kind of an incentive
that goes beyond just going to LNG, ... it would apply
whether they go to a gas-to-liquids project or go to
just [a] gas sales project. Is there a benefit of
having an incentive potential?
It's not a giveaway. It's not a negotiation. It just
says that if you qualify, we've got a thing over here
that you can work under. Does that benefit? And the
concern was expressed, "Well, yeah, but if they
exercise that, they come running in and they've got a
head of steam." And I submit to you that this is
selling the legislature short.
REPRESENTATIVE GREEN recalled that last year there was a "head
of steam" to allow BP to take over ARCO; that was a very popular
concept with the public and many legislators. To their credit,
the leadership of both bodies developed a committee of House and
Senate members who "worked long and hard, got some heavy-weight
consultants to back us up, went to the Federal Trade Commission
[FTC], and said we didn't think that that was the best, in the
interest of the state."
REPRESENTATIVE GREEN acknowledged that he didn't know whether
that committee of legislators was instrumental in persuading the
FTC or not. But finally, the BP takeover was disallowed. He
emphasized his belief that the legislature has some clout and
doesn't always listen to the governor. He added, "We do have
the wherewithal to take a long look at it and make sure it is in
the best interest of the state."
REPRESENTATIVE GREEN cautioned that right now, there is an
attitude among the industry that maybe the State of Alaska isn't
open for business, because the state is only interested in
allowing an incentive relating to LNG.
Number 2038
REPRESENTATIVE DYSON asked, "Aside from what we both probably
consider a limitation we put into [HB] 393, how else do you
think we have been sending the message that we're not open to
any other options?"
REPRESENTATIVE GREEN answered that although there was a desire
to not limit it to LNG, the dialogue was, "No, no, no, it's LNG
or nothing." That reverberated around the domestic investment
world. Representative Green said he believes it is time to show
that it isn't necessarily the case, and that the state truly is
open to "as good a deal as we can make."
Number 1980
REPRESENTATIVE DYSON asked whether that is on any kind of
delivery of the product.
REPRESENTATIVE GREEN replied, "Certainly. If the only delivery
might be ... to the Midwest, then it's better to have that
delivery than no delivery at all." He indicated it could be LNG
or gas-to-liquids, or the line could come down to Fairbanks and
"trifurcate into three different ways, to sell the gas." Those
aren't mutually exclusive. Emphasizing that the market is
fluctuating, Representative Green suggested that the state
doesn't want to limit or even send the message that it's
limiting the possibility of selling to that market.
REPRESENTATIVE GREEN explained that there is a tremendous amount
of gas available right now, not only around the world but in the
Lower 48. If the gas price stayed at $15 or $16, [Alaska]
probably would not be able to sell its gas because a lot more
gas would be developed closer to the market. "And that's
something we must not lose sight of, that it's not a given that
our gas is going to be a marketable product," he said.
Representative Green stated:
We need to be able to react when there's a chance to
react. And I don't want to cause a lot of pessimism
or fear, but you may recall that I talked to this
group - or certainly to several of you - that the gas
line, once in, whatever it is, is not going to be a
panacea to replace the crude line.
The value that nets back to us, as a royalty owner, is
going to be a far cry from [what] it was when we were
selling oil barrels. And so, don't ever think that
what we're going to get from a gas line, no matter
where we sell it, is going to be anything like Prudhoe
Bay was. It'll be a big step forward, but it won't be
the panacea.
Number 1850
REPRESENTATIVE GREEN addressed the question of why HB 9 doesn't
have an expiration date. He explained that he didn't want to
put an expiration date until he found out the will of a
committee, either the House Special Committee on Oil and Gas or
the House Resources Standing Committee. He noted that with a
six-month extension, should the legislature adjourn in May,
"there really isn't a whole lot of benefit to anything going to
the end of the year, because the deal might be made but we
wouldn't be able to react until next year - the bill's dead."
REPRESENTATIVE GREEN suggested that if there is going to be a
"short fuse," it should be at least through July 1, 2002. That
way, people who are working on a potential deal will have time,
and it will allow the legislature to reconvene and see what is
going to happen. If something is working, the legislature could
extend the sunset date; otherwise, the legislature could let it
die. At least it would allow time for people to think about it.
REPRESENTATIVE GREEN reiterated Commissioner [Condon's] point:
It isn't the case that once the deal is cut, it is cut in stone.
Rather, if the legislature didn't like a deal that was cut by
the governor and a company, just as with the BP merger, the
legislature wouldn't approve it. Then the company would go back
to the boards, drop it altogether, or do something else.
Number 1684
CHAIR OGAN expressed concern that the governor might "spin it"
that a pipeline deal in the Lower 48 was stopped by legislators
who turned down a deal that the governor negotiated. He
returned to the analogy of a train with a head of steam,
emphasizing how hard it is to stop. Although HB 393 talked
about approval by the legislature, Chair Ogan said, his
impression was that it was an "up or down" [vote]. He isn't
sure the legislature would have a line-item veto on a deal
negotiated by the governor, although Commissioner Condon, a
former attorney general whose opinion he respects, had said
differently. Chair Ogan asked Representative Green to comment.
REPRESENTATIVE GREEN responded:
My feeling is just the opposite: yes, we do. And we
did hear it from - as you say - a member of the
present administration, both currently as commissioner
of [the Department of] Revenue and a prior attorney
general, so his word would certainly be more
impressive than mine, because I'm neither a lawyer
[nor] a tax expert.
REPRESENTATIVE GREEN reiterated that with the proposed BP
merger, the legislature didn't stop it but was instrumental in
going to the FTC to perhaps get it stopped; the legislature
stood together, saying it was not the best thing for the state,
which was very powerful. In this particular case, however, the
legislature would just not approve it.
REPRESENTATIVE GREEN commented on changes regarding Northstar,
which [the legislature] did approve: "I think there was a lot
of thoughtful deliberation that it was a better deal for the
state to modify that royalty. There may be those of you who
disagree, but the majority of us felt that this was a better
deal."
Number 1480
CHAIR OGAN asked Representative Green whether he considers this
a concession.
REPRESENTATIVE GREEN answered no; he considers this as "a way to
look for a way - it says that now you are free to negotiate."
Number 1438
CHAIR OGAN referred to AS 29.45.810, which read in part:
Sec. 29.45.810. Exemption from municipal taxation.
(a) A party to a contract approved by the
legislature as a result of submission of a proposed
contract developed under AS 43.82 or as a result of
acts by the legislature in implementing the purposes
of AS 43.82, and the property, gas, products, and
activities associated with the approved qualified
project that is subject to the contract, are exempt,
as specified in the contract, from all taxes
identified in the contract that would be levied and
collected by a municipality under state law as a
consequence of the participation by the party in the
approved qualified project.
CHAIR OGAN said he doesn't understand how it isn't a concession
to exempt people from municipal taxes, even if they are going to
pay them later.
REPRESENTATIVE GREEN emphasized that both parties would have to
agree before it is a "done deal." The contract is where the
negotiations occur, he added, "and that hasn't been signed by
anybody, and won't be, with this bill; it just says, 'Hey, go do
your best.'" Representative Green emphasized that it is a
deferral, not an exemption.
CHAIR OGAN indicated it is an exemption that requires trusting
that the governor will consult with the municipalities and
negotiate an adequate payment in lieu of taxes.
REPRESENTATIVE GREEN replied that he doesn't know; it hasn't
been determined. "That's when the negotiations start," he
added.
Number 1278
REPRESENTATIVE GUESS asked what Representative Green what he
thinks about the date proposed by the governor [in HB 38].
REPRESENTATIVE GREEN replied that if the legislature is out of
session, he would prefer to know that the legislature still has
this bill in effect, so that whatever is negotiated through the
interim can be approved under the bill. He recommends going to
2002 because it allows another legislative session to review
whatever might be done. He said if [the committee] wished to
extend it another year, he would suggest having it until July,
so that it is through another legislative session.
Number 1188
REPRESENTATIVE GUESS asked whether the date is for accepting
applications or negotiating a contract.
REPRESENTATIVE GREEN said he would have to reread the language,
but he believed the intent was that it would have to be a "done
deal" by that termination date.
REPRESENTATIVE GUESS pointed out that those are two different
questions: submitting a contract and having a "done deal," and
just submitting a contract.
REPRESENTATIVE GREEN replied, "That's not so critical then, and
I wouldn't have any objection. ... My estimation was that it
would be a 'done deal,' and I would like us to be in session
before that happened."
REPRESENTATIVE GUESS suggested perhaps the [committee] could
look into that.
Number 1101
CHAIR OGAN referred to page 22, line 21, of HB 393, which is
codified as AS 43.82.435. That statute read:
The governor may transmit a contract developed under
this chapter to the legislature together with a
request for authorization to execute the contract. A
contract developed under this chapter is not binding
upon or enforceable against the state or other parties
to the contract unless the governor is authorized to
execute the contract by law. The state and the other
parties to the contract may execute the contract
within 60 days after the effective date of the law
authorizing the contract.
CHAIR OGAN read the first sentence. He commented that it seems
to be contrary to [Representative Green's] contention that "we
can basically renegotiate the terms if we don't like some of
it." He said it appears the legislature would either give the
governor authorization to execute the contract or not, although
he supposed the legislature could deny authorization and then
ask that [the governor] renegotiate. Chair Ogan reiterated that
if it is presented in a bill, the legislature has a lot more
line-item, hands-on authority.
Number 1020
REPRESENTATIVE GREEN suggested that if legislators don't like
all or a part of a contract, it would go back to the governor
with the caveat that the legislature would accept it if, and
only if, that change was made.
CHAIR OGAN announced that he would like to call in Jack
Chenoweth [Legislative Legal Services attorney] to clarify that,
because he himself was interpreting the statute differently.
REPRESENTATIVE GREEN emphasized that it would be "yes" or "no,"
but the "no" would be "no, because" if [the contract] was close
[to gaining legislative approval], unless it was an outright
rejection. "But that's not required in there; it just says
'yes' or 'no,'" he added.
CHAIR OGAN said that is the way he interpreted it.
Number 0905
REPRESENTATIVE CHENAULT referred to lines 23-25 [page 22 of HB
393, and the second sentence of AS 43.82.435], which read:
A contract developed under this chapter is not binding
upon or enforceable against the state or other parties
to the contract unless the governor is authorized to
execute the contract by law.
REPRESENTATIVE CHENAULT commented, "I assume we give him the
authorization to execute the contract."
Number 0880
CHAIR OGAN affirmed that. He offered closing comments:
I hope that industry doesn't interpret that ... we're
not open for business. I think I'd be more
comfortable if they were coming to us and saying,
"Yeah, we have this project," or, "We're ready to
build a gas pipeline ... down the highway, and we've
done these studies; here are the facts; these are the
bottom lines." ... That's basically what was being
done with the LNG project. ... We had some real good
data to base this on, and ... I was comfortable
delegating this authority to the governor to do this,
under that scenario.
CHAIR OGAN noted that when the "working group" makes its
scheduled presentation to the committee, he wants to know how
far along they are.
Number 0740
CHAIR OGAN suggested that Representative Green consider
modifying [HB 9] so that the "execution provision" is not an "up
or down." Rather, the governor would negotiate the contract and
submit all the terms of the contract in a bill; the legislature
could either modify the bill or send it back to the governor to
renegotiate specified portions. That would give the legislature
a little more leverage.
Number 0714
REPRESENTATIVE GREEN emphasized that he wants to do this now,
then explained:
It's not [a] good time to pass legislation if there is
a bill pending; then you have a tremendous pressure to
approve, ... and so you really don't have the time to
study it in detail that you do now. If this is done
and he comes in, we have as much time as we think we
need to take. And if it's a short-term contract,
don't even bring it to us, because we won't have time
to look at it. He knows that.
But what I'm concerned about is if we wait to pass the
enabling legislation to modify or get another
incentive, they've negotiated some incentive, and we
are almost ... pressure-bound to say, "Well, okay, in
order to get this project, ... we're going to have to
go the way it's been negotiated." I think that's the
wrong way to negotiate.
Number 0555
REPRESENTATIVE GREEN asked when HB 9 might be heard again by the
House Special Committee on Oil and Gas.
CHAIR OGAN answered:
A few years ago, when we passed [HB] 393, we had Exxon
actively here saying, "We want this, we need this." I
haven't heard anybody but a bill sponsor - either you
or the governor - come before us and explain any
desire for this legislation, with the exception of Mr.
Peterson [who testified during the hearing on HB 83].
... I hope sincerely someone comes to us and says,
"We've got a project; ... we need to discuss this."
REPRESENTATIVE GREEN noted his disagreement with Chair Ogan
about when the best time is to pass legislation or negotiate.
Rather than setting it aside, Representative Green said, he
believes the incentive should be passed; if nobody wants it,
nothing is lost. "But we may have deterred somebody if we don't
pass it," he cautioned.
CHAIR OGAN cited his personal experience in negotiating
contracts and said he would like to get the best deal possible
for Alaska. He reiterated that he believes this is a
concession.
REPRESENTATIVE GREEN pointed out that this is not the
negotiation but a method to use. He said there is a significant
difference between a government and a billion-dollar deal, and
what [Chair Ogan] did as a person. Chair Ogan was negotiating,
but this is not negotiating.
CHAIR OGAN said he would respectfully disagree. He believes
this is an important negotiating tool, and that it is the
legislature's constitutional responsibility to negotiate the
best deal and be at the table. "We are a 12-1/2 percent owner,"
he added, "and we need to be treated like an owner rather than a
renter." [HB 9 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:21
a.m.
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